Economies all over the world have been going through nearly unprecedented shortages, and there isn't much evidence that it will stop soon. A problem economists have started calling the supply chain crisis is creating bottlenecks for all kinds of global industries, but the effects are particularly sharp in big, complex economies like the United States. Before coming to grips with the supply chain crisis and its implications for building and manufacturing industries, it's helpful to get a sense of the scale of what's going on.
The current crisis is bigger than most of the economic disruptions since the 1970s gas shortage. Also, unlike the housing crash of 2008 or the Savings & Loan failures of the late 1980s, the supply chain crisis isn't confined to just a few sectors. It has already reached into the homes and spending patterns of nearly all American consumers and employers.
Let's take a look at a few key effects of the crunch:
- Labor shortages: Summing up the labor situation for November 2021, the Bureau of Labor Statistics reported 10.4 million open jobs but only 6.7 million people hired. The same period saw 4.3 million workers quit their jobs for various reasons, including voluntary separation and retirement. Workers are leaving their jobs at the highest rate since December 2000.
- Product shortages: From the last quarter of 2021, consumers in the United States have had to deal with shortages of baby formula, chlorine, Christmas trees, lumber, and mid-range microchips. Disruptions combined with irrational increases in demand from the pandemic have caused shortages in bicycles, ammunition, bathroom tissue, and even coins.
- Longer lead times: Fewer workers and more expensive, harder-to-get supplies are a recipe for two problems: higher end-user prices and longer lead times. Lead time is the length of time between the initiation and completion of a project or manufacturing process. With supplies and available workers both in short supply, lead times in several key industries have lengthened. This, as the IMF explains, causes higher prices, complicates inventory control, and even potentially worsens shortages as commodities with limited shelf life spoil in the warehouse or in transit.
Supply Chain Disruptions by Industry
While industries all over the world have been affected by the supply chain crisis, some of the most visible effects have been seen in three key sectors: home building, construction, and manufacturing.
Home building takes lumber and workers. Both of these have been in short supply since early 2020. A lack of younger workers has been made worse by critical shortfalls in construction-grade lumber. In the spring of 2021 alone, commodity prices for lumber futures went up 325%, and as of January 2022, they are still more than double the pre-crisis price per board foot.
Construction is bigger than just new home starts, but every sector has been hit. The trade war with China hit steel production and supply for girders and tools, and a trade war with the European Union cut into international orders and partnerships. The shortage of skilled workers to replace retiring construction managers has also stretched out lead times and driven up costs at every level.
Manufacturing has all the same vulnerabilities of construction and residential housing, and it's hit by shipping problems in both directions. First comes the shortfall in delivered components, and then comes the higher cost of shipping out the finished goods.
This isn't caused by a single problem. There's a scarcity of raw materials at many of the source points for iron, copper, zinc, and several rare earths and a bottleneck in refining and processing ore. "Rare" earths like neodymium aren't actually rare, but they do take a lot of refining to produce a usable commodity. When the refining centers have long lead times, production drops, and supplies dwindle.
As if this wasn't enough, all three of these sectors are hit even harder by inflation. While a drop in consumer demand might seem like just what the doctor ordered for hard-hit supply chains, the fact is that people don't stop consuming altogether during periods with high inflation; they just downshift from profitable luxury purchases like steak and champagne to thin-margin necessities like rice and milk.
What Are Supply Chain Issues and Why Do They Happen?
There are two classic ways to create shortages in an economy. Demand for a product can increase faster than the suppliers of that product can keep up, or there can be a disruption to the supply that makes it fall beneath the existing demand for it. In both cases, the disruption tends to be limited in its scope.
How big or small the problem depends on where it happens. A strike at the tractor assembly plant, for instance, results in a shortfall in tractors, but car and boat buyers don't notice a problem because their products are still being produced. A shortfall in something more basic, such as a flood at the only iron mine in the country, has downstream effects on every part of the economy that needs iron and steel; tractors, cars, boats, and children's toys alike are all caught up in the disruption.
There is a third way to create shortages, and it's one that can strike anywhere and in any industry. This is a disruption to the supply chain. To understand how this can go wrong, it's good to start by answering some basic questions, like: What is a supply chain, and why does it matter?
What Is a Supply Chain?
To put it simply, a supply chain is a network that connects producers to consumers. Before the Industrial Revolution, supply chains were local and short. Jan the woodcutter chopped wood for Geert the carver, who carved a jewelry box for Johanna the fisherman's wife. Short and simple chains like this were not especially efficient or productive, but they tended to be secure. Not a lot went into Jan's chopping except an ax and some trees, and Geert the carver just needed some chisels and shellac, which he could probably get locally.
