Supply Chain Bottlenecks – 2022 And Beyond

Industry analysts and experts love to forecast. Back in the 1960s financial analysts began to make money, forecasting the future and recommending stocks based on their crystal ball. To encourage investors to buy and sell, which is how they made money, they realized that “optimism” was the magic potion. Predict how things would be “better” next year and investors would run out and buy stock. What’s more, financial analysts quickly realized that investors loved “good news” and abhorred “bad news” and that they routinely turned a deaf ear to dour predictions.

“Good News” Forecasting

Sounds familiar? Most construction industry analysts are predicting a robust 2022 in spite of raging inflation, skilled labor shortages, and supply chain collapse. No one wants to hear anything else. However, a careful reading of their forecasts uncovers a quirk in their predictions – they are only talking about our construction industry getting new business, not making more money. Few “experts” even mention industry profits. 

Profit Is Not A Dirty Word

My entire career has focused on construction industry profit. I do not rely on top-line forecasting but focus my analysis to advising industry leaders about effective management decisions under varying market conditions. In my view, effective management decisions are profitable, or they would not be effective. The variable, of course, is market conditions. “How will varying market conditions in 2022 affect our ability to make a profit on the work we put in place? What management adjustments must we make to account for new, unexpected market conditions?” 

Supply Chain Bottlenecks

Serious kinks in the world-wide supply chain have emerged during the last two years of struggle with this dastardly COVID virus. Everything from toilet paper to lumber was hard to come by. New car supply was hampered by a shortage of computer chips so used car prices went through the roof. Seafood disappeared from some restaurant menus and “cleaning product'” shelves went empty in supermarkets. 

What Supply Chain Kinks Look Like

“A shipping container that cannot be unloaded in Los Angeles because too many dockworkers are in quarantine is a container that cannot be loaded with soybeans in Iowa, leaving buyers in Indonesia waiting and potentially triggering a shortage of animal feed in Southeast Asia…

“An unexpected jump in orders for televisions in Canada or Japan exacerbates the shortage of computer chips, forcing auto manufacturers to slow production lines from South Korea to Germany to Brazil.” (NY Times, Peter Goodman and Keith Bradsher, Nov. 14, 2021 – The World is Still Short of Everything. Get Used to It.)

The Whole Chain is Kinky

These N.Y. Times reporters did a great job of characterizing how interdependent economies are connected by a chain that can develop kinks anywhere along the way. This structural “kinkiness” is caused by the piecemeal design of this critical supply chain that can’t keep up with the explosion of international trade. Sooner or later the volume of world trade was going to overwhelm the supply chain’s rickety structure and inhibit the flow of goods. 

World trade evolved beyond the piecemeal supply chain because:

     1. Although the U.S. remains the world’s top consumer nation, we are no longer the world’s top producer nation. Almost everything under your Christmas tree was shipped there from far off lands via an inadequate supply chain.
     2. Manufacturers in countries around the world are now competing for a limited supply of key commodities that must be shipped to them creating two-way competition for logistical capacity. Raw materials shipped into a country and finished goods shipped out across the world through narrow supply channels simply means chronic delays, limited supplies, and higher prices.
     3. This new world economy has led to over reliance on a limited number of third parties. Many businesses have developed strong relationships with one major supplier. Exclusive dependent relationships often result in shortages when kinks in the supply chain stop the vital flow of raw materials.
     4. “Just-in-time material inventory replacement” is cost-efficient when the supply chain functions perfectly. Any “kink” in the chain causes critical shortages and delayed production which results in additional finished goods shortages down the line.

Many recent supply chain issues have been caused by another 2022 market factor, labor shortages. We have already discussed the fact that the labor shortage is here to stay until we formulate systemic change, and of course, the supply chain cannot be repaired without the labor problem being solved. 

The World in 2022

World-wide trade channels will not be able to be reconfigure by the end of 2022. Higher prices and material shortages are here to stay throughout the year. This may have little or no effect on construction’s top-line. But you can bet it will be a significant challenge to our bottom line. 

Don’t miss next week’s return to our Science of Construction Business Management series.

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