By: Boyd Montgomery , Regional Business Manager Sports Fields & Grounds North America - Commercial Products Division for The Toro Company
If the Pandemic has taught us anything, it is that no industry is immune to global disruption!
To understand the current state of our industry, we need to start at the beginning and consider how manufacturers were conducting business before March 2020. At that time, many industries were conducting business as usual, with a focus on working capital and following a “just in time” process - building to what their customers needed, dealing with single-source suppliers, and managing inventories.
Enter the Pandemic
Everything changed in March 2020 when uncertainty entered the landscape with COVID-19. Businesses had to suddenly make difficult decisions with little knowledge or experience with the kind of disruption now before them. In the beginning, many were told to “stay at home,” while the economy slowed and uncertainty rose. Manufacturers had to make hard choices around capital expenditures, people, and in some cases, solvency. The initial impact carried on until about June, when most industries learned to pivot from their original plans and manufacture in the new COVID environment. Although manufacturers did not see mass cancellations of previous orders, the flow of new orders slowed to a trickle. Others turned a portion of their production facilities into making PPE items to help assist in the fight against COVID. Manufacturing lost 1.4M jobs early in the Pandemic and only about 63% of that workforce returned after the stay-at-home orders were lifted in the U.S. (National Association of Manufacturers). Internationally, numerous manufacturing facilities had used migrant workers before the Pandemic and when those workers were sent home, many countries did not allow them to return to work. In July 2020, the GDP took a sharp dip as manufacturers struggled with run time efficiencies due to the new environment. Businesses did adapt, however, re-project their targets for the year and slashed capital expenses. Some industries saw cap-ex spending cuts as deep as 80%. While these necessary transformations were taking place in late 2020, the number of truck drivers began to shrink nationwide, foreshadowing a much longer struggle ahead.
As we entered 2021, many industries started to see demand take off domestically. Manufacturers' existing inventories were immediately depleted, as well as field inventories throughout their channels. Fueling this demand was the federal government's infusion of dollars into the economy through several legislative moves. Private industries like golf benefited from consumers’ ability to get outside and utilize the sport for connecting, exercising, and having fun. Rounds went through the roof and revenue began to flow for many clubs. The demand curve quickly turned from a steady climb to a rocket blasting off. As this demand started to show, manufacturers reprojected needs to suppliers. However, these suppliers were already constrained, so they resorted to allotments to manufacturers, cancellation of orders, and long-term contracts; some even went out of business.
Supply Chain Stress
While the Pandemic was the tipping point to expose supply chain issues, the real fragility started to show in early 2021. In February of that year, 4.5 million Texans went without power for months as the Texas freeze hit. In March, the Suez Canal was blocked and halted many manufacturers' products on the water. This blockage affected over 400 vessels scheduled to pass through the canal. In August, hurricane Ida hit Florida and disrupted petrochemical production (resins and plastics), citric acid and carbon dioxide (soda drinks), nitrogen, and other processed chemicals. Nearly 60% of America’s PVC production was taken out by Ida. West coast ports began to balloon with ships waiting to be offloaded, causing a massive bottleneck on the water. This build-up was fueled by multiple issues - ports were trying to navigate relatively new COVID policies, all while seeking over-the-road transportation limited by a decreased number of truck drivers, or the inability to move containers by rail. Manufacturers and suppliers moved quickly and started sending ocean shipments to the east coast which only caused another backup at those ports. Add to all of this, the manufacturing and supply chain disruptions brought about by COVID variants Delta/Omnicron.
As we turned the page to 2022, China’s New Year shutdown and zero-COVID policy, crippled many component suppliers' manufacturing abilities. For example, in March, China’s Pudong port had a backlog equivalent to fifty 747 cargo freighters. China did not start to relax its zero-COVID policy until June of this year. Russia’s war on Ukraine and the subsequent sanctions imposed on it during this time, also disrupted many commodity markets. According to the Federal Reserve, it is estimated that the kinks in the global supply chain have resulted in ½ of the current 4-decade high inflation rate. Additional disruptions have been recently dealt with as rail and longshoreman workers, along with the Union, have begun to threaten slowdowns and a possible strike. The most recent averted rail strike took the federal government's intervention. It is estimated that if a rail strike would have proceeded, the U.S. economy would have been crippled to the tune of $2 billion each day. Going further, California enacted the AB5 law which significantly impacted the ability of independent truck drivers to operate in California, causing yet another backlog of containers waiting to be transported.
As these global pressures continued to ramp up, all industries started to see escalating costs starting as early as the end of 2020 and continuing today. While some costs have come down, many are still higher than their pre-Pandemic levels. Moving containers on the water escalated from pre-Pandemic prices of $3000 to over $25,000. Overnight air freight, which in pre-Pandemic times meant the next day, has turned into a week and a half to two weeks, at triple the price. Commodities such as steel went from $600 a metric ton to approximately $1,950 per metric ton in August of 2021 ($938 a metric ton in 2018 was the previous high). Steel prices were again impacted in early 2022 when the war in Ukraine escalated costs to nearly $1,550 per metric ton. Oil also continues to be extremely volatile and impacted by the sanctions against Russia, which exports nearly $74 billion in refined petroleum annually. Oil impacts products such as diesel/gasoline, tires, auto parts, asphalt, paints, plastics, motor oil, etc. Semiconductors impacted numerous industries as chip availability hit many manufacturers. Cost for chips skyrockets from .75 cents to $75 per chip. Semiconductor production impacts cell phones, computers, copiers, cameras, communication devices, vehicles, heavy equipment, etc. As rising costs to manufacturers escalated, many were forced to take pricing actions; not necessarily to recoup the escalating costs, but to help subsidize the impact of their losses. Think of it as manufacturer “A” producing five million widgets and manufacturer “B” producing 250 specialized products. If each manufacturer realizes cost increases of 10 million dollars, then manufacturer A could pass an increase of $2.00 on each item produced, while manufacturer B would have to add $40,000. The specialized manufacturer would absorb a tremendous hit in costs as they would likely be unable to pass the full cost increase onto their customers.
What’s it all Mean
Manufacturers continue to ride a wave of uncertainty as the next big impact on the global supply chain could send reverberations throughout manufacturing. Labor, components, and allocations on any given day can cause disruptions in manufacturing line run rates impacting the products produced. Any shrinkage of production or lack of ability to increase production impedes a manufacturer's ability to dig out from their tremendous backlog of orders. Manufacturers are looking at only producing limited models to help with some of the backlogs. While in recent months the supply chain has improved, the industry is nowhere near getting on the other side of fulfilling existing demand and new orders. Only time will tell if the existing demand is met by production, evaporates due to economic changes, or experiences another supply chain disruption. The best estimate for the industry is that in Q3-Q4 of 2024, we may start to see signs of improvement.