If you are in the construction industry — or almost any non-service industry — you probably don’t need me to tell you that, as of the end of April 2021, the entire supply chain is a mess:
• Production for virtually everything cannot keep up with demand.
• Shipping costs doubled and, in some cases, tripled; load-to-truck ratios are up anywhere from 400–1,700 percent year-over-year, April 2020–April 2021.
• In April 2019, the price of a common lumber western spruce and fir two-by-four was around $400 for every 1,000 cubic board feet (28.3 m3). The price is nearly three times that amount today, at just over $1,100 for every 1,000 cubic board feet.1 Lead times are out to 12 weeks or more, from only two weeks or less pre-COVID-19 pandemic.
• As a result of the “Great Freeze” in February on the Gulf Coast, crude oil production across the Permian Basin dropped by an average of more than 2 million barrels/day during the next three days.2 As of the end of April 2021, we find most products from this area are still subject to force majeure, and the supply chain, with individual product exceptions, won’t be fully functional until early in 2022.
• Epoxy resins, for all intents and purposes, are simply not available.
• Raw material price increases for a basket of components used to make paints and coatings, adhesives, sealants, caulks, plastics (e.g., ABS, PVC, and acrylic), and similar materials used in construction will increase anywhere from 9 to 20 percent for 2021, based upon what we are seeing at the end of April.
Yes, COVID-19 played its part as one component of what has turned into a “Perfect Storm” with regard to the manufacturing and construction industries in North America, as did the Great Gulf Freeze, but the current situation has been a storm in the making for the past 8–10 years. Rising consumer demand,3 historically low mortgage rates4 fueling a major residential housing boom, serious problems during the past decade with insufficient personnel and equipment in the trucking sector,5 an extremely high savings rate, high consumer confidence — and the list goes on — have all been acting, over the past several years, on the economy to bring us to the point where we are today.
For this reason, it is an exercise in futility to blame COVID-19, the Gulf Freeze, or any other factor or set of factors alone. The problem is that the U.S. industry, in general, has failed to build resilience into its supply chains, and we are now paying the price for industry’s negligence.
The United States is now putting an additional $1.9 trillion in new stimulus funds into circulation at a time when many experts feel that we are on the cusp of a consumer boom. This will only exacerbate the situation for the most prepared of all manufacturing and construction firms and will potentially wreak havoc on less-prepared producers of raw materials and finished goods who have failed to build sufficient resilience into their supply chain philosophies and practices.
Is a Boom Good News?
On the surface, a consumer boom sounds like good news, but — upon closer examination — it really bears a mixed message. With consumer spending up, prices tend to rise; people travel more, raising the demand for gasoline, diesel, and jet fuel, leading to shortages and higher prices; with currently low interest rates, an increasing number of millennials will wish to purchase their first homes or “buy up,” leading to an even worse residential home shortage than is currently the case, while driving up housing costs. As a result of the shortages, and resultant price increases, of lumber and other construction materials, the average new home costs about $40,000 more today than it did at this time last year.7
We quickly see a picture forming: a picture in which inflation is increasing; lumber, steel, aluminum, PVC, ABS, and virtually all other manufacturing and construction raw material costs are rising; and the finished goods made from those raw materials are forced into higher pricing, whether it’s a gallon of paint, a pail of construction adhesive, or a new residential home. A picture in which the already challenged U.S. trucking fleet and driver shortage cannot be addressed soon enough. A picture in which facility shutdowns have exacerbated already existing shortages and lengthened supply lines that were already strained. In short, we have a mess — and we have a mess because the global supply chain is fundamentally lacking resilience.
Clearly, changes need to be made in the global supply chain, and they need to be facilitated by those companies that rely upon it not only to remain in business but to flourish. What, though, does this have to do with “resilience”? For starters, this term simply means, “The capacity to recover from difficulties quickly.” Supply chain resilience has four elements:7
1. Visibility across the entire supply network.
2. Agility — the speed at which the supply network can respond to shifts in the environment, such as scaling production quickly and easily to meet demand, reconfiguring plants and logistics networks, opening new demand channels (e.g., shifting from a brick-and-mortar model to e-commerce).
3. Diversification of the supplier base, production footprint, and transportation partners.
4. Contingency planning that stresses the ability, coupled with appropriate tools, to anticipate and respond to disruptions.
Those who prefer to see the current, chaotic situation as the result of COVID-19, in light of the assumption that “things will return to normal” at some point in the future, have a very rude awakening ahead of them. Those enterprises that understand that the current issues have been developing over a period of many years, and that they will not go away just because COVID-19 does, are already beginning to realize that they need to take a new approach toward spreading their risk — even if it comes at a higher cost.
The crisis of 2020 made clear that the old ways of purchasing will no longer produce optimal results — we have had a powerful light shone on the importance of visibility across the supply chain. Increased data sharing by raw material producers, adhesive manufacturers, lumber suppliers, steel producers, et al., and end-use customers is truly going to be a necessity to avoid the kinds of surprises that are becoming increasingly common — and that wreak havoc with people and systems because they were not anticipated.
A properly functioning chemical logistics system must be a top priority for suppliers, manufacturers, builders, constructions firms, architects, and customers. The entire system reacts to the smallest changes, delays, or fluctuations in the supply chain, often leading to production downtimes and delivery problems to end-use customers.
