Steve Soares is breaking a sweat. Yes, it's a hot day in northern California, but more than that Soares, owner of Livermore, Calif.-based manufacturers' rep company Wirant Sales, is concerned about what he's going to say to a customer at a rental company that needs tires for a loader when the tire supplier won't tell him the cost until the tires arrive three to six months down the road. And if that's not problem enough, Soares is going to have to make a special call to find out the freight cost.
“We used to have a pretty good handle on freight costs,” Soares says. “We had a multiplier, whether it was 6 or 7 percent or whatever. Not anymore. Now almost every day we have to call in on an order if we want a freight quote.”
Greg Martin of Summit Sales in Honeoye Falls, N.Y., has had the same experience, and even had manufacturers change the price after the order was made, citing increased costs for raw materials. While both Soares and Martin say manufacturers have been remarkably restrained in keeping price increases relatively minimal despite significant changes in their costs, preferring to concentrate on enhancing efficiencies rather than pass along significant price increases to the rental industry, supply chain strains are adding to uncertainties in the marketplace.
Increased lead times are, for the most part, unavoidable and are a major part of rental industry reality in 2011. Although the ability to forecast and buy in large quantities helps larger rental companies in particular to overcome lead-time problems, almost any rental company ordering new equipment in 2011 is finding it takes longer to actually receive shipment than it did the past two or three years.
For most rental companies, according to rental people, reps and manufacturers alike, on larger pieces of equipment, particularly excavators, lead times could be as much as six to nine months. A lot of engines require lead times of six months or longer. Items that might have taken two to three weeks last year might take six weeks or longer now. Lead times are extending a wide range of items such as earthmoving equipment, aerial work platforms, pressure washers, service and delivery trucks, and almost everything else.
This shouldn't come as a great surprise; it's a cyclical phenomenon. When business is in a downturn, manufacturers, no matter how well they plan, find themselves with plenty of inventory available and too much manufacturing capacity. Not being able to keep on a lot of idle production personnel, or to store large numbers of unsold machines, companies downsize staff, the amount of equipment manufactured and in some cases physical facilities. Then when demand picks up, often more rapidly than expected, manufacturers have to scramble to rehire workers, hire new personnel and increase production capacity.
In this particular cycle, a variety of problems complicate the scenario, even as different points on the supply chain are communicating better than in the past. Industry participants point to a wide range of issues and causes, all of which in some way interact, depend and affect one another in the interlocking chain of supply. Difficulty in obtaining components, engines and tires; increases in the costs of fuel, copper, steel, rubber, oil and other resources; freight and shipping costs; the devastating earthquake and subsequent tsunami in Japan that cut into production, availability of materials and components and clogged shipping lanes; finding qualified labor; being able to get materials, components, engines, steel, and tires at times that correspond to need and the overall progress of the build; currency fluctuation and the weakness of the U.S. dollar; a sudden dramatic spike in demand; and uncertainty on the part of suppliers that the economy is going to continue to improve, are all cited as complicating factors.
“It's all of the above,” says Rick Dahl, president of Metrolift, Sugar Grove, Ill. “Cost, availability of certain components and increases in pricing are all combining to make getting product difficult.” And while so many issues complicate the supply chain, it's a testament to the growing maturity and sophistication of the rental industry and its manufacturer partners that lead times aren't significantly greater than they are.
Many of the primary reasons lead times have been extended lie farther along the supply chain. In other words, how long it takes a particular manufacturer to produce an excavator may have less to do with the capability and efficiency of that manufacturer than the myriads of companies that supply it with components, engines, tires, and a range of raw materials. Interruption in the supply of even one part or component can cause production delays on machines thousands of times the size or complexity of that one piece. So to a manufacturer, it's almost a juggling act because if a large shipment of steel arrives in April, but a small but necessary component won't arrive until June, the ability of that manufacturer to operate efficiently can be severely compromised.
“Everybody is trying to pace themselves with their lowest performing supplier,” says Dave Smith, president of aerial manufacturer Snorkel. “I may be able to get the steel components but I don't want the steel components sitting on my ground if I'm not going to be able to get the engines. I would rather back [the components] off until that pacing item gets here and then get all 100 percent of the material at the same time. It's like being the conductor of an orchestra.”
