Supply chain issues? Blame COVID and globalism
Even if AIA’s Architecture Billings Index (ABI) is settling into a productive mid-50s zone, supply chain problems are top of mind for the AEC industry. Key manufacturing components are held up in delayed containers and along broken shipping lanes, which in turn spikes the transportation costs that are absorbed or passed along. But someone always ends up paying. This situation, according to AIA’s Chief Economist Kermit Baker, Hon. AIA, isn’t a function of COVID, but rather the Achilles' heel of globalism.
Do we have a demand problem driving up costs and stretching timelines or a supply problem?
My sense is that this is fundamentally not a demand problem we’re dealing with now. It’s a supply problem that might have been there all along and has only been revealed by the pandemic. It’s been hard following commodity lines because the pain points are different for everyone and there’s no grand narrative. We’re now 18 months since COVID really hit and things are getting ironed out, but we are still hearing new supply chain issues every week. Lumber was the first that saw problems last year—and there was a unique story related to lumber because mill owners shut down their production because everyone thought it would be a while before things would come back.
Buildings use hundreds of products and, in general, whether you’re talking about energy efficient windows or HVAC systems, lesson number one is the more inputs you have – as in the number of things you need to source – the greater your risk and likely pain.
What are some of the longer-term issues related to the supply chain that allowed the pandemic to disrupt the system?
There are three things. First is what’s called “just in time” inventory management, sometimes known as JIT. It says that I should source materials based on my production schedule, which is in turn based on demand. In other words, I don’t stock up materials or parts in an expensive warehouse and wait for them to be needed. Instead, I source things as they are needed. It’s a seamless system that operates very efficiently in good times. You can see why in bad times, so to speak, JIT might be problematic.
The second thing is that the source of imports has changed. As recently as 15 years ago, the No. 1 source of imports to the US was Canada and No. 3 was Mexico, and together they amounted to well over a quarter of our imports. While the balance has shifted to China in recent years as our top source of imports, I would say that for a lot of people in the US who need stuff, if they can get it from Canada or Mexico, they’ll do it because they don’t have to deal with port delays or a problem with crumbling Chinese roads causing delays. Lately, we’ve seen jumps in imports from places like South Korea, but especially Vietnam. But all that stuff still has to travel over the Pacific Ocean to get to us.
The third thing is globalism, itself, which is to say that if I’m a country, I won’t make something that someone else can make cheaper. Going all the way back to 1940, the value of imports to the US was equivalent to 3.3% of our GDP, which has gone up every decade. By 1980, it was 10.3%, and by 2010, it was 15.9%. By last year, we’d stepped back to 13% or so, and that’s probably related to the pandemic. But the upward trajectory carried forward by globalism has been well-established over the past several decades. You can see here why, in bad times prompted by a pandemic, globalism might also be problematic.
Are there constants within the global supply chain that are reliable and immune to things like pandemics?
We’ve discovered during this pandemic that the answer is no. If I have a labor force that’s going to show up and I have inputs that are rock solid and ready to deliver, there’s no way I could have predicted a delay in the Suez Canal and, moreover, there’s nothing I can do about that delay. Lately, I’ve been hearing that it was the storms in the Louisiana area that caused a recent slowdown in building materials for a bunch of homebuilders within the United States. That had to do with delayed ships in the Gulf of Mexico. That had to do with port damage and clean-up. That had to do with inland transportation connections. So, even if something only has to get from New Orleans to Dallas 500 miles away, before and after it hits the unloading dock, it is still subject to the effects of globalism and, increasingly, climate change.
What lessons are manufacturers looking at in order to move forward?
I’ve seen the term “supply chain resiliency” and “inventory resiliency” popping up a lot lately. Becoming a concept and a buzz word gives these things credibility, but they still point to a basic idea about reducing risk and improving efficiency. To that end, a first and very simple lesson is that we might want to back away from this popular “Just In Time” inventory management system and actually begin to stockpile materials to draw from in order to respond to demand.
Secondly, more and more companies are going to add domestic, meaning North American, production that includes Mexico and Canada. That gives me a buffer to deal with problems and it doesn’t make me vulnerable to a Suez Canal backup or a tsunami in the Pacific.
Three, I’ve heard a lot about vertical integration recently, which means if I’m a window manufacturer, I source my glass from X, my wood from Y, and my latches from Z, then I’m going to start to want to control more and more aspects of this chain. I’ll either buy a latch manufacturer, for instance, and if the price isn't right, I’ll become one.