SirCom, based in Temecula, California, needs parts out of Germany and China to manufacture its early warning systems. Some 70% of the products that were expected in the last week of February and the first week of March never arrived. The company has not received an expected delivery date.
“We haven’t yet been in a situation where we failed to meet demand but we are at high risk, there is about a 65% chance we will not make our mid-April deadlines,” said Qais Alkurdi.
Mr. Alkurdi, owner of SirCom, an American manufacturer of early warning systems for military bases, schools and hospitals, is three weeks behind on inventory deliveries. The company is experiencing disruption because it relies on key raw materials from China. The delays mean they will not reach their 2020 projected profits, even with a recovery in the next 2-3 weeks.
Between the trade wars that took over 2019, market volatility on oil prices and more recently, COVID-19, U.S. manufacturers can not seem to catch a break. While early economic indicators have not yet reflected the full extent of the damage on the sector and its jobs, many manufacturers say if things don’t improve in the next two to three months, jobs will be lost and companies shut down.
Of the Fortune 1000 companies surveyed by the American Chamber of Commerce in Shanghai, 94% are experiencing disruption of their supply chain due to COVID-19. As a result, impacted companies will not reach their 2020 tier annual sales target and the effects will be seen in layoffs and reduced wages.
According to the Institute for Supply Management’s Report On Business, an index that monitors monthly changes in manufacturer’s production levels, February’s backlog orders spiked by 4.6% from the previous month, the highest since April of last year.
Parts coming from China continue to be delayed even as factories began starting back up. Full production is not back to normal level. In a typical year, there would be a high spike in production before and after the Chinese New Year to offset the slow down or halt in production during the holiday. This year, the ramp up trends were not reflected.
“Our supply chain has been disrupted in every possible scenario, including from shipping and deliveries. The UPS and DHLs of the world are acting similar to how you see them around Christmas time, they are doing what they can but being pushed and pulled in every direction. The delays are bad and there is no communication from our logistics partners. We expect deliveries one day, we get them the next,” said Alkurdi,
The company attempted to mitigate inventory gaps by seeking raw materials from other countries but were only successful in substituting 30% of the materials that came from China. With demand also coming from other manufacturers seeking alternatives, there was not enough supply.
Key materials required for lithium batteries and printed circuit boards, such as electronic circuitry, resistors and capacitors, were not easy to replace.
For Alkurdi’s company, if supply chain issues continued into mid-April, the outcome would be catastrophic. Large projects that had been awarded to them would fail to meet their dates and the impact will begin to affect jobs.
Some companies appear to be better positioned for the turmoil, in part because of the trade war with China. The trade wars that took over 2019 had a harder impact on manufacturers but a positive cushioning effect that is now being witnessed during COVID-19.
“Most companies operate in a ‘just-in-time’ inventory economy because it is costly to keep inventory stored, but with tariff issues and the pandemic, there was pre-planning on some of our members’ part to store additional parts and supplies,” said Bennett, president of the Texas Association of Manufacturers.
According to Bennett, the increased tariffs unexpectedly helped prepare many Texas manufacturers by forcing them to reroute logistics components from countries other than China. Throughout 2019, they were forced to diversify to places like Vietnam, India and Mexico.
“Companies are well stocked so we haven’t seen large indications of supply chain issues. More supply chain issues may happen in another month or so when companies start to work through their supply chain inventories,” said Jay Bryson, economist at Wells Fargo.
Since the virus has spread globally, many countries are beginning to suffer the same fate as China. While diversifying the supply chain helped cushion some manufacturers by alleviating earlier impacts, new problems arise as demand falls for durable goods.
“People are going to fear they can’t make car payments,” said Bennett.
One of the hardest hi industries in durable goods are those that service oil fields. The commodity’s drop in price has rapidly slowed demand for trailers, rigs, steel and metal fabrications, and fracking rigs. Bennett estimates Texas is approximately two to three weeks away from significant unemployment figures, and claims to the Texas Workforce Commission and local unemployment offices.
“For manufacturers, the closer they are to oil and gas, the more misfortune will be in store for them,” said Bennett.
The downwards spiral would continue until oil prices went back up.
“You may see [workers] shifts going down, like one shift out of two or three a day. You see a slowdown and then if things get really bad, we may see a shutdown. I haven’t seen shifts going down yet, but that is usually the way it happens,” said Bennet.
Not all manufacturers are facing the same fate. Some are beating the odds and even thriving while adding new jobs.
“When you go to the grocery store and see the empty shelves, those are the manufacturers doing well,” said Bennett. Manufacturers for food, beverage, paper products, personal hygiene and protective gear can’t keep up with demand.
Duggal Solutions, a printing company out of New York, was able to shift its manufacturing line to output 20 thousand personal protective gear a day for healthcare workers, something they had never manufactured before. The company’s manufacturing line works heavily with paper and plastic products, key materials in the fight against COVID-19.
“We have advanced machinery that was going to sit idle, we have a workforce that was going to sit idle and we were able to put them to something that helps,” Mike Duggal, CEO Duggal Visual Solutions.
As the virus continues to spread globally, the long term impacts on manufacturing remains an open-ended question.