Time And Time Again, Solving Supply Chain Issues Circles Back To One Thing

Supply chains have been a complicated issue since the beginning of time, in all types of situations, from the battle field to the project site.

In the case of the battlefield, lives were on the line as supplies weren’t able to get through the devastated landscape and the broken lines of transportation. For housing, affordability is on the line as typical supply chains are disrupted, altered and even shut down.

Nowhere is anyone escaping the issue. As Martin Luther King said, “Whatever affects one directly, affects all indirectly. I can never be what I ought to be until you are what you ought to be. This is the interrelated structure of reality.”

Now, builders, developers, manufacturers, architects, and contractors are dealing with that reality and trying to reimagine a more successful path forward, while all trying to serve themselves and their own bottom lines. It’s a messy paradigm.

Some manufacturers depend on either components or assembled products from overseas. The shipping costs for containers from China to the east coast of the US have climbed more than 500% from one year ago according to freight-tracking firm Freightos. Yet, nowhere is there room in the home building process to pass along an increase of 500%.

Bob Tancula serves as senior vice president of building product manufacturers advisory at national media and data group Zonda and says that another large part of the issue is about labor.

“One of the biggest issues is labor constraints,” he said. “Manufacturers don’t have enough labor on the plant floors. Demand is not going to drop back, so this is the first time in 30-plus years where the demand for products is unlikely to be met by manufacturers.”

With that growing demand, manufacturers are investing more in labor. Some have started to offer higher wages, spending more to attract and keep workers, even offering sign-on bonuses. Tancula believes this increase in labor costs will likely constrain market growth.

As a temporary fix, some service-oriented categories have tried paying people at the end of the day or the end of the week to entice them to show up.

Learning from the Tech Supply Chain

Greg Leung is the CEO of Connect Homes, a California-based builder delivering high-tech housing solutions, who also spent more than a decade at Apple as senior director of worldwide supply demand management.

He says that technology has a much more global supply chain and that it has a lot more components than housing, pointing out that housing is much simpler.

“Supply chain management is all about information and decision making,” Leung said. “In technology, over decades of management, there is a great deal of information and stakeholders have learned to use data to make decisions on supply chain visibility and inventory, which means it can be managed better. The building supply chain isn’t as advanced. It has lots of blind spots, which makes it difficult to manage and it can cause bullwhip affect.”

A good example of the bullwhip effect was lumber during the pandemic. Builders started to fear a shortage, they stocked up, it exacerbated the shortage, prices went up, then manufacturers ramped up production. The increased production can then lead to a glut of lumber, which would then lead to dropping prices. It starts with a small disruption, and gets amplified with customer buying behavior.

Leung says the antidote to bull whip effect is more information. In the lumber example, suppliers could proactively smooth out the peaks and valleys if they had the right information, but he says access to data in housing isn’t sophisticated enough.

One area he suggests housing leaders could improve is looking at the situation to differentiate between end user demand and actual consumption.

“For example, home starts have increased but not quadrupled, while pricing has,” Leung said. “What you can do is manage different tiers and differentiate between users and consumption and not just fear and stocking up. If you have data to see if the increase in demand is actual consumption or panic buying, that’s a very important tool.”

He also suggests building strong, strategic relationships by choosing partners carefully and sharing your vision and private data with them, which is more difficult to do in the housing industry because it is more transactional and less collaborative.

“To drive innovation, you have to get partners to buy into the mission,” Leung said. “It requires buy in and support that you can’t get without a personal and professional relationship. You should help them become part of the strategy and objective, and maintain close relationships with the management of the company. That’s a typical tech practice.”

Amit Haller is founder and CEO of another home building company Veev and he has found ways to be avoid the shortages in the supply chain impacting the industry. His building process is unique and doesn’t rely on the materials that the rest of the industry relies on.

“A lot of the materials that are challenging other builders practically don’t exist for us,” Haller said. “We don’t use the wood or paint. Now the wood is not just the wood, resins are in shortage as well because of the factories shutting down in Texas and are not back in production. We also make kitchen cabinets with high performance surfaces, which puts us at a very strong advantage.”

Many builders are not in a position to make these sweeping changes to materials.

The challenge continues to be how to develop solutions that strike the targeted balance between effectiveness, agility, reliability, speed, visibility, and cost.

Suppliers Take a Step Forward

As builders try to reinvent themselves and take more control of the supply chain, distributors are taking on more risk and adding more value in other ways.

