Listen to What Next:
Austen Hufford writes for the Wall Street Journal about factories and manufacturing, which means a lot of what he writes about is supply chains.
What’s a supply chain? Basically, it’s everything that needs to happen, in a very specific sequence, to turn raw materials into a finished product. So, for instance, that phone in your pocket—the supply chain means mining the aluminum in it, fabricating the silicon chips, transporting all these materials around to the different factories where they’re assembled and combined; it means workers, warehouses, container ships. It’s a whole incredibly complex choreography, in which any one step could go bad—and derail the entire process. Supply chain professionals are used to preparing for the worst, but Hufford says that even they were caught off guard by the COVID pandemic. Among the many crazy things this pandemic has done to the world is what it’s done to supply chains: It’s disrupted them. Dramatically.
“When you think about it, what are similar situations? OK, maybe a hurricane. But in a hurricane, that cuts off one region for three weeks or a few months at most,” Hufford says. “But this pandemic was global. It impacted every country in the world. It impacted every supply chain in the world. And so even these guys who their job is to imagine the worst? I don’t think they really imagined what this would be like.”
The supply chain chaos has spilled over into all these other parts of the economy, too. To take just one situation, problems with lumber supply led to a slowdown in housing construction, which led to less housing supply, which led to higher home prices, which led to people making different choices about where to live and whether to rent or buy.
So, you can see how this is a big deal. Suddenly you’re talking about huge knock-on effects for our economy. On Monday’s episode of What Next, I spoke with Hufford about how COVID ripped our supply chains apart and ask: How long will it take to stitch them back together? Our conversation has been edited and condensed for clarity.
Seth Stevenson: The supply chain disruptions began much like the novel coronavirus itself: in China. And, like the virus, these disruptions were, at first, seen as a containable problem.
Austen Hufford: Basically, as the virus started spreading in Wuhan, it started shutting down production there. Manufacturers primarily viewed the coronavirus story as a China problem. I remember in those early weeks in early 2020, that was the talk of manufacturing: How are we going to get that component that we usually make in China? What’s going to be our alternative?
Fast forward to March of 2020, and manufacturers thought we were going to be entering a prolonged recession. Essentially, manufacturers pulled out, in many cases, literal recession binders, basically their recession playbook, and said, “We think a recession is coming. That means that we need to do everything we can to save costs, to ensure that our company survives in the long run.”
What are the typical plays you run from that recession playbook?
You go out and you get additional financing. You call your banks and get as much cash as possible. The second thing you do is you try to cut your expenses. And then, if need be, you may furlough or lay off employees.
Remember that manufacturers are also workplaces. They’re also places where people come and socialize and meet each other, and that means they are also places where the coronavirus can spread. And so in those early weeks, there were some factories that shut down because of both recession fears and coronavirus fears. Everyone assumed that this was going to be a really, really bad recession.
So they’re expecting this typical recession where demand is just going to plummet, and nobody’s going to buy anything. Did there come a point where they realized this isn’t going the way we thought it was going to go?
Within a few weeks, depending on the industry, they started seeing massive demand. I remember speaking to a boat manufacturer—they make small motorboats—and they said that within a few weeks, the phone was ringing off the hook from their dealers saying, “Hey, we need more boats. The traffic that we’re getting in stores is crazy.”
And basically these manufacturers had to figure out how to go from “oh my goodness, we’re in a recession playbook” to “oh my goodness, we’re in an economic boom playbook.”
Is there any good way to quantify this huge societal shift in demand?
For certain industries, they think that 2021 might be some of their biggest revenue numbers ever, whether it’s in motorcycles or boats or certain other industries.
They never recovered from 2006. 2006 was their peak revenue here in the U.S. And in 2021, some of these companies think they’re going to have even higher revenue than that. And so in some weird way, the pandemic has actually led to the recovery from the last recession. Who would have thought that this world-changing pandemic would actually be the driver that’s leading to finally recovering from where we were before the prior recession?
It seems like the root cause here is a huge shift in the type of demand, where the demand stops and then it restarts with a vengeance, but it’s for a totally different set of things than demand had previously been for.
Exactly, one easy way to think about it might be products vs. services, right? The demand for restaurants, for hotels, for travel—all the types of services—basically evaporated. And then that demand went into all this stuff: home furniture, painting, motorcycles, home appliances, mattresses.
In hindsight, it’s easy to say, well, of course, in a pandemic, people are going to stop traveling, they’re going to stop eating out, they’re going to hunker down at home, and they’re going to want stuff to entertain them or to do around the house. But did anyone predict that at the beginning?
One manufacturer told me that if they say they did, they’re lying. At the time, it made a lot of sense to be pretty conservative in your outlook. It seems like one of the biggest mistakes was canceling orders for supplies. You look at what’s happening with the automakers right now. A big cause of that when it comes to computer chips was that the automakers canceled a whole bunch of orders for computer chips. And when you cancel an order, what happens is that you’re then last in line when you go to reorder. So you basically lose your spot. And if these manufacturers had kept their orders for a year down the line or six months down the line, they would probably be in a lot better shape when it comes to their supply chains today.
So it makes sense in hindsight that this would happen in the first few months. Are you surprised at how long this resurgence in demand has sustained itself? I mean, doesn’t everyone who wanted an exercise bike or a weed whacker or a boat have it by now? Why is the demand still there?