As the economy grows less local and more specialized, supply chains get longer and include more players, until even the simplest thing is a global effort. A pencil produced after 1945, for example, may be designed by a Swiss engineer who works for a German company and uses cedar farmed in Brazil and rubber from Indonesia for the eraser and tin from the UK for the metal crimp. To produce the pencil, the company needs educated European designers, affordable Brazilian and Indonesian contractors, electricity at reasonable rates for smelting, stamping the metal crimps, and so on.
For some sectors of the economy, this elaboration of supply chains can get absurd. A modern smartphone has components that touch more than 100 countries during the production cycle, from financing in London or New York and design in Finland, France, or Canada to rare earth mines in Afghanistan, rare earth processing in Pakistan, and assembly in China. Add in the Filipino crew of the Panama-based cargo ship, which uses Saudi marine diesel to go from Shanghai to Los Angeles, and the whole web stretches out in front of your eyes.
This would all be complicated enough if it stopped at pencils and iPhones, but every single one of the components of these supply chains also has a supply chain of its own. The rare earths, for instance, are not dug by hand. Machines built in India or China are used to dig and process ore, and each of those machines has a logistics tail as long as the commodities they're producing. Thus, a pencil may be made from Brazilian cedar, but that tree was fertilized with Argentine phosphorus, which was mined with an American digging machine, whose engineer used a No. 2 pencil to draw the plans.
Why Do Supply Chains Matter so Much?
Supply chains have always mattered, even when it was as simple as a woodcutter with an ax. They matter a lot more now though, and it's mainly for three reasons:
- Supply chains are longer than ever. A typical modern supply chain runs through dozens of countries and includes tens of thousands of people. From extraction of the raw materials to the consumption of the finished product, the components may have crossed the ocean several times and taken months to come together in a way that can be sold to the end consumer.
- Supply chains are interconnected. Every supply chain on earth depends critically on every other supply chain. While it may be hard to see the connection between handmade wooden boxes and mass-produced pencils, they are connected in a dozen different ways. They both use wood, need fuel of some kind to produce and transport and use space for shipping.
- Supply chains are global. Disrupted supply chains were a regular thing in the pre-industrial world, but they were almost always local. In the search for ever-increasing economies of scale, producers up and down the supply chains have spent decades merging networks into huge, vastly complex, and extremely efficient global streams. That Panamanian ship with the smartphones on it is hauling a lot more to Los Angeles than just consumer electronics. It will have cargo containers full of sugar from the Philippines, jute fiber from Bangladesh, and exotic hardwoods from Borneo. This is efficient, but a snag that slows or stops that one ship hits the Apple Store, sugar consumers, rope makers, and furniture manufacturers all at the same time.
The Ripple Effect of Minor Disruptions
It's characteristic of complex systems that small disturbances can rapidly spread out and displace other parts of the network. Here's a snapshot of a few of the more serious disruptions you might have been affected by in 2021:
- Global shortages across all sectors rose by 638% in just the first half of 2021.
- 75% of business owners reported that supply chain disruptions had negative or strongly negative impacts on their businesses.
- More than 70 container ships at a time, each with displacement in the tens of thousands of tons, are backed up off the coast of California, unable to get berthing clearance due to a shortage of dock workers.
- 90% of the chamber of commerce leaders across the United States say labor shortages are limiting economic growth in local areas.
- The semiconductor chip shortage inflicted a $110 billion loss on the automotive industry in 2021, caused mainly by long lead times and product shortfalls.
What Can You Do Until This All Blows Over?
You can't change a global supply chain crisis by yourself, and even the largest governments and corporations can only have incremental effects on what is basically a network problem. You can, however, set your own business up to survive — or even thrive — until things calm down and new supply chains get the bugs worked out.
Make a Team Effort
If you're going to get through this, everybody in your company has to be on the same team. Consider pulling everybody together for a meeting or two on the subject of global supply chain disruption and how it has been affecting you. Form a plan of action to cope with sudden and hard-to-predict shortfalls from suppliers, price spikes in needed goods, and an overall higher cost of doing business.
Form Internal Partnerships
Think about linking specific divisions together to tackle specific issues. Your marketing and sales teams, for example, should be on the same page about the issues you face. It's no good to have a sales rep telling prospective clients that their orders need a longer lead time and will be 15% more expensive than last year while your marketing team is tweeting a conflicting message. This working group can also brainstorm to elevate products and services you can easily deliver while easing up on products you know will be in short supply.
