As the US and indeed the global economy continues to hum along at a pace not seen in more than a decade, a surprise bottleneck is reducing output from many manufacturers: a shortage of parts and components that make up the final product, as suppliers simply cannot keep up with demand.
A report on the growing problem last week from the Wall Street Journal noted that “Suppliers of everything from engines to electronic components aren’t keeping up with a boom in U.S. manufacturing, which has lifted demand in markets such as energy, mining and construction. As a result, some manufacturers are idling production lines and digesting higher costs.”
The monthly Purchasing Managers Index from the Institute for Supply Management (ISM) tracks US manufacturing growth each month, but little cited among other indicators ISM tracks is a measure on supplier deliveries. That metric indicates deliveries from suppliers have slowed for 22 consecutive months through July.
An example cited by the Journal of the impact that the supplier delays are having on the bottom lines of manufacturers is Terex Corp, a maker of construction equipment. The company recently said its mobile-crane-making unit incurred a loss in the second quarter as parts shortages hurt efficiency at its plants.
“The reality of it is that elements of our supply base could not keep up,” CEO John Garrison said on its Q2 earnings call.
Terex competitor Caterpillar said it is paying more for deliveries from suppliers that are incomplete orders. The company recently notes that castings – the metal building blocks for engines and other large vehicle parts – were in particularly short supply.
Many parts suppliers cut back manufacturing headcount during the Great Recession and have been slow to bulk back up. Now some suppliers say they are struggling to find skilled staff and remain hesitant to ramp up production because they worry a machinery-sector recovery that began in late 2016 could be drawing to a close.
“Suppliers have not been willing to jump on adding capacity because they’ve been burned badly before,” Shiv Shivaraman, a managing director at consultant AlixPartners, told the Journal.
But right now, it is almost a crisis. The number of job openings in manufacturing climbed to 482,000 in June, the Federal Reserve Bank of St. Louis said last week, the highest level in 17 years.
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With all the general economic good news, “The irony is we reached the limits of our ability, in the current configuration we have, to keep up with demand,” says Tom Derry, CEO of ISM.
So, in this unusual environment, some companies are deciding to throw some of their Lean principles out the window.
For example, “We built some inventory last quarter because we had seen the lead times extend and we are trying protect our customers,” said Andrew Silvernail, CEO of Idex Corp., a maker of pumps, valves and meters based in Lake Forest, IL.
The Wall Street Journal adds that “Still, [manufacturing] executives expressed confidence that booming order books will encourage suppliers to boost output, either by increasing wages to attract staff or investing in more capacity.”
But for now, supply variability and rising prices are likely to be with manufacturers for some time.
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