Peter Jackson is the CFO from national distributor Builders FirstSource and says that its manufacturing has increased 50% since the beginning of the year as builders look for ways to take time out of the build cycle with prefabricated solutions. Jackson says the company is actively expanding manufacturing facilities across the country and signing new ones with regularity now, providing open ended truss systems, roof trusses, wall panels and other products that take work off the job site for more efficiency.

Buliders FirstSource also is experimenting with robotics to create more automation in the process. In 2019, the company acquired Raney Construction, an innovative offsite construction company that reduces time and labor in the home building process. Now, more and more builders are interested in experimenting with these types of processes.

Jackson and Robyn Pollina, the CEO at Palmer-Donavin, a distributor serving the midwest of the US, emphasize the importance of building strong relationships.

Many solutions include better transparency. Palmer-Donavin is not only looking for ways to share data with partners, but also to uncover actionable insights from the data that makes innovation possible. For example, Pollina says they are doing research in artificial intelligence tools that will make product suggestions for customers during order entries.

Today, the company is investing in inside and outside sales, providing tools and resources to them to be able to consult with customers. 

Jackson’s team took the time to strengthen existing relationships with vendors and providers to make the supply chain more efficient by communicating future needs and by keeping signals clean between teams.

Jackson says that his company’s scale also helps to differentiate it and make it an attractive partner. He looks for partners that value the service offering, parting ways with the ones who do not and are only looking for lower cost and abusing the relationship along the way.

“But, that’s the nature of being a distributor, you’re always subject to people wanting to disintermediate,” he said. “Our partners can’t move product to the site in a just-in-time way. So, we protect our position by aligning with the home building process. We understand the building schedule so well that builders delegate many of the scheduling tasks to us. Providing value-added services has become more important in this day and age.”

Pollina also talks about the long-term implications of production delays.

“Our manufacturer partners are desperately trying to keep up,” she said. “They are focused on enhancing their processes to increase capacity. There is also a longer-term problem we see in the construction industry to this laser focus on building capacity. We have not seen manufacturers focused on new product innovation in building materials for the past 18 months. We rely on new products to grow our sales and bring better solutions to our dealers and their builders.”

Pollina says that Palmer-Donavin also tracks the retail industry, where there was major disruption even before the pandemic, to learn about transformation and to learn how to quickly adapt to customer behavior or face extinction, a concern hopefully none of the distributors have to face.

Future Impacts

Dr. Vikram Mansharamani is a global trend-watcher who shows people how to anticipate the future, manage risk, and spot opportunities, and the author of the recently-released THINK FOR YOURSELF: Restoring Common Sense in an Age of Experts and Artificial Intelligence. He discussed some of the factors impacting the future of the supply chain.

“The just-in-time and lowest-cost architecture of supply chains is no longer the way to go,” Mansharamani said. “Trade wars and lock downs brought up prices and even made it impossible to get product, so now you need alternate methods.”

He pointed to the rising importance of ESG metrics to support shorter supply chains, plus Trump’s tax cuts that will make it more attractive to manufacture domestically, also shortening the supply chain. Plus, new technology and automation solutions are able to compete with the lower cost of labor overseas, so labor is less of a factor.

While a shorter supply chain is attractive, there could be some side effects. For instance, China has few to no restrictions on protecting the environment, which is a big concern in the US that also costs a lot of money. At the same time, more local sourcing provides resiliency and security of supply.

Mansharamani asks: How much more can you spend to avoid that?

“There is a valley and the valley will be disrupted,” he said. “Once we get across the valley, we will get product that is better for us and better for the world. We did it in World War II. We were patriotic.”

 Shipping rates are high, we thought it was 25% cheaper coming from China but profits are going to shipping companies.

If nothing else, he recommends developing a redundancy in the supply chain right now, even if it cuts into margins. If you want to get the cheapest supplies always – there is a probability are vulnerable. Price increases because of tariffs, highjacked profits in the value chain, but it’s more vulnerable to have longer supply chain.

There is a strong theme for creating strong, valuable relationships. As Leung, Jackson and Pollina suggested, Mansharamani also recommends developing relationships.

“It is a safer supply source from a risk perspective. Start building the relationships and start sourcing from an alternative supplier and if they can ultimately be able to scale and earn the business.”

Listen to more about Mansharamani’s thoughts on supply chain including trade wars, currency from his presentation here.