I am surprised, but there’s a lot of people who, because of the supply chain constraints, still haven’t gotten what they wanted. They’re still waiting on their couch. They’re still waiting on their hot tub or their pool.
And then there’s also the secondary order of things. People say that product demand could be almost contagious. If you go over and you see the new hot tub at your friend’s house, then guess what? You might want to buy one, too, in a few months.
And then the third thing is maybe there’s a long-term pivot to the home. Maybe all of us are viewing our homes a little bit differently now, and we’re all willing to invest just a little bit more into making our homes places to live, places to socialize. I have a porch here in Chicago, but I only bought patio furniture last summer. And I never had patio furniture before because I didn’t really feel a need to be on my little patio. But now, most mornings I go out there and have a coffee and read a book before starting work. I like to take advantage of that new space. And I think that’s true across the board, that people are rethinking their own spaces and investing more into them.
You wrote a piece that described how all the moving parts of materials and labor come together to make a hot tub. I’d love for you to take me through that reporting. So take me through the details of all the challenges that this hot tub company faced and had to overcome.
Yes, so this company is called Bullfrog Spas and it’s in Utah. Over the summer of 2020, they start getting an influx of orders.
A hot tub seems basic. How many parts can it have: 100? 200? There’s 1,800 parts in a single hot tub. And so, as you can imagine, there was a lot of issues.
For example, the shell of the hot tub—the actual thing that you sit on—basically starts as a flat acrylic sheet in Kentucky. And this flat sheet then gets driven on a truck to Nevada. In Nevada, a second sheet of a different type of plastic is added. So now you have the acrylic and a different type of plastic that are bonded together, and then from Nevada, that all gets driven to their facility in Utah. At this company’s facility in Utah, a different chemical, urethane, which comes from a factory in Georgia is then added to this. And then all of that gets turned into the shape of the hot tub in these giant industrial presses. And so that’s just one basic example of how this is a fully U.S. supply chain for this one component, the shell of the hot tub, but that’s just three steps. And each one of those steps takes multiple steps before that to get there.
So if you remember, in February of 2021, there were these winter storms that came out of nowhere and shut down a massive chunk of the country’s oil and chemical production in Texas and parts of Louisiana. And I don’t think people realized at the time, but it took months for the country’s chemical production to fully recover. To turn production back on in these giant chemical plants isn’t easy. And what that meant is that if you were a user of these chemicals—and these things go everywhere, into mattresses, tabletops, any product you have it’s probably produced by some chemical made somewhere around Texas—it meant that these companies were stuck without the products they needed.
If this hot tub company had known somehow that the pandemic was coming, if they had a hot tub time machine, for instance, what do you think they would have done differently to prepare?
I think they probably would have invested more in having larger inventories of the raw materials.
Because that is another part of this whole story. For the last 30 years, manufacturers in the U.S. and around the world have focused on becoming lean. Manufacturers have focused on reducing the quantity of materials that they store at their plants. And in good times, that works out really well because instead of having a million dollars’ worth of spare parts in your warehouse, you’re able to take that million dollars and invest it in a machine or buy another company.
But during the coronavirus pandemic, people have realized that there are real dangers to focusing so much on reducing inventories
It’s not just materials that have been a problem; it’s labor also. How much of a role has labor shortage played in this?
For several years, the so-called manufacturing labor shortage has been a problem. But it now seems like it’s the worst that has been really ever.
Why is that? Why is it so hard to hire right now?
In some ways, it’s a bit of a mystery to people. Everyone has different opinions. Some people say, “Oh, it’s because of the extra unemployment benefits.”
But I have another theory, though. In certain parts of the country, manufacturing wages are no longer a giant premium compared to other entry-level jobs. I profiled several companies in West Michigan—furniture manufacturers, car part manufacturers. And in certain towns in West Michigan, Wendy’s is offering $14 per hour starting jobs, but so is the factory that makes furniture. And so in that kind of environment, why would someone come to your factory, which might not be air conditioned, which might mean you have to start at 5 a.m.? In some ways, it’s a question of compensation. Manufacturers are increasingly no longer paying excess wages compared to other industries in the economy.
Could that change as a result of this whole situation?
It might, but what some manufacturers have told me, though, is that they are competing globally. If you raise wages too much, you’ll basically become noncompetitive with your products, right? If I’m buying office furniture, I don’t only have companies in West Michigan. I have companies in Atlanta. I have companies making it in China. I have companies making it in South America. And compare that to a restaurant: If I’m looking for dinner in West Michigan, I’m not going to be driving to Chicago to get dinner.
Let’s talk about what happens in the future. How do you see this resolving or will this ever resolve?
It’s funny because when I speak to manufacturers, I think a lot of people are really surprised that here we are in September of 2021, 18 months into this, and things haven’t really been resolved. It makes sense in the first three months and the first six months. OK, this is a global pandemic. There’s going to be some hiccups. But 18 months, that isn’t a hiccup. That feels like it’s a more fundamental reckoning.
It’s possible to imagine the pandemic subsiding and people wanting to get back out in the world and to travel and to have experiences. If that happens, could there be a whole new disaster that results from that demand shift? And what would that disaster look like?
That is the fear and that is part of the reason why we are still in this position 18 months in. There has been a hesitancy from some manufacturers to fully invest in new operations. Why would you invest in a second factory if the new demand might evaporate in three months?