After the Covid lockdowns of 2020, the current state of supply-chain disruptions, including long lead times and price increases, has become the new abnormal.This article comments on supply problems from FOC's perspective
In recent months has your business encountered any of the following problems:
- delays in the delivery of parts, causing bottlenecks that have affected the delivery of your own products or services?
- parts or materials being unavailable, causing projects or production runs to be rescheduled or even canceled?
- higher prices for key parts or materials, affecting factory margins, or causing you to increase prices for your customers?
As a consumer, have you:
- clicked to order something online and receive a message saying "out of stock" or "delivery in six to eight weeks (or more)"
- seen empty shelves in a store or supply center?
- driven by a car dealership and seen rows of empty spaces in the lot out front?
At this point, near the end of 2021, most of us have experienced problems trying to get building materials, appliances, electronic devices, instruments, paper products, furniture, food, and many other consumer and business-to-business products.The news media offer many articles covering disruptions to "the" supply chain.On television, late-night comics are joking about it.But depending on the products, delayed deliveries and price increases are causing severe problems, including layoffs or shutdowns.Supply chain disruptions are affecting many industries, and some economists have said this will cause GDP growth in the second half of 2021 to be lower than expected.
Our view in a nutshell: it is easy to speak of supply-chain disruption as a single problem, but there are many different problems affecting different product areas.There is no single source of these disruptions, but the Covid pandemic has been a key factor in many of the problems.Other factors include weather and natural disasters, longer-term changes in labor markets, congestion at choke points in the transportation/distribution pathways, and in some cases, dependencies on a small number of suppliers for key parts.A mix of these factors has caused imbalances in the supply and demand of key products, and it will take months to restore or establish a healthy balance.
Fiber optics companies are not unscathed
Fiber optics was considered an essential industry during the lockdowns of 2020.Based on our contacts, most cable assembly and network equipment manufacturers fared reasonably well in 2020 and early 2021.Procurement and installation of fiber optic products remained strong and in some cases were spurred by network capacity requirements associated with increased telecommuting, remote schooling, e-commerce, and other pandemic developments.
Thus, demand for fiber optic cable, connectors, and other components did not fall off during the 2020 recession, nor did they show an astronomic surge when the lockdowns and other restrictions were lifted, as other products did.As a result, many companies in the fiber optics industry avoided extreme swings of supply-demand balance (or imbalance) through 2020 and early 2021.
But in the second half of 2021, we are seeing supply-chain problems affecting some of the products that FOC sells.Some of the manufacturers that we support have told us that supplies of some instruments or materials will be constrained or delayed for months, or that their costs have gone up and they must raise prices.
FOC's vendors have reported cost increases of 20% or more for some materials, and lead times for products stretching out by eight or nine months beyond normal cycles.Examples of such inventory and cost problems affecting FOC's vendors include:
- specialty polymers and resins, such as prime-grade and engineering-grade plastics, adhesives, and epoxy components;
- ICs and other electronic components;
- extruded and manufactured parts, such as valves, sleeves, and instrument controls;
- syringes, cartridges, containers, and other specialized packaging.
FOC founder and current advisor Neal Weiss said, This is the first time ever we've seen this kind of disruption.He added, "Over the years, I was amazed at how steady the business was pricing and supply problems just never happened".Mr.Weiss noted a possible exception during 2000 [the surge year in the telecom "bubble", "Two connector suppliers committed their entire production capacity to their top 5 customers, requiring us to meet our customer needs in the spot market from other sources.Otherwise, supply was very steady," he said.[Note, Mr.Weiss founded FOC in 1991 and this 30-year interval would have included the dot-com recession, the Great Recession of 2009, and economic cycles that affected many other industries.
What's causing the recent disruptions in the supply-demand balance?
The pandemic has been a key factor on both sides.On the supply side, many businesses and production lines were shut down during the 2020 lockdowns.Reduced labor forces also caused problems at ports, warehouses, truck fleets, and other parts of the distribution chain.The factory shutdowns affect supply, but also have effects on the demand side.That is, the shutdowns curtail the demand for parts and materials in the factory operator's bill of materials.Other pandemic-related changes on the demand side were new patterns in consumer spending, as people shifted to working at home, using fewer outside services, and shopping online rather than in stores.The increased use of online retail affected the distribution pathways surface transportation and warehousing.The increased demand for certain household goods also caused shortages for appliances, electronics, and other products.
Another disruption in the demand side occurred when the lockdowns ended in 2021.Consumers and businesses resumed buying, often before supply had ramped back up.In some industries, such as home construction and home renovation, pent-up demand caused pronounced surges when the lockdowns ended, resulting in shortages of lumber and other supplies.
These general supply and demand trends were complicated by many other phenomena in purchasing, transportation, and manufacturing:
- the long-term shift of manufacturing to Asia has relied on container shipping, which in turn relies on steady operations in ports and a regular flow of containers to where they are needed.
- port capacity is not elastic port capacity has not increased in parallel with the size of ships or the number of containers being shipped in recent years.
- the number of intermodal chassis used for hauling containers on trucking routes is not in balance with the number of containers.
