The Supply Chain Matters blog provides our latest news capsule format follow-up relative to previous supply chain management related developments we have shared with readers.
This edition provides six supply chain focused updates related to the following:
Higher Input Prices and Mandated Energy Consumption Restrictions Hampering China’s Factory Output
Higher Global Costs for Steel Continuing to Challenge Manufacturers
Paper Shortages Across North America
Amazon’s Additional Facilities and Workers to Meet Ongoing Demand
COVID-19 Outbreak Continues to Impact Vietnam’s Manufacturing Industry
Critical Shortage of Truck Drivers in the United Kingdom
Higher Input Prices and Mandated Energy Consumption Restrictions Hamper China’s Factory Output
A combination of higher inbound commodity costs for coal, steel and other commodities has reportedly resulted in factory gate prices rising at their fastest pace in 13 years. Meanwhile, amid a push to enforce existing environmental regulations, rationing of electrical power is leading to forced cuts to factory production among a number of China’s more prominent manufacturing regions.
China’s National Bureau of Statistics reported earlier this month that the country’s producer-price-index rose 8 percent in August, the fastest increase since August 2008. Reportedly, to curb such input price increases, Chinese authorities are selling select commodities from government stockpiles while clamping down on perceived hoarding. Economists now warn that higher input prices will add to profitability pressures for manufacturers in the country, on top of higher transportation costs and continuing supply chain disruptions. Record high coal prices are making it unprofitable for certain power plants to operate.
Electrical power restrictions have reportedly expanded to more than ten Chinese provinces, including the manufacturing regions of Jiangsu, Zhejiang and Guangdong. Local provinces have been ordering the power cuts in efforts to avoid missing targets for reducing energy and emissions intensity established by the central government.
According to reporting by Global Business Network CNBC: “the disruption to China’s vast manufacturing industries reflects the ruling Communist Party’s struggle to balance economic growth with efforts to rein in pollution and emissions of climate-changing gases.” The report cites economists and an environmental group indicating that manufacturers used up this year’s quota faster than planned as export demand rebounded from the coronavirus pandemic.
Products speculated to be impacted include smartphones and other consumer products ahead of the upcoming holiday shopping season. Reportedly, a components supplier for Apple’s iPhones had indicated a suspension of production at a factory west of Shanghai under orders from local authorities. There are other indications that Tesla’s EV production facility in Shanghai may have been impacted.
Between rising factory input prices and energy curbs, some economists are revising annual economic growth targets downward. Other reports point to manufacturers now refusing to accept new orders until ongoing rising costs and energy curbs can be stabilized.
Higher Global Costs for Steel Continue to Challenge Manufacturers
Manufacturers across the globe continue to face the highest costs for steel and aluminum encountered in years, along with production shortfalls amid higher commodity, tariff and transportation costs along with worker shortages.
The American Iron and Steel Institute indicates that steel producers are now cranking out supplies at the highest rate since before the financial crisis in 2008. Yet supply shortages remain for certain products.
The shortfalls have resulted in food and beverage as well as consumer goods producers to both encounter shortages of cans and have to pay elevated prices to secure what inventory they can muster. The situation with metals supplies has impacted global automotive, truck and farm equipment, as well as appliance producers with higher inbound costs of rolled steel or aluminum components. Likewise, exercise equipment providers such as Peloton, or office equipment providers such as Steelcase have to incur additional raw material costs. Production lead times are consequently impacted as well
Import tariffs implemented by the Trump Administration and continued with the now Biden Administration have particular impact for U.S. manufacturers.
Reportedly to keep manufacturing operating, companies are either modifying designs or accepting nonstandard metal sizes in addition to turning to what over foreign sources that make economic sense. The current high costs of global transportation and severely eroded shipping service levels do not help in seeking out alternatives. Steel suppliers and manufacturers are also electing to increase supply inventories when supplies can be garnered.
Paper Shortages Across North America
Bloomberg recently reported that skyrocketing demand for shipping boxes and packing materials has now resulted in the limited availability of paper across North America. Amid strong demand in online ordering and customer fulfillment, some mills have converted production to paper board output while others have shutdown.
The report cites ERA Forest Products Research as indicating that more than 2.5 million metric tons of North American printing and writing paper capacity has been offline since the start of 2020.
As a result, there are estimates that 100 million catalogs printed by retailers will not be able to be printed by the height of this year’s holiday buying season. Reportedly, supplies of certain grades of specialty papers are so tight that commercial printers cannot obtain the paper supply needed. Book publishers are also reportedly hampered by limited supplies of printing paper.
Soaring online advertising costs along with increased controls related to user tracking in online advertising have motivated retailers to return to specialty printed catalogs to maintain customer touch points and brand loyalty.
In addition to the above, supplies of toilet paper and paper towels are again in short supply among certain regions. Warehouse retailer recently imposed quantity buying restrictions on these products.
In the United Kingdom and certain parts of Europe tight supplies of paper and numerous price increases are further noted as concerns.
Amazon’s Deploys Additional Facilities and Workers to Meet Ongoing Demand
The Wall Street Journal reported that online retail platform provider Amazon has opened more than 250 facilities this year, with plans to operationalize a further 100 facilities by the end of this month.
