Empty Shelves Everywhere

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S1: Yeah. My name is Austen Hufford. I’m the U.S. manufacturing reporter for The Wall Street Journal.

S2: Austen Hufford writes 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. You’ve talked to a lot of different supply chain professionals. What are they like? Is there like a common personality archetype

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S1: there at the kind of person who is always focused and a little bit morbid, but like when they walk into a restaurant, they’re always looking at the exits to make sure something goes wrong. They know where to go. That’s like a good supply chain person. They’re always preparing for the worst.

S2: They’re always planning for the worst. But then the worst kind of happened and it caught them off guard, right?

S1: I guess this was like a new level of worse than even they haven’t imagined.

S2: Among the many crazy things the COVID pandemic has done to the world is what it’s done to supply chains, which is it’s disrupted them dramatically.

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S1: Like when you think about it, what are similar situations you say, OK, maybe a hurricane may maybe a hurricane somewhere might have been the worst. But in a hurricane that cuts off one region that maybe takes time production in three or four states for three weeks or a few months at most. 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 do their job. Is it to imagine the worst? I don’t think they really imagined what this would be like.

S2: The supply chain chaos has spilled over into all these other parts of the economy, too. To take just one situation, problems with the 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. Of course for you, perhaps the most pertinent thing is just how long it takes that new sofa you ordered to arrive at your door.

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S1: I think people don’t understand the complexity of even products that seem pretty simple. You know, you think, Oh, a couch. Like how? How hard can that be? It’s just the couch. Right? But you don’t realize that probably the fabric of that couch is actually a type of plastic that is reliant on fracking wells somewhere in Texas that eventually get turned into polypropylene somewhere, maybe around Houston that eventually has to make it to the fabric supplier that eventually makes it into the couch supply. And so even something as simple as that, just the fabric on your couch takes five or six or seven jumps

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S2: when you hear friends saying, Oh, these things I’m ordering, all this stuff is coming so slow. What do you say to them?

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S1: I tell them they’re not alone, and that it seems like the best thing to do is just to get in line.

S2: Today on the show, how did COVID rip supply chains apart? And how long will it take to stitch them back together? I’m Seth Stevenson filling in for Mary Harris. You’re listening to what next? Stick around. 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,

S1: basically as as the virus started spreading in Wuhan. It started shutting down production there.

S3: Breaking news tonight on several fronts in the coronavirus pandemic, CO workers out in China did not come back to work. 94 percent of the Fortune 1000 are seeing major disruptions.

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S1: Manufacturers primarily viewed the coronavirus story as as a as a China problem. They don’t necessarily view it as, Oh, this is definitely going to come here. This is definitely going to disrupt, you know, our entire world. We’ve seen shutdowns

S3: in areas in China shut down. There’s a kink in every link in the supply chain. So building toward a resilient supply chain will be at the epicenter of future discussions for years to come.

S1: And so I remember in those early weeks and in early 2020, that was the talk of manufacturing was how are we going to get that needed widgets? How are we going to get that component that we usually make in China? What’s going to be our alternatives? Fast forward to March of 2020 manufacturers where they thought we were going to be entering a prolonged recession.

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S4: They’re absolutely concerned that putting pause on society, American culture, our economy is going to hurt us because we’re not going to be out there spending

S1: growers, producers, suppliers have all come to the point where they can’t make it up. They used to

S3: work in an economically downturn. There’ll be big losses.

S1: Essentially, manufacturers pulled out, you know, in many cases, literal recession binders, basically their playbook and said, we think a recession is coming. That means that we need to do everything we can to to save costs to ensure that our company survives in the long run.

S2: What are the typical plays you run from that recession playbook?

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S1: You go out and you get additional financing. You basically 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 start, you make furlough or lay off employees. I mean, remember that manufacturers are also workplaces. They’re also places where people come and socialize and meet each other. And that means there are also places where the coronavirus can spread. And so I think in those early weeks, there was some factories that shut down, both because of recession fears, but also because of coronavirus fears. I think everyone assumed that this is going to be a really, really bad recession.

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S2: So they’re expecting this typical recession where demand is just going to plummet, 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?

S1: Yeah. So basically what happens is they pull out the recession playbook. And then within a few weeks, depending on the industry, but within a few weeks, they started seeing massive demand. You know, I remember speaking to a couple that got like a boat manufacturer, they make small motorboats for for fun. And they said that within a few weeks, the phone is ringing off the hook from their dealers, saying, Hey, we need more boats where you know, the traffic that we’re getting in stores is crazy.

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S5: We just had our best month ever. I think we sold 12 boats last month. We normally three or four boats a month is a is a good month for us. We’re really thinned out half these boats in our base and right now we’re in contract. So it is hard to get good inventory and to keep it in, but it’s a good problem for us.

S1: And basically, these manufacturers had to figure out going from, Oh my goodness, we’re in a recession playbook. So my goodness, we’re in a climate boom playbook.

S2: Is there any good way to quantify this huge societal shift in demand, any numbers that stick out to you or some way to characterize the scope of this

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S1: for certain industries? They think that 2021 might be some of their biggest revenue numbers ever. That, you know, whether it’s in motorcycles or boats or certain industries they never recovered from 2006. Basically, 2006 was their peak revenue here in the US, 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. And that recession wasn’t that wasn’t recent. It was a long time ago at this point. And so I just think it’s kind of crazy. 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?

S2: It seems like the root cause here. The inciting incident 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.

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S1: Exactly. I mean, one easy way to think about it might be products or services, right? Like, if you think about it, the demand for restaurants, for hotels, for travel, all other types of services basically evaporated. And then that demand basically went into all this stuff home furniture, painting, motorcycles, home appliances, mattresses. I mean, if you’re at home right now, look around your home. Any product you see basically saw a spike in demand last summer that has extended through this year.