And if equipment manufacturers are facing challenges when it comes to conducting the orchestra and getting all of the needed materials and resources for a production process, multiply that times the number of suppliers in a particular supply chain — with each individual supplier along the chain facing the same challenge to one degree or another. And those many suppliers have been struck by the same recession as this industry has. Hence some suppliers can't get what they need from their suppliers, some of which may no longer be in business, or have changed emphasis of their business, be struggling with increased demand themselves, or simply may not have geared up production significantly enough to deliver what is needed.
Made in Japan
How much more delicate the supply chain balance becomes when a natural disaster, especially on the magnitude of March's earthquake and tsunami in Japan, occurs.
“It's not about the manufacturing factory being down, it's about all the myriad parts suppliers that send components into that factory,” says Jamie Cowin of Birmingham, Ala.-based Cowin Equipment. “So a small widget factory in the tsunami-affected area can mess up the whole supply chain. Japan also has infrastructure and transportation issues. Finally, many of these manufacturers had reduced capacity because of the recession. So it's hard to start to ramp capacity back up regardless, but then the tsunami greatly exacerbated their problems. Small component suppliers from Japan are impacting suppliers outside of Japan too, including Korean and U.S. factories. It's a global supply chain world.”
Many of the Japanese component manufacturers also supply makers of mobile phones, computers, televisions, other consumer electronics and automobiles. Thus when production is affected, construction manufacturers might have to wait in line along with a multitude of other industries needing components.
Even where production issues in Japan were minimal, shipping caused complications. “It became very hard to get things out of Japan because everybody there was importing things,” says Dale Asplund, senior vice president of business services for United Rentals. “It was not that they couldn't produce the components, it was getting them to the docks and getting them transported out of Japan that was the biggest issue caused by the tsunami/earthquake.”
Some say Japan-related issues will continue for some time. “There's still a wave coming that we haven't experienced yet,” says Ed McHale, director of fleet management for Volvo Rents. “People had stocks of components and now they are running through that and they can't backfill quickly enough to meet demand. I understand that certain car dealers are suffering because they can't get certain models right now because of the tsunami, for whatever reason. It's going to be an issue going forward.”
Supply chain strain
When a company streamlines its supply chain, it can create significant cost savings, but that very streamlining suddenly can become problematic in times of growth.
“During the downturn some of the suppliers tried to reduce the number of vendors that they had to leverage their buying power,” says United's Asplund. “If they had two suppliers for a particular component, they said ‘look we've downsized so much that we only need one supplier.’ So they cut back to only one. Today they probably need two again so it's forcing them to go back to that second supplier.”
“Some components were affected but, to date, alternate supply sources have been identified so we have not been adversely impacted,” says Matt Fearon, vice president and general manager of Terex AWP Americas. “We are engaging some new suppliers and making sure that we have double sources on some items.”
Fearon points out that it's not just increased demand in the aerial rental industry that is straining the supply chain. “Certain components have been experiencing significant global demand, so it's not just aerial work platforms, it's not just Genie or our competitors, it's other parallel industries. The supply chain is definitely strained.”
Increasing production in response to burgeoning demand is not as easy as it might sound. In some cases, manufacturers completely shut down certain facilities during the recession, and even more laid off large numbers of workers. Re-opening those factories is not just a matter of turning on the power switch.
“It's a little more of a prolonged process than perhaps the unemployment headlines would lead you to believe,” says Tim Stommel, chief operating officer of Fort Mills, S.C.-based Sunbelt Rentals. “Some of them are still trying to add personnel to meet the demand that they've been confronted with. There are technical skills that are lacking and that has delayed or slowed their hiring process.”
Re-opening dormant facilities, re-hiring workers, and re-invigorating supply chains for components that haven't been used for a while takes time and when demand occurs quickly, delays are inevitable.
“Our biggest problem would be if a customer wants a special-order product that in the past [our suppliers] may have had some components for so they could build for us in a relatively short time,” says United Rentals' Asplund. “But then in 2009-2010 nobody carried any of that inventory. Now they are starting to get those components in again so they could actually start to build things more as requested. It might take some time.”
