• The price of containers is throwing a wrench into supply chain logistics.
• Some manufacturers have been unable to keep up with the increased demand by distributors because their suppliers can’t source the necessary raw materials.
• Some distributors think supply chain issues will start to be resolved next year, while others say it will take longer, according to MDM’s 2022 Trends survey responses.
There have been two dominant trends for distributors in 2021; supply chain constraints and labor shortages. While the labor shortages have ramped up since the onset of the pandemic, there were labor shortages in some areas, such as truck drivers, even before COVID-19.
The supply chain issues have been front and center this year, highlighted by a sideways container ship in the Suez Canal. In order to find out what’s top of mind for distributors for the remainder of this year and into next year, MDM’s 2022 Trends online survey took the pulse of more than 100 distributors, manufacturers and service providers. The outlook for supply chains improving in the short term is murky at best.
“I don’t think they’ll really start straightening out until probably the end of first quarter, maybe the beginning of second quarter of 2022, and that’s if things settle down around the world with COVID,” says Mallory’s Andy Mitchell, vice president of sourcing and supplier relations. “Between the demand spikes for product, the shipping issues and then the COVID shutdowns around the world of factories, it just caused a colossal disaster in supply chain. I probably spent 50% of my time trying to solve supply chain issues that a year and a half ago I did not do.”
Mike Marks, managing partner of Indian River Consulting Group, cites research he’s seen that says the supply chain issues will start to be resolved in late 2022 or early 2023. Aside from the price of shipping containers, Marks says the supply chain problems can be traced back to second- and third-party suppliers who are having difficulties sourcing raw materials to send to manufacturers, who in turn are having problems keeping up with the demand of their distributor customers.
Marks says a number of manufacturers and suppliers have declared “force majeure,” which, at its most basic level, means unforeseeable circumstances are preventing manufacturers and suppliers from fulfilling their contracts.
“I’ve never seen so many force majeures,” says Marks. “We have suppliers that can’t deliver because their suppliers have declared force majeure. I’m on the board of a manufacturing company and our revenue is limited because we can’t get the chemicals to make the foam to go into refrigeration. Our supplier has declared a force majeure. We just had discussions with him [the manufacturer] because we’re a big customer. He said, ‘Look, my suppliers have declared force majeure on me. I’m not going to release mine (force majeure) until they release mine on me, and it’s a long way off.’ People can’t get the core materials they need to make things.”
Alternative coping strategies
Penn Hoyt, vice president of operations and Marketing at LMT Imports, says his company, which mainly makes rustic pine furniture for customers in the Southwest, saw some of its manufacturers shut down last year due to COVID-19 restrictions. On top of that, large Chinese companies have been buying up the South American wood that furniture manufacturers in Mexico relied on in the past. Sellers are taking cash in-hand from whomever meets their prices, according to Hoyt.
“We still have orders on top of the back orders,” Hoyt says. “We were down there [in Mexico] a couple months ago at one of our factories. We walked through the area where they usually keep the raw materials. It was only a third full, where in the past that place was always full.
“It’s a full-time job just trying to scrounge lumber. We’re reading some stuff that it’s supposed to be getting a little bit better and the prices are going to be dropping. We’re hoping, but we’ll see.”
Hoyt says some of the larger furniture companies, such as Ashley HomeStore, that normally build their furniture in China and Vietnam have bought up factories in Mexico, so they don’t have to deal with the uncertainty and high cost of using shipping containers.
“A couple have gone down there with wads of cash and started buying up factories and saying, ‘OK, you’re no longer going to make this for anyone else,’” Hoyt says.
With the shortages in raw materials, Steiner Electric’s Michael Butera, director for digital marketing, says it’s crucial for distributors to provide their best estimates for lead times and to come up with possible substitutes for their end customers. “It’s also important for us to say, ‘Here are your substitutes and here’s what you can do today versus what you’d have to wait for tomorrow, or next week,’” Butera says. “In some cases, it could be a couple months down the line before some products are available.”
The container conundrum
While the mantra for real estate is “location, location, location,” for supply chains it may as well be “containers, containers, containers.” Whereas the cost of a container from a country such as China used to be $4,000 to $5,000 per container, it’s now easily double those amounts.
“Things just got all cocked up and every container is in the wrong place,” Marks says.
As an example of a supply chain being broken, Marks says typically nails are used to fill the bottom couple of feet of a container, since an entire container of nails would be too heavy and too costly to ship. “It used to be economical to ship nails over from China that way,” Marks explains. “Right now, the price of a container is somewhere between $11,000 and $20,000, depending on how bad you want it. And there isn’t enough gross margin in the entire container to cover the difference in the shipping costs. So, all the nails that are manufactured are sitting in containers, which aren’t being used by anybody else. I could give you 20 more examples of that.”
Several large international distributors have solved the container problem by buying them outright, or exclusively leasing them for long periods of time, but other distributors have to be more creative.
“We are living the supply chain issues with our domestic suppliers and also with our own direct sourcing around the world of over 20 containers a month,” Mallory’s Mitchell says. “There is really no tech to help us do better. It’s a knowledge of supply chain, knowing the people to call and the angles you can use to move goods better and quicker.”
Mitchell speaks with contacts here and abroad to find the bottlenecks and potential solutions. For example, he recently had a 40-foot container of disposable clothing coming from Wuhan, China to San Francisco.
“My international freight broker came up with a $20,000 cost,” he says. “Pre-COVID, that was a $2,000 to $2,500 lane. I told them it won’t work. I shared my concerns with the factory owner in Wuhan, and they found they could get a container to Los Angeles for $9,000 and then I’ll add another $2,100 to truck it up to San Francisco. Each day we are looking at things and making these sorts of decisions.”
Relief in sight?
There is hope on the horizon for improvements in distributors’ supply chains. With the increase in demand in 2021, there’s been a lot of growth — and money gravitates to growth, according to Marks. If there’s a recession, the supply chains could catch up again as the pendulum swings to lower costs.
“What happens is if the demand drops the containers and the supply chains can catch-up,” Marks says. “Everybody just needs a little breathing room to get things back. In the short run, everything goes down. What ends up happening is the containers will get moved around and the price of shipping and containers will end up back where they’re supposed to be.”
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