S2: In hindsight, it’s easy to say, well, of course, is 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?

S1: 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 know, you look at what’s happening in 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 basically when you cancel an order. What happens is that you’re then last in line when you go to reorder and so you basically lose your spot. And if 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.

S2: 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? Why is the demand still there?

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S1: You know, I am surprised, but there’s a lot of people who, because of the supply chain constraints, still haven’t gotten what they wanted, right? 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 where people say that product demand could be almost contagious. You know, 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 two 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 socialise, places do things with. I have a porch here in Chicago, but I only bought patio furniture, you know, last summer and I never had a patio furniture before because I didn’t really feel need to be on my little patio. But now most mornings I go out there and have a coffee and read a book, you know, 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.

S2: More with Austen Hufford after the break. 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. First of all, why? Why did you choose a hot tub? Why was that a good example?

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S1: Like for me, the last 12 months have been a little bit like deja vu. Like, I feel like I’ve been writing about the supply chain disruptions so many times. It’s like, Oh, this product is in short supply or this province, your source bio. This product is in short supply, and we want to say, OK, let’s zoom in on one product and convince a company to tell us everything there is to know about that product, just to show how crazy it has been for manufacturers in the last 18 months.

S2: So take me through the details of all the challenges that this hot company faced and had to overcome.

S1: Yes. So this company is called Bullfrog Spa’s, and it’s in Utah over the summer of 2020. They start getting an influx of orders. A hot tub, say, seems basically OK. A hot tub holiday party is going to have 100 200 this 8500 parts in a single hot tub. And so as you can imagine, there was a lot of issues.

S2: Can you give an example of something where like, is there an individual example we can give of just how complex this is?

S1: Yes. So for example, like the shell of the hot tub, the actual thing that you sit on, it basically starts as a flat acrylic sheet in Kentucky, and this flat sheet then gets driven on a truck to Nevada.

S2: In Nevada,

S1: 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, 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 which comes from a factory in Georgia is then added to this. So now you have the acrylic, another plastic and urethane, and then all of that, that’s basically using pressure and heat that gets basically turned into the shape of the hot tub and 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 the shelf, the hot tub. But it takes 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 20 21, there were these winter storms that basically came out of nowhere and shut down a massive chunk of the country’s oil and chemical production in Texas and parts of Louisiana, the

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S3: entire state for the first time in weather history under that winter storm warning. We also had portions in West Texas that were under a blizzard warning. We reported early this morning seven degrees in parts of Dallas and other parts of the state,

S1: and I don’t think people realize at the time, but it took months for the country’s chemical production to fully recover. They basically literally just had to press the emergency buttons and just stop production immediately. To turn production back on in these giant chemical plants isn’t easy, and you basically need to inspect essentially every inch of the plant to ensure that there’s not going to be an industrial accident. And what that meant is that if you were a user of chemicals that that were produced, then that these things go everywhere, go into mattresses, go into tabletops. Any product you have is probably produced by some chemical is probably made somewhere around Texas. It meant that that these companies were stuck that without the products they needed.

S2: 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?

S1: I think they probably would have had had invested more in having larger inventories of the raw material 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 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.

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S2: It’s not just materials that have been a problem. It’s Labor also, how much how much of a role has labor shortage played in this

S1: 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.

S2: Why is that? Why is it so hard to hire right now?

S1: I think in some ways it’s it’s it’s a bit of a mystery to people. You know, 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 type jobs. I kind of profiled several companies in West Michigan. They have furniture manufacturers, they have car parts 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, you know, which may not be air conditioned, which might mean you have to start at five a.m.? And so I think in some ways, there’s also a question of compensation. Manufacturers know our increasingly no longer paying excess wages compared to other industries in the economy.

S2: Could that change as a result of this whole situation? Could that change in the long term?

S1: It might. But what some manufacturers have told me, though, is that they are competing globally that if you raise wages too much, you’ll basically become noncompetitive with your products. Because if I’m buying office furniture, I don’t. I don’t only have companies West Michigan, I have companies in Atlanta, Georgia. I have companies making it in China. I have companies making it in South America. And compare that to a restaurant. You know, if I’m looking for dinner in West Michigan, I’m not going to be driving to Chicago to get dinner.

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S2: All right. Let’s talk about what happens in the future. What happens next. How do you see this resolving or will this ever resolve?

S1: Yeah. I mean, 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, right? Eighteen months into this and things haven’t really been resolved. You know, it makes sense, OK? In the first three months and the first six months, OK, this is, you know, this is a global pandemic. It makes sense is going to be some hiccups. But 18 months, that isn’t a hiccup that that that feels like it’s a more fundamental reckoning.

S2: 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 in being sick of doing home improvement projects and sick of sitting in their hot tub in their backyard. If that happens, could there be a whole new disaster that results from that demand shift? And what would that disaster look like?

S1: I think that is the fear, and that is part of the reason why we are still in this position 18 months in is that 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?

S2: Austen Hufford, thanks so much for being with us.

S1: Thank you.

S2: Austen Hufford is a reporter for The Wall Street Journal. That’s the show. What next is produced by Davis Land. Elena Schwartz, Mary Wilson, Danielle Hewitt and Carmel Delshad. Special thanks to Ethan Brooks, who helped out this week. We’re led by Alison Benedict and Alicia Montgomery. I’m Seth Stevenson, filling in for Mary Harris while she’s on vacation. Thanks for listening. We’ll catch you back here tomorrow.