How to Build Resilience
No organization can react to changes in the supply chain without creating a risk assessment of its own logistics. This is of primary importance and allows for planning and maximum control of value chains. There are five influencing factors in chemical logistics:8
1. Economic situation. Logistics always depend on the current political and economic world situation. Embargos, crisis areas, but also trade tariffs create unstable conditions and often complicate reliability and punctuality in the supply chain.
2. Regulatory affairs. Increasing legal requirements, such as transport regulations, customs regulations, but also occupational safety or data protection, must be observed and implemented. This requires flexible structures to allow for permanent adjustments.
3. Delivery capability. The ability to deliver or transport uninterruptedly must be considered. Customers increasingly require individual customized logistics solutions. This is where a broad-based and service-oriented chemical logistics system provides advantages.
4. Complexity. The demands on modern chemical logistics are enormous: flexibility, resilience, and responsiveness are important factors in maintaining supply chains and maintaining customer confidence.
5. Technological change. Digitization is key for better networking of all those involved, for faster communication of data, and for better counteracting changes or disruptions.
Of the nearly 150 executives responding to Foley & Lardner LLP’s Global Supply Chain Disruption and Future Strategies Survey,9 70 percent agreed that, as a result of the lessons that they have learned from COVID-19, sourcing from the lowest-cost supplier will no longer be the sole focus in making supply decisions. Companies will place greater emphasis on partnering with suppliers that have more resilient and flexible processes to assure continuity of supply.
Sixty-two percent of respondents agreed that the pandemic will lessen companies’ focus on just-in-time manufacturing models in favor of warehousing and inventory banks for additional protections against shutdowns. Companies will reduce their reliance on a single source for the supply of various materials and components. Where dual sourcing is a viable option, manufacturers can and should qualify alternate suppliers with manufacturing operations in different locations.
Companies and organizations should take time to map the entire supply chain, tracing inputs from raw materials — whether pumped from wells, mined from the earth, or harvested from sustainable forests — to finished goods. This process will require not only identifying the company’s suppliers but also the suppliers’ sub-suppliers and logistics providers. This allows for the assessment of critical risks at each step, whether it is natural disasters, tariffs, power outages, labor issues, transportation links between suppliers, or any number of other potential hurdles to continuity of supply. Manufacturers can then find suppliers in different regions that will not be subject to the same set of risks and adjust contracts to allocate who may bear the additional costs associated with interruptions.10
It’s not pretty, it’s not going away anytime soon, and we won’t see the “new normal” until 2022. Isn’t this plenty of incentive for anyone with common sense and a strong survival instinct to begin handling their supply chains different going forward than they have in the past? Building resilience into the entire process is the only way forward, and it will require that we spend less time being concerned with the lowest price, the fastest delivery, minimum inventory, and the longest payment terms — and more time focusing on visibility, agility, diversification, and contingency planning.
This article was originally published in the AMPP membership news section in August 2021. Reprinted with permission.
[1] Retzlaff, Brady. Lumber Industry and Home Building Materials Seeing a Drastic Increase in Price, Shortages, April 12, 2021. https://globalnews.ca/news/7751206/lumber-industry-home-building-increase-price-shortages/ (accessed May 13, 2021)
[2] Jacobs, Trent. As Temperatures Rise, U.S. Producers Expected to Recover Rapidly. Journal of Petroleum Technology, Feb. 19, 2021. https://jpt.spe.org/as-temperatures-rise-us-producers-expected-to-recover-rapidly (accessed May 13, 2021)
[3] Trading Economics: U.S. Bureau of Economic Analysis. https://tradingeconomics.com/united-states/consumer-spending (accessed May 13, 2021)
[4] Trading Economics: Mortgage Bankers Association of America. https://tradingeconomics.com/united-states/mortgage-rate (accessed Feb. 26, 2021)
[5] Huff, Aaron. Driver Shortage Credited for Buoying Freight Economy in 2020 and Likely into 2021. Commercial Carrier Journal, November 11, 2020.
https://www.ccjdigital.com/business/article/14940101/driver-shortage-to-keep-capacity-tight-in-2021-and-beyond (accessed May 13, 2021)
[6] https://globalnews.ca/news/7751206/lumber-industry-home-building-increase-price-shortages/ (Accessed May 13, 2021)
[7] Ibid.
[8] Treschau, F. Challenges and Trends in Chemical Logistics, Jan 21, 2021. Haltermann Carless website. https://www.haltermann-carless.com/blog/challenges-and-trends-in-chemical-logistics (accessed May 13, 2021)
[9] Uetz, A.M.; Kalyvas, J.; Miller, V.; Wegrzyn, K. Global Supply Chain Disruption and Future Strategies Survey Report, September 2020. Foley & Lardner LLP website. https://www.foley.com/-/media/files/insights/publications/2020/09/foley-2020-supply-chain-survey-report-1.pdf (accessed May 13, 2021)
[10] Uetz, A.M.; Miller, V.; Supply Chain Strategy Trends: COVID-19 Is Prompting Executives to Reconsider Resilience, Supply Chain Management Review. Nov 2, 2020. https://www.scmr.com/article/supply_chain_strategy_trends_covid_19_is_prompting_
executives_to_reconsider (accessed May 13, 2021)