Enhanced communication between manufacturers and larger rental companies helped many manufacturers prepare to ramp up in advance. Larger rental companies tend to have sophisticated forecasting capabilities and since they buy in such large volumes can help manufacturers have a fairly accurate window into what their customers will need.
“Some models have much longer lead times than others,” says Fearon. “Some of that is directly related to demand. We started really ramping up in the fourth quarter last year, we talked to enough of the big guys, we could see it coming, so we really accelerated in the fourth quarter of 2010 and that helped us out quite a bit.”
As larger rental companies increasingly become more sophisticated about their ability to forecast and improve communications with their suppliers in more of a partnering relationship, the better those manufacturers can be prepared for market demand. And while smaller independents don't buy in the same volumes, the better they can predict their need, the better suppliers can prepare.
“We cannot get up in the morning and think we can order as much fleet as we need from anybody, it would be bad for the industry,” says United's Asplund. “So nationals need to meet with their suppliers, get a plan, give them estimates because they need to go back in their supply chain to make sure engines, axles, anything that they outsource, is ready for them to be able to build a product. We just order too much not to have that level of communication with them.”
While most manufacturers are increasing production, there is still considerable reluctance to ramp up too much because the economic outlook continues to be uncertain. “They're kind of dusting off from the downturn too and saying ‘Is this real, is this really going to stick?’” Fearon says.
“While in the past people would make machines on speculation, they're basically building to order now, because they don't want to get caught with a bunch of inventory on the ground like they did two-and-a-half or three years ago,” says Volvo Rents' McHale. “They were hit with a lot of holding costs incurred by having large fleet sitting with nobody to buy them. So manufacturers are not going to ramp up like they did in years past, and the fact that they're not ramping up and the fact that componentry is so hard to get, it's a two-fold issue right now.”
Manufacturers' rep Soares still sees a lot of hesitation on the part of independent rental companies in his territory. “I'm not hearing them saying ‘We need to add to our fleet big time,’” he notes. “It's like they're scared to death to buy until they really see something to go on.”
“The risk of another economic slowdown restricts the businesses from taking too much risk in hiring or adding capacity,” adds David Stahlman, vice president of global marketing - portable power, for Doosan Infracore Construction Equipment.
Rev up the engines, tread the tires
Lead times for engines, which, including shipping time, often top six months, is cited by many manufacturers as a major cause in production delays.
“A lot engines come from Japan, which is obviously affected by the earthquake as well as all the components around engines: forgings, castings, manifolds, that kind of stuff,” says Snorkel's Smith. “There is a significant lead time on all those components coming together. And of course [aerial manufacturers] are all using the same size horsepower diesel engines, they are all looking at about six months lead time right now.”
Engines will present greater challenges in the coming years as Tier 4 comes closer to reality and, in addition to other challenges, manufacturers will have to take changes in engines into consideration.
“Any time you see a factory needing to get rid of all the components for one particular manufacturing of a piece of equipment and then switch over to the Tier-4-type engine required, with the housing being different and everything, we're going to see some delays” says Asplund. “So it's critical right now for us to get all of our orders in so as they start making those changes either late fourth quarter, early first quarter next year, we make sure we have enough on order so they can see that. When somebody doesn't plan we could be back to where we were in Q1 this year where they won't be able to react as quickly as needs to happen.”
There are shortages of tires as well, and increases in the cost of rubber. When the cost of rubber goes up, the costs of tires and hoses follow. The retread industry in North America is facing a shortage of retreadable truck tires, also known as casings. Bridgestone recently increased prices 11 percent in the U.S. and Canada on Bridgestone and Firestone brand truck and bus tire products, Bandag retreads and related retreading materials. Bridgestone Commercial Solutions president Kurt Danielson says intense supply pressures and escalating raw materials made the price increase necessary. Rubber as a commodity has become significantly more expensive. Although the cost of rubber dropped slightly in June, it has risen steadily since 2008, and soared dramatically to all-time highs in the spring of this year, and many economists expect demand to continue to outpace supply for some time to come.
Although how the question of lead times will play out in the coming months and year is not clear, with some believing the worst is behind us and others saying the worst is yet to come, what is clear is that the issue will bear watching for a good while. Rental companies will do well to keep their suppliers informed about what they think their needs will be, keeping in mind when ordering equipment that they may not get it as quickly as they want it.