As I mentioned on these pages a few days ago, there will be supply chain issues with the Co-Vid 19 event, whether you think it is the next Black Plague, or just another version of the flu (from reading the comments on Trent’s post on the subject, we appear to have both reading here). As a reminder, I deal in HVAC distribution, which is a subset of industrial distribution. Most equipment for my market is made close to the USA or in the USA itself, but the component parts are many times made in China.
Today I got the first letter from a vendor talking about the possible issues. They are saying that they are preparing to see product shortages due to component supply problems and are actively trying to source from other places, but the information is very general in nature. It seemed more CYA than anything and almost could be a force majeure setup, recommended by their attorneys to get ahead of contracted jobs. I have no proof of that but have seen enough legal documents in my day to know that a lawyer or ten helped write their CoVid-19 letter rather than a bunch of HVAC dorks like me.
But let’s be real for a minute. The supply chain (in my industry) is long so we aren’t likely to see any problems for the Summer, as most of those orders for inventory are already in the tank and on their way to our warehouses. Fall/Winter is my estimate for issues in industrial distribution if the problem continues. And that could be a BIG problem for you if you have a house where a furnace breaks down and it is -20 outside. Critical infrastructure will get priority I am assuming (blood banks, etc) but you don’t know when that stuff will break, do you?
As I receive more communications from my vendors I will put up an occasional post here. I have a meeting next week in DC and will personally speak with many of my vendor contacts and may get more/better information at the cocktail parties when my contacts get loosened up from the booze. It’s going to be an interesting year in industrial distribution and I imagine that the Chinese are going to lose some business over this when it is all said and done, never to come back (the main reason I don’t think this whole episode is fiction/blown out of proportion – incentives).
Thank you for sharing your view from the front lines.
Likely impacts of the coronavirus:
Health — Modest (while recognizing that every death is tragic).
Economic — Probably significant, but quite likely in ways we do not expect.
Political — Wild card: could be none, or could be devastating.
One of the parts that is difficult to account for is the time delays in the system — as you mention, goods in transit. Shortages could start showing up well after the virus is no longer hot news.
It will be very interesting if you get any info from suppliers on their views about how long it will take to reorganize manufacturing sites and supply chains. As someone once said, 9 women cannot get together and have a baby in 1 month — everything takes time.
Gavin – the problem isn’t that the manufacturers couldn’t re-engineer a product within a relatively short period of time with an alternate supplier. The problem is all of the UL and other approvals (and hence, the underlying insurance) that require you to re-test with any new components in the bill of materials of a finished good. That timeline is super long (maybe UL will grant waivers if the situation is bad?). The replacement parts business I am guessing will be relatively unaffected at this point, but you never really know. I think that raw materials (copper), chemicals (in all refrigerants) and finished goods will bear the brunt of this from what I am hearing and understanding at this point.
At least some companies have been inspired to make supply-chain changes / add supply-chain resilience by Trump’s trade policies and actions. Whether it’s enough to have any broad-based protective influence on the economy is unclear.
My daughter and I did the usual monthly round of “stock-up” on supplies of various things yesterday – meat for the freezer from our preferred source, bulk household supplies (cat litter, pet food, paper towels, TP, frozen veg and entrees) … all of that. And also – flu medications, OTC remedies… we already have masks, bleach, a huge bottle of aspirin. All good stuff to have on hand. We can work remotely from home, in any case.
We did notice that the shelves at the HEB dealing with OTC medical stuff (and at Costco, too) were pretty well filled. No gaps there. HEB was even offering coupons on flu relief meds. It’s the shelf-clearing shortages when panic sets in, and the supply chain no longer functions which is cause for worry.
I did tell my daughter, though – that partaking of the food samples in HEB and Trader Joes’ will probably not be a good idea, in another couple of weeks.
My daughter replied, “That day is not today…”
At least some companies have been inspired to make supply-chain changes / add supply-chain resilience by Trump’s trade policies and actions.
I keep saying that Trump is lucky in his enemies and we have another example. The resourcing has begun a couple of years ago.
Thanks for the insight.
I work for a German manufacturer. I wonder how long we’ll have? It is hard to guess the Chinese components inside my drawer glides and hinges, etc.