- the number of US truck drivers had been in short supply before the Covid pandemic, due to retirements and increasing demand.Then, the pandemic spurred some early retirements and caused shutdowns at some driver-training schools.[1]
- congestion at ports with the lockdowns and reduced staffing, ports have a backlog of containers to unload, inspect, and move into distribution channels.
- fewer containers were produced in 2019 due to trade reductions, especially between China and the US.
- weather problems affected some chip factories as well as oil and polymer production.These events have included hurricanes, which disrupted petroleum processing in Texas, as well as winter storms that shut down Texas refineries and other businesses with freezing conditions.
- some businesses have been accused of panic buying or over-stocking.This refers to companies placing larger orders or keeping inventory at higher levels than in recent years in efforts to avoid future shortfalls with some parts and materials.
Photo by Caleb Ruiter from Unsplash
Some of these factors are directly pandemic-related, and some are not.Many of the problems stem from\/arise from transportation and distribution, and not specifically manufacturing.Other than the Covid lockdowns and weather problems, the amount of manufacturing capacity for key parts and materials generally does not seem to be the main culprit.In most cases, the supply-demand imbalances have resulted from the timing of the lockdowns and the subsequent surges in demand, and from the problems in shipping, trucking, and warehousing.
There have been reports that the cost of shipping a container from Asia to the US has increased more than 20 times in the past 18 months.There are also news reports that dozens of ships are waiting offshore to unload containers in southern California.Similar queues at other ports around the world put the number of containers delayed by port congestion in the millions.
When will these disruptions be over?
To characterize the beginning, middle, and end of pandemic-related supply-chain problems, we'd say the beginning was in March 2020.This was the start of lockdowns and production cutbacks in many industries.These cutbacks were global, especially in Asia, where many key electronic parts are made.
The middle phase of pandemic supply problems began early in 2021, as the lockdowns were lifted and many companies encountered pent-up demand, after the slow year in 2020.These mismatches in demand have been exacerbated by all the shipping and transportation problems.Throughout 2021 different industries have encountered delays and rising prices, and in some cases, fluctuating prices.
Lumber prices, for example, had spiked to such high levels in the summer of 2021 that orders fell off and prices dropped back to 2020 levels in August and September.Since then, however, the imbalance has returned, and prices are headed back up.The current short-supply situation may last into 2022.[2]
For many manufacturing businesses, however, delays can be more troublesome than price fluctuations.If an automaker cannot obtain a key chip, production is delayed even if all other parts are available.Similarly, shortages in key polymers can delay production because there are no practical substitutes.
So when is the end?FOC has been scouring trade publications and business news.No one seems to have "the" answer, and often it is difficult to find any answers.Most economists and industry experts are cautious, using language like "at least partway through 2022." We can conclude that the end of supply-chain problems will vary among industries.Electronics companies executives are being quoted as saying chip shortages will last through 2021 and into 2022, with delays for some chips possibly lasting into 2023.
Polymer capacity is said to have come back in the second half of 2021 but has not yet reached peak levels for all types.Of course, polymers support a wide range of products from high-volume food packaging to high-end precision parts used in medical products, electronic instruments, etc.In some cases, the polymer resin supply disruptions are expected to last as long as the chip shortages.As noted, polymer resin supply was affected by weather-related production outages in Texas, so this vulnerability could persist well after Covid problems have eased.
Government and business sources have indicated that shipping and container problems will last into 2022.Trucking and surface or land distribution problems may extend even further, due to long-standing imbalances in the supply of drivers and equipment.Even after manufactured goods have achieved a stable balance of supply and demand, surface transportation may continue to affect prices.
Conclusion:
As 2021 ends and 2022 gets underway, shortages for some products may improve.Purchasing manager index (PMI) data from previous years has shown that prices can exhibit greater volatility than lead times.So as supply-demand imbalances are resolved, delivery times and prices should improve, but not necessarily with smooth trajectories.Knowing that our customers rely on us to keep their production moving smoothly, we always work closely with them to figure out accurate product forecasts.These times have only made that communication more important.At FOC, we do not stop there.The discussions and planning with our suppliers have also increased.Topic number one is usually making sure they have a handle on all supply chain issues.And to further minimize chances we cannot fulfill customer requests in our timely standard, we have significantly increased our inventory levels!particularly on our consumables that include lapping film, epoxy, cleaning supplies, etc.
Many of FOC's suppliers have been affected by the recent disruptions.We are keeping in close contact with our suppliers and customers and working with all of them to minimize cost and delivery problems.
Our view is that many product areas within the telecom equipment and fiber optics industries are highly competitive.That is, there are multiple companies in each product area, and the competition for customers, such as assembly manufacturers, keeps downward pressure on prices.This view is consistent with our experience over 30 years prices have been remarkably stable.Plus, our suppliers have made regular investments in production processes and capacity to meet industry demand.
FOC always has worked to pass along competitive prices to our customers and will continue to do so as the pandemic abates.
Please feel free to contact us with any questions about product availability and options to support your production plans.
