Splits are emerging in corporate America’s response to a supply chain crisis which growing numbers of executives expect to last all year, heralding a wave of spending on new capacity, better data and support for weaker vendors.
This earning season, companies have complained of shortages, delays and spiking costs in a quarter in which they scrambled to procure semiconductors, were left waiting for components and suffered the effects of suppliers’ staffing gaps.
The reporting season has also exposed how differently supply pressures are affecting the country’s largest companies, however, with some expressing confidence that they were past the worst while others still struggle to put the disruptions behind them.
Apple, which had warned that supply constraints could cost it $6bn in the three months to December, defied Wall Street’s fears that the toll could be as high as $10bn and reassured investors that it expected better conditions this quarter.
Groups including 3M, Freeport-McMoRan and General Dynamics similarly hailed their ability to overcome their supply chain challenges, but others reported unexpectedly serious fourth quarter deteriorations or cautioned that the disruptions would last for months to come.
GE said shortages of semiconductors, resin, parts and labour had affected its quarterly sales by about 3 percentage points, while Caterpillar admitted that the challenges had been more significant than expected.
Mondelez warned that its supply “headwinds” in North America would grow stronger this quarter, and keep costs elevated for most of the year.
The supply chain would be “the fundamental limiter of output” this year, Tesla chief executive Elon Musk told analysts, adding that the chip shortages it faces might not ease until 2023.
Companies including VF Corp, the clothing group behind The North Face, said they had moved some production to suppliers closer to their biggest markets. Intel, Tesla and Texas Instruments hailed recent investment in new semiconductor facilities, saying these would give them more control of key components.
Companies with more domestic suppliers and those that had moved before the pandemic to broaden their supply chains were faring better than others with more complex, global logistics, said Tim Ryan, chair of PwC US.
A mid-January survey of US executives by PwC found that less than half expected supply chain disruptions to ease by the end of the year, and more than 60 per cent planned to raise prices in response.
“Overall, it’s still the biggest companies that are able to buy their way out of the tough spots,” added James Zahn, deputy editor of the Toy Book, which tracks the toy business. Even so, he said, some companies that planned to present at February’s Toy Fair were “teetering on not having their samples and prototypes available to show”.
The extended impact of Covid-related factory closures, elevated shipping costs and driver shortages is forcing companies to question long-held beliefs about “just-in-time” production, including how few suppliers they depend on, how far critical components must travel and how little inventory they can hold, executives said.
“The pandemic has pushed manufacturers to redesign their supply chains in favour of certainty of supply and locating inventory closer to customers,” Ed Elkins, chief marketing officer of railroad operator Norfolk Southern, told investors.
Hamid Moghadam, CEO of Prologis, said that clients were telling his property company that they would need 20-25 per cent more warehouse space so they could carry more “safety stock”.
“The engineers have designed supply chains around predictability and when that predictability goes away everything goes to hell in a handbasket,” he told the FT.
“Most companies are realising that they over-tuned their operation for performance versus resilience,” echoed Rich Lesser, Boston Consulting Group’s global chair, who said in an interview that clients were adopting more of a “just in case” attitude.
Holding more inventory was only part of the answer, he said, pointing to companies’ investment in better data to keep track of supply chains and prepare for future dislocations.
Executives cited a wide array of supply headaches, from difficulty in procuring specialist components at Danaher to a shortage of welders for the castings Raytheon Technologies needed. The responses were similarly diverse, from Sherwin Williams, the paint company, buying a resin supplier to VF Corp chartering “full-sized jetliners” to secure supplies.
Some have needed to offer financial support to small vendors that are struggling to weather the storm, with Lockheed Martin accelerating more than $2.2bn in payments to suppliers last quarter as “a prudent risk mitigation strategy”.
Ambrose Conroy, CEO of a supply chain consultancy called Seraph, said concerns about some suppliers’ financial fragility were widespread.
“I have a couple of clients in automotive who are financially distressed: in earlier days they would have gone bankrupt but . . . customers are giving them cash injections,” he said.
The prospect of a series of interest rate rises this year have sharpened such concerns, observed James Gellert, CEO of RapidRatings, which tracks companies’ financial health.
“When volatility comes in and we begin to have more credit questioning, it will affect the lower end of the credit spectrum and private companies more than it will the large public companies,” he noted.
Greg Hayes, Raytheon’s chair and CEO, underscored how critical small producers could be to large groups with complex supply chains. Out of the defence contractor’s 13,000 suppliers, “less than 100 . . . are giving us real concern,” he told investors, “but it only takes one to make us miss a shipment.”
Additional reporting by Matthew Rocco in New York and Steff Chavez in Chicago