No end in sight to supply-chain snarls, so now what?

The concept of a "supply chain" tends to conjure up images of routine, repetition and predictability; the concept is most commonly illustrated by a straight line or a perfect circle. The pandemic threw all of that out the window.

Those nominally tasked with overseeing engineering and freight networks had to become de facto government-relations specialists, health-care service providers, employee busing coordinators and eventually vaccine distributors more or less overnight as they worked to keep factories open and support the communities in which they operate. It took a toll. "I was totally out of gas" by November and December, said Torsten Pilz, chief-supply-chain officer at Honeywell International Inc, in an interview. "I was so stressed. I've never felt like that in my life. It was just the compounding effect of all of this." Things have gotten better: In much of the developed world at least, fewer people are dying, and supply-chain leaders' biggest headaches once again entail problems with the actual supply chain rather than pandemic dangers. Manufacturers would always prefer to bend over backwards to meet rising demand than have to adjust to a recession. But it remains an incredibly challenging operating environment, affecting the production of just about everything. And there's no real end in sight.

We're now most of the way through the industrial earnings season, and you'd be hard pressed to find a press release or conference-call discussion so far that didn't include a mention of supply-chain bottlenecks. Raw-material shortages and logistics logjams prevented paint maker PPG Industries Inc from filling some customer orders in the second quarter. A dearth of semiconductors is kneecapping Rockwell Automation Inc's sales growth. Industrial distributor Fastenal Co can't find enough workers to staff the counters at its retail branches. Stanley Black & Decker Inc is having to pay $80 million in additional transportation costs in the second half of the year to lock in ocean containers and ship goods by air to keep up with hot demand for tools. Dover Corp is struggling to get the components and labour it needs to make garbage trucks and industrial-sized refrigerators. 

The supply-chain challenges and the great debate over whether inflation will suffocate the economy are related. Many industrial companies — including Carrier Global Corp — are now on their third set of pandemic price increases in an effort to offset rising material costs and compensate for labour and freight-capacity constraints. "Clearly there's inflationary pressures. We can't get caught in the middle," Carrier Chief Executive Officer Dave Gitlin said in a Bloomberg TV interview on Thursday. Customers aren't balking — at least not yet. "Do you actually go for the fourth price increase? Because the fact of the matter is, you run the risk of demand destruction in the short-term, and that's not good," Dover CEO Richard Tobin said on a call last week to discuss the company's results. But for the moment that's more of a secondary concern: "It's not so much a pricing dynamic right now," Tobin said. "It's whether you can get the product out the door."

At Honeywell, CEO Darius Adamczyk said the company could easily generate as much as $200 million of additional sales in the current quarter if it wasn't for supply-chain constraints. Resins and semiconductors are its main pinch points, though Honeywell also had a container on the Ever Given ship that blocked the Suez Canal for nearly a week in March, Pilz, the supply-chain chief, said. Because of how ocean containers are stacked sky-high on vessels, it's impossible to extract just one. So the Honeywell goods were stuck in Egypt until earlier this month when authorities at longlast allowed the Ever Given to depart after months of legal wrangling with the ship's owners over a settlement. The ship finally arrived at the Port of Rotterdam this week.

The seemingly never-ending pileup of supply-chain pileups has required both holistic solutions and on-the-spot creativity. Honeywell was already in the process of simplifying and localising its supplier network when the pandemic hit, and Covid-19 forced the company to kick that effort into high gear, Pilz said. It's never going to be realistic for Honeywell to domestically produce everything it sells in a given region; for certain technologically sophisticated products, there may be just one factory in the world, Pilz said. But there were instances where geographically diverse parts networks had worn out their usefulness. Honeywell has a large manufacturing presence in Eastern Europe, for example, but it was relying on a global supply chain based out of the US, China and Western Europe for certain electronic and mechanical products. "At the end of the day, this was really not necessary," Pilz said. Automation makes wage arbitrage less important, so the company has also moved some electronic components production into the US from Mexico.

These days, Pilz's job has shifted to what he calls "tactical" supply-chain management — essentially coming up with alternatives when a port is backed up or a chip is in short supply. The ports of Los Angeles and Long Beach are particularly congested: The average time that inbound containers wait after they're unloaded from a ship stretched to 4.76 days in June, compared to 2.44 days in December 2019, according to the Pacific Merchant Shipping Association. So Honeywell has been rerouting shipments to the Port of Tacoma or the Port of Vancouver and supplementing with rail connections. The company will also ship products by air when it needs to: A digital overhaul of its supply-chain management system helps it prioritise the pricier air-freight options for those situations when it's truly critical. 

Industrial manufacturers aren't feeling the pinch of the semiconductor shortage quite as much as automakers, which rely on many of the same kinds of computer chips as consumer electronics and gaming companies to build increasingly sophisticated infotainment consoles. But certain kinds of industrial semiconductors are still hard to find through the normal channels. Demand for Honeywell's box scanners has exploded alongside the boom in e-commerce, but some sensors that help power them are in short supply, for example. So the company has reworked the design to accommodate alternatively formatted chips. "It's not easily interchangeable but there are common structures sometimes," Pilz said. "At the end of the day, we go by capability — what do we need the chip to do? There are different ways to do it." The toughest part has been getting the regulatory certification and registration for these tweaks because that process is out of the company's hands and takes longer, he said.

Caterpillar Inc is also reworking its manufacturing practices to minimise disruptions. The machinery maker said Friday that changes to its assembly-line processes and alterations to material specifications for hard-to-find resins meant that availability for the majority of its products remained within normal ranges in the second quarter. But Caterpillar expects the bottlenecks to last through the end of the year. The supply-chain challenges it's facing now are much broader than the one-off component shortages or metal-casting logjams that might normally be expected in an economic upturn, CEO Jim Umpleby said on a call to discuss the results. The company reported better-than-expected sales and earnings for the second quarter amid booming demand for heavy-duty equipment but also warned that rising employee compensation and manufacturing costs would weigh on operating margins in the current period.

The big question, of course, is how long industrial supply-chain leaders need to keep coming up with new ways to make and ship products. Some of the component bottlenecks and high raw-material costs will work themselves out as the economy settles into a more sustainable growth rate. But absent an economic slowdown that no one wants, the only real way to rectify the semiconductor shortage and a dearth of ocean-freight capacity is to build more chip factories and shipping containers. That takes time. Freight broker CH Robinson Worldwide Inc warned this week that the cargo logjam will last at least through the Chinese New Year holiday next February. Even that is something of a guess or wishful thinking. At this point in the earnings season, it's telling that I can't think of one CEO who expressed much optimism about a near-term ease to the supply snarls. "I'm not ready to say we have turned a corner," Rockwell CEO Blake Moret said in an interview. "It's not going to be over quickly. But we're dealing with it."

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

Disclaimer: This opinion first appeared on Bloomberg, and is published by special syndication arrangement