Efficiency Matters Now More Than Ever
Efficiency describes the output per unit input ratio. When your inputs are hard to find or more expensive, the only way to maintain your output is to become more efficient. Consider designating an in-house efficiency consultant who can recommend improvements and streamline every part of your business. Whether you're switching to a payroll management app to reduce demand on your HR department or merging overlapping positions into a single job description to deal with a hiring shortfall, now is the time to think about efficiency.
Watch Your Supply Chain(s)
In the past, you may not have been too careful about your supplies. Need lumber? Buy it. Ran out? Home Depot. Microchips? They used to be everywhere and easy to get. Now, with disruptions to every supply chain on the planet, you're going to have to watch your vendors for early signs of trouble. You might want to assign one or more of your employees to touch base with critical suppliers every week or so to make sure all is well.
When all is not well, this policy can give you an early warning that your lumber, replacement tools, or other must-haves are going to be delayed. Advance warning like this can help you plan future orders, find alternate supplies, or even prepare clients for delays and higher costs if they happen.
Diversity Is Your Strength
Diversify your supply chains immediately. Do you buy microchips from Taiwan? Those have been in short supply since 2021. Can you get an equivalent product from Germany? Japan? Canada? Mexico? Do you get beech hardwood from Europe? If the ships are delayed, can you get it locally? Is there something different but just as good you can find within 100 miles? It's best to have the answers to these questions before you need them.
Invest in Customer Service and Transparency
Supply chain disruptions feel like mysterious bad news to the people experiencing them. They're complicated and not easy to explain; doing so can be tricky when you're trying to retain a customer base. Train your reps to be open, honest, and well-informed about the supply chain issues you're having. A little upfront honesty about the difficulties you face can make almost any customer more forgiving when your supply issues become a problem for them too.
Facing Your Customers During the Crunch
While you can't really affect the way supply chain disruptions interfere with your business on the back end, you are in absolute control over how you present your business to the public. Now is the time to find new and better ways to communicate with the customers that keep you in business so they will continue to do so even during delays and price hikes you can't avoid.
Enhance Your Website
Evaluate the website content you have now with an eye toward recruiting customers as allies to deal with the supply chain mess together, rather than just guiding them down a sales funnel. Here are some things to think about as you try to make your website more customer-partnered:
- How often do you refresh your content with current updates?
- Does it load well? Is it time to switch to a web host with better bandwidth to make visiting the site a more pleasant experience?
- Is the site mobile responsive?
- Do your customers have an opportunity to interact with your site? How long do they stay before bouncing, and do they fill out a form or leave a comment?
- Are visitors converting like they should?
- Is your website ADA-compliant? Do you have font and contrast options for visually impaired visitors? Do your video spots have good subtitles?
- Do you have a keyword strategy? Has your keyword strategy changed?
Looking Ahead to 2022
It's been a challenging few years, and it's not over yet. While many of the most acute issues arising from the supply chain crisis can be addressed with time, some things aren't going back to the way they were before.
Demand goes through a self-regulated normalization during times of shortage. When gas gets expensive, for instance, people start to carpool. This demand destruction reduces strain on supply and helps bring things back under control.
The United States is taking steps to address the problems with supply chains. In early 2022, around $17 billion is slated to be invested in transportation-based infrastructure, principally for waterways and port infrastructure. This is expected to reduce congestion and open up a few bottlenecks.
Internationally, demand for new shipping is as high as it has been for decades. Global orders for new cargo carriers look set to expand the current fleet by 6.4%, which should at least play a part in trans-oceanic shipping.
With improvements to the shipping, offloading and continental infrastructure underway, most of the physical issues causing the supply chain shortage are being addressed. Labor shortages continue, but consumer demand has peaked and things are expected to settle down by the end of 2022.
Invest in Your Company's Growth During the Supply Chain Crisis
You can keep growing through the rough times by innovating how your company approaches your customers. In a climate where meeting budgets and deadlines can be a challenge, your marketing needs to bring customers on board almost as if they're members of the team. Innovations such as fresh marketing, website updates, reimagined processes, and a newly revamped customer support team can make the difference between continued growth and stagnation during the supply chain crisis.
We know how much of a company's success depends on good marketing, and we've helped builders and manufacturers develop more leads, see more growth and realize more of their potential through innovative approaches.
LAIRE has helped countless small-to-big players in the construction and home building trades get their brands in front of potential customers and clients of every kind. With assessments, content creation, and innovative marketing strategies, we have successfully promoted B2B brands in the manufacturing industry. No matter how the shortages have hit your business, we're here to help. Contact LAIRE today for a professional marketing assessment of your company's needs and to find out how we can help you thrive during the supply chain crisis and beyond.