- Supply chain snags have been a problem for companies all year. For example, freezing temperatures in Texas resulted in chemical plants struggling to meet the growing demand for such products as PVC.
- Even the largest companies, such as plumbing distribution giant Ferguson, have been impacted by the shortage.
- However, the company has managed its supply chain well, posting strong fiscal third-quarter results with nearly 25% revenue growth.
- Ferguson executives and a spokesperson shared some of the company’s issues and how the distributor is handling them.
The global supply chain is so tightly woven, so intimately interconnected, so frighteningly fragile, that a pair of seemingly disparate events can be closely related. Consider it a new twist on the butterfly effect.
The latest example is how a deep freeze earlier this year in Texas resulted in a shortage of polyvinyl chloride, or PVC. That short supply, in turn, added to a host of issues for plumbing distributors and other companies in this space no matter if they’re upstream or downstream.
This disruption comes at a time when the global supply chain is already experiencing a host of delays, as MDM outlined last month in “Supply Chain Snarls Threaten to Temper Strength of Economic Upswing.”
Supply chain disruptions have included a cargo ship stuck in the mud outside the Suez Canal, clogged shipping lanes, unprecedented product demand, a global container imbalance, a national truck driver shortage and, of course, a pandemic that is still raging across the planet, albeit at a slowing pace.
All these factors have led to distributors working doubly hard to get product from their suppliers and to their customers without raising prices so much as to hurt anyone’s bottom line.
“There are always issues, but none that have slowed down the supply chain to the same degree as recent weeks and months,” Brian Bushelow, the supply chain director for Raleigh, North Carolina-based HVACR distributor ACR Supply, says. “Mostly, you have one issue at a time, and that stuff can be dealt with. In today’s world, several things are happening simultaneously.”
The recent deep freeze in Texas was an unexpected one, but it’s had a huge effect on the production of PVC. John Schiegg, vice president of supply chain services for Houston-based homebuilder David Weekley Homes, told the Wall Street Journal that the problem was growing as PVC piping manufacturers alerted customers to a significant delay in materials deliveries.
“We had no idea how much came from the Gulf Coast area,” Schiegg told WSJ reporters in the article, “Texas Freeze Triggers Global Plastics Shortage.” “I tell people it’s going to get ugly. There’s going to be a big fight for materials.”
Not surprisingly, that fight has made its way to wholesale distribution, which sits in the middle of the movement of goods from supplier to end customer. The industry is a key cog in keeping this country’s economy moving, and at no time has that role in the supply chain been more critical than during and after the pandemic.
One of the companies dealing with material supply issues is Ferguson PLC, the plumbing distribution giant whose global annual sales near $22 billion with most of that total coming from North America. Ferguson is based in the United Kingdom while its U.S. operation is based in Newport News, Virginia.
When MDM reached out to the company for comment, Christine Dwyer, Ferguson’s U.S. director of communications and public relations, said the reason for the crunch is the upswing of the economy as business comes out of COVID-19.
Demand is good, but it’s sometimes difficult to match it with an adequate amount of supply.
“Economic recovery is fueling rapid growth in building and construction markets,” she says. “Manufacturers are working hard to keep up with demand but are faced with unprecedented material shortages, product price increases and ongoing supply chain disruptions.
“Ferguson is not immune to inventory and supply chain challenges. However, the strength of our DCs, overall supply chain and vendor partnerships put Ferguson in a strong position. We have several mitigation strategies in place, including keeping in close contact with our suppliers to forecast shortages. We have invested in inventory and are actively managing existing inventory to best serve all of our customers.”
Just as it was during the height of the pandemic — and just as it has been during any disruption expected or unexpected — communication with customers amid this material shortage is mission-critical, Dwyer says.
“We are also keeping our customers regularly informed and doing everything we can to get the product they need,” she says. “We are asking them to place orders as soon as possible so we have greater visibility into product needs and order only what is required for the project to better manage our inventory. Significantly larger than normal orders require special approval. Lastly, we publish a monthly newsletter for our Ferguson.com customers that explains market and commodity conditions so they understand the current landscape and can make informed decisions for their business.”
Ferguson posts blowout quarter
While Ferguson has been saddled with PVC shortages, the company is navigating the situation as well as can be expected.
The company recently reported that its third-quarter revenue jumped 24.5% from the same quarter a year ago to $5.9 billion while its trading profit increased 65.4% to $579 million. Adjusted EBITDA was up 61.2% to $603 million.
The company’s U.S. performance has started to gain traction as COVID-19 winds down for much of the country. Ferguson said the company’s strong revenue growth included 20.1% organic growth in the U.S., boosted by sequentially increasing sales price inflation and easing prior-year revenue comparatives.
In its 3Q earnings recap, Ferguson said, “U.S. market demand accelerated through the quarter as the US economy continued to reopen.”
“Ferguson has brought forward its Q3 announcement as we delivered strong revenue and profit growth ahead of expectations,” said Ferguson CEO Kevin Murphy. “Our associates continued to provide outstanding service and support to our customers in the face of increasing supply chain pressures leading to product availability concerns. We were pleased with the strong earnings growth and margin expansion arising from continued operating efficiencies and pass-through of acute price inflation as the U.S. economy re-opens. We thank our 30,000 associates for their exceptional contribution to these results.
“Revenue picked up strongly through the quarter continuing into early May and we are pleased with the momentum in our business.”
Based on its better than expected third-quarter results, Ferguson now expects to generate group trading profit in FY2021 in the range of $2 billion to $2.10 billion.
But what about supply chain hiccups?
On Ferguson’s 3Q earnings call, Murphy didn’t specifically call out the problem with PVC, but supply chain disruptions remain a hot-button issue for any distributor whether they generate $20 billion or $20 million in annual revenue.
For larger companies like Ferguson, scale remains an advantage. That’s something businesses like Ferguson, Grainger, MSC Industrial and others have discussed as a differentiator when it comes to delivering product on time — even if the cost to the distributor increases.
“We’ve also been using … the scale of our supply chain to maintain unmatched product availability for our customers at a time of great scarcity,” Murphy said. “Manufacturing supply chains are struggling to balance increased demand with staffing and transportation pressures.
“We think this has led to a gravitational pull of customers to Ferguson. As we continue to gain share costs, these recent developments have also created some uncertainty for our customers, not least around the medium-term impact of limited product availability and rising price inflation. We remain very focused on continuing to ensure high levels of availability for our customers and will continue to drive the benefits of our scale and our business model.”
One area where a distributor can differentiate — and size doesn’t matter here — is through digital investment. Ferguson, to its credit, continues to “remain committed to investing in digital capabilities in our supply chain to better serve our customers,” Murphy said. “We are mindful of the inflationary pressures on the cost base in areas such as transportation and wages, but we believe we can manage through that through those appropriately.”
Murphy said Ferguson also remains committed to improving supply chain hiccups through its people and its processes. Even when the current material shortage is remedied, even when the pandemic is no longer resulting in a clogged supply chain, disruptions are bound to happen. The companies that address them beforehand are more likely to pull through unscathed.
“It’s about having the best people in relationships with the best digital relationships, a world-class supply chain sourcing organization that provides that fill rate, and then making sure that we’re driving that product strategy, both for margin, as well as to make sure that we enhance that best filtering,” Murphy said. “We think that continues over the long haul.”
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