At the same time the online provider has plans to add 125,000 employees across the United States in the midst of a tight labor market. Most all of these new hires are reportedly non-seasonal in context. Noted is that the average pay for warehouse fulfillment workers is now at an average of $18.32 per hour to attract added workers.
The report further indicates that the online retailer has initiated more than 450,00 hires in the U.S. since the pandemic began, with total employment t more than 950,000. An estimated 750,000 positions are in warehouse operations.
An economist at the Georgia Institute of Technology is cited for observing that for Amazon, not having required labor is acutely expensive in maintaining required volume thruput, thus the willingness to pay higher in in a tight labor market.
Adding to the tight labor market is other retailers and brands hoping to sell more direct thru online channels for the upcoming holiday fulfilment period. That has added to the ongoing explosive demand for warehouse fulfillment and support workers. Reportedly, the average wage for warehouse fulfillment workers at retailer Walmart now averages $20.37 per hour.
The ongoing labor shortage is further driving additional needs for warehouse automation and autonomous robots. In a prior June Supply Chain Matters This Week in Supply Chain column, we highlighted DHL Supply Chain, the contract logistics business entity within Deutsche Post DHL Group, announced framework agreement expanding an ongoing logistics automation collaboration with Locus Robotics to deploy upwards of up to 2,000 assisted material picking collaborative mobile robots, 500 of which are to be deployed by the end of this year.
According to the U.S. Labor Department, the number of unfilled job openings across the U.S. has risen to a level of 10.1 million, the highest since the year 2000. That number exceeds the reported 9.1 million of unemployed workers.
COVID-19 Outbreak Continues to Impact Vietnam’s Manufacturing Industry
Business and industry media continue to report that ongoing COVID-19 mitigation measures to curtail the spread of the virus are having a major impact on the country’s manufacturing sectors. Industry supply networks impacted include apparel and footwear, smartphone and high-tech electronics production, among other sectors.
The country’s vaccination rates among its population is among the lowest in Asia, leading to what is described as draconian measures to curtail virus spread. In a prior Supply Chain Matters commentary highlighting August PMI indices, The IHS Markit Vietnam Manufacturing PMI® had fell to 40.2 in August from the 45.1 reported for July. The August report made indication of the worst outbreak of the COVID-19 virus since the pandemic began.
Factory shutdowns have been more concentrated in the southern portions of the country with reports indicating that some workers are now sleeping within factories to attempt to keep some production from complete suspension. Companies that have reported direct impacts include Nike and Samsung, both with a significant manufacturing presence. Nike indicated in its recent report of financial performance that it will take several additional months before production levels in the country can recover.
Footwear and apparel brokers and manufacturing agents are now advising brands to seek out production alternatives in Bangladesh, China, India and Indonesia as options, as these regions have managed to bounce back from virus infection cycles. In high tech supply networks including smartphones, China and India are options although as note in an above update, Chinese manufacturers have different challenges.
Critical Shortage of Truck Drivers Continues in the United Kingdom
Business and mainstream media reporting indicates that a truck driver shortage that began in the aftermath of the Brexit trade agreement with the EU, has now reached a crisis point across the United Kingdom.
The shortage has led to delays in food and fuel deliveries and consequent panic buying behavior among the country’s consumers this past weekend. The crisis has led to pressures on the government of UK Prime Minister Boris Johnson to intervene and mitigate the driver shortage.
Earlier this week, there were reports that the government would call in the military to assist in moving essential goods and supplies, particularly fuel supplies. That move has since been qualified as being a last resort.
The government has instead announced intent to open up 5,000 additional visas for qualified truck drivers especially from Eastern European countries to help ease the shortages. These visas would reportedly extend until the Christmas holiday. Organizations and spokespersons representing Eastern European drivers indicate that drivers are not interested in short-term visa windows and instead would seek longer-term work commitments.
Apparently, the long lines of queue trucks that piled up in UK and EU ports at the height of the brinkmanship Brexit agreement, along with the ongoing effects of COVID restrictions remain fresh in minds of truck drivers. According to reporting by Bloomberg, the crisis strikes at the heart of Brexit arguments that the U.K.’s reliance on foreign workers dragged down domestic wage rates and discouraged in country recruitment and training.
John Perry, Managing Director of supply chain and logistics consultancy SCALA has indicated in part: “The driver shortage is a long-standing problem that had been partly patched over by drivers from the EU. The UK visa scheme is a short-term fix, but there are longer term solutions that can be guided by the actions of the government and UK companies. Years ago, drivers were well paid and often employed by the major brands on very good terms and conditions. However, with increased competition and a drive to reduce costs, wage levels have been eroded as transport operations have been outsourced with very little profit margin for the logistics operators”
The government has reportedly now suspended competition rules, last invoked during the height of the pandemic, to allow companies to coordinate fuel and food supplies.
How and when this driver crisis is resolved is again subject to the dynamics of British and EU political forces. In the meantime, supply chains and goods flow will remain impacted without a remediation plan.
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