“I wonder how long we’ll have?” Trillion dollar question (literally) and everyone will be playing for keeps.
Some supply chain issues will happen faster than others, depending on what is made where in China would be my guess.
Dan – Getting components certified through UL can be a problem. However, I’ve gotten it done in less than 6 months. It is very dependent on the competence of program management, the engineering team, and most especially the work load at UL. Something like the single board computer that controls an HVAC system would be easy to get through, UL workload depending.
The real problem isn’t certification, or even assembling the board. The real problem is the sheer quantity of components (PC board, chips, resisters, diodes, etc.) manufactured in China. Yes, there are alternate sources. But even if China was only 10% of the total manufacturing base, and I’m not sure anyone has a handle on the real number, dropping that much out of the global supply change counts as a Very Big Deal. Getting a US manufactured board UL certified wouldn’t be the problem. Getting the quantity of components necessary to produce the needed quantity of boards would be the killer.
That is an interesting perspective, John. Thanks for sharing.
One of the issues is the difference between “nice to have” and “must have”. No one really needs a new iPhone. If the supply of those is interrupted, most of us won’t even notice and even fewer will care (except for stockholders). On the other hand, we will quickly notice the lack of medications which come from China.
I find myself wondering about the essentials we never think about — say, the chemicals & materials used in treating & purifying municipal water supplies and keeping them safe. Where do those kind of “must have” supplies come from? Elites who were dumb enough to offshore most ethical chemical manufacturing to China may have been dumb enough to offshore other critical supplies.
Thanks John good info.
Gavin – I would put HVAC under a “must have”. Especially if you are old and it is 95 and humid outside, or if you are “anyone” and it is -20 outside. Outside of human comfort, we also have process heating and cooling to think about, as well as HVAC for everything from server rooms to blood banks and commercial refrigeration is a whole ‘nother ball game. Interesting times ahead.
I wonder how many companies even know what their supply chain *is*, beyond the first level of the Bill of Materials. Everyone knows who the vendors are that they are buying from directly…but who are *those* companies buying from? And so on down…There can easily be 5 levels involved before you get down to mining the raw materials.
I suspect it is an exception to have anything like complete visibility into the supply chain at all levels.
David – I’m about to find out next week. I suspect for all but the largest conglomerates that they will have no clue as you point out. And with the big conglomerates, there are probably so many levels of impenetrable bureaucracy that it will be impossible for them to react quickly.
On the topic of pharmaceutical supply chain, the FDA is clueless.
â€Most of the FDA’s investigators who are sent to China do not speak the language. They can’t read the manufacturing records. The FDA does not always provide independent translators. Instead, the companies provide translators who, more often than not, are company salesmen. Sometimes, FDA investigators simply give plants a pass, deeming them to be No Action Indicated because they have no way to tell otherwise. The investigators also can’t read street signs, which make them vulnerable to wild manipulations. Companies steer them to phony ‘show’ plants, where everything looks compliant, but the companies aren’t manufacturing there. Sometimes a group of companies pool their resources and invest in the same “show†factory, so that different FDA inspectors return to the same plant at different times, each one thinking they are inspecting a different facility.â€
>â€In the United States, in order to inspect drug plants, FDA investigators simply show up unannounced and stay as long as is needed. But for overseas inspections—due to the complex logistics of getting visas and ensuring access to the plant – the FDA has chosen to announce its inspections in advance. Overseas drug plants typically ‘invite’ the FDA to inspect and the agency accepts. Plant officials serve as hosts to the visiting FDA investigators, who become their guests. It is not unusual for manufacturing plants to arrange local travel for FDA investigators. This system has allowed manufacturing plants to ‘stage’ inspections, as one FDA investigator put it, and conceal evidence of data fabrication.â€
Worth reading the article.
Action Indicated because they have no way to tell otherwise. The investigators also can’t read street signs, which make them vulnerable to wild manipulations. Companies steer them to phony ‘show’ plants, where everything looks compliant, but the companies aren’t manufacturing there. Sometimes a group of companies pool their resources and invest in the same “show†factory, so that different FDA inspectors return to the same plant at different times, each one thinking they are inspecting a different facility