Building Tech & Products
The Supply Chain Chokehold Can Wreck Trust ... Don't Let It
Shocks to construction's supply chain can either break or make opportunity to over-deliver on customer expectations even as you pivot on timelines and terms.
Supply constraint started as a thing, and when the novel coronavirus pandemic hit, it became a crisis. Now, it's an embedded, urgent business and culture issue.
The Builder's Daily, and this piece in particular, lean beyond recognizing the challenges, toward solutions. To do that, we have to reframe the challenge as an epic opportunity for the building community to waken to new responses to these new issues. Reflexive ones won't work, but the good news is there's a big reward for those companies, cooperatives, and linkages who'll work to tap cultural tools to deal with supply chain dislocation, not tactical sleight of hand.
Here's what we mean.
Homebuilder challenges can sound like zen riddles, like koans.
Here's one for you: What's one problem builders would do anything to face when it's not here, that they dread existentially when it shows up?
Too many customers.
Can there be that? Too many customers? You bet there can! That's no koan; that's reality. There are too many customers.
And, when there's one too many customers, there's risk of customers lost forever – and an equally likely risk of an algorithmic growth of them.
One contracted homebuying customer who does not get the home, or the finish spec, or the delivery timing, or the price and the buyer's journey experience negotiated with a signature and deposit, is one customer too many.
One would-be buyer who's told "we don't have anything for you, and we are not even going to put you on a waiting list until we can take care of our current backlog of buyers ... maybe sometime in early 2022," is one customer too many.
And there are plenty – maybe tens of thousands – of both now.
Building supply chains, by nature, are operational resource channels to deliver value to building's value life-cycle. A temptation, and a widespread habit, of players whose livelihoods and operations orbit housing, is to deflect exogenous impacts as matters over which they have no say. Customers, then, face the full brunt of consequence of these impacts.
That's where the opportunity lies, in adaptability to adverse conditions. But to do that takes trust.
The business, strategy, and equity growth opportunity here is not about working some sort of miracle to convert frustrated people en masse into deals that will eventually close. If you have reason to believe that a great rotation is shifting an all-about-what-we-do value creation epoch to an all-about-what-you-want-and-need customer-centric value model, the supply chain convulsion right now is a flashpoint.
The big opportunity is to work in the present – supply chain crisis and all – to earn and deepen your customers' trust in you and your team, and to keep it and reap its rewards.
An urgently-calling near future of homebuilding, development and investment, will comprise a practiced jujitsu response to such shocks to the building products and materials channel. Like hurricanes and wildfires, there'll be more of them and more powerful ones.
Supply chain turbulence is certainly that, turbulence that's the result of a lack of stability in the first place. Lumber prices have tripled in a year, and engineered wood products are almost impossible to source. A raft of resin-based materials and products are "on allocation" at bare ration levels. And don't even talk to us about name-brand kitchen appliances.
Two take-aways that demand action, not just thoughts, words, or meeting agenda items.
- Shock and stress at this magnitude or even greater can no longer be thought of as "once in a generation" events.
- Resiliency in light of those mega disruptions will not only mean securing improved control of "the channel," but securing the real end-game, which is a robust team-member and customer value chain fit to thrive come what may in the sourcing, distribution, and assemblage of more than 20,000 separate pieces that become a home.
Blame international trade disputes and tariffs. Blame a mighty back-up of container ships full of materials from China, literally adrift off the ports of Los Angeles and Long Beach. Blame a 500-year Texas freeze that paralyzed resin output, and choked up capacity for an indefinite number of months ahead. Blame a pandemic flashpoint that idled a cohort of young laborers, who today are unsure whether they want to return to hard, low-paying jobs loading trucks at the lumber yards, unloading containers at the ports, putting in the windshield hours moving the merchandise. But these must be viewed less as operational challenges to margins, and more as customer-care opportunities.
The logic here may not be self-evident.
So, first, let's ask: Just how bad is residential construction's multivariate supply chain disruption on a scale of 1 to 5, with 1 being modest and 5 being off-the-charts hellacious?
Or, more directly to the point, how meaningfully have supply chain disruption impacts started to mess with what you're capable of doing for your current paying customers, and what you're capable of saying to those who're clamoring to be a customer?
Can you deliver homes – the same ones your contracted customers anted up earnest money for at the price you accepted as a bid and in the timeframe you promised delivery?
That's not a simple question, and in April 2021, the answer shifts and wobbles and veers toward "loss-of-control" as more and more building materials and products, ranging from site work to rough-framing to fit-and-finish get sucked into one or more of the global supply chain's nodes of dysfunction.
Who is not thoroughly "over" the use of the term "pain-points?" We are, but the term will have to temporarily suffice to reference areas of disrupted flow in the building-lifecycle channel that moves materials, people, products, and processes to home sites.
To get up to speed – not just on what's gotten thrown off the rails, but with an around-the-next corner view of related shocks that still haven't fully shown up – on the pervasiveness of supply constraint, here are a few must-review overviews of the challenge.
This Wall Street Journal piece, "America's Imports Are Stuck on Ships Floating Just Off Los Angeles," from staffers Kara Dapena and Dylan Moriarty draws heavily from this analysis by Katie Arcieri, of the S&P Global Retail & Consumer Products, Technology, Media, & Telecom Group at S&P's Panjiva unit.
Appliances, furnishings, electronics – including the microprocessor capability to keep pace with smart home tech solutions have been feeling the squeeze since early last Summer, when demand sparked back into full motion, but people power and channels choked up.
This Institute of Supply Management manufacturers survey of multiple measures of supply and demand activity characterizes the high-level as "Supplier Deliveries Slowing at Faster Rate; Backlog Growing; Raw Materials Inventories Contracting; Customers’ Inventories Too Low; Prices Increasing; Exports and Imports Growing." How many more ways to say the balances of supply and demand are off-kilter and that not too many of the 20,000 separate items that go into a home aren't caught in the squeeze.
Fact is, many, many, many of those items draw on acrylic resins production channels to become the full-fledged material or product they need to be – flooring, vinyl windows, paints, roof sheathing, acrylic stucco, not to mention engineered wood products, to name a few. Here, Harvard Business Review contributor and Resilinc ceo Bindiya Vakil, makes a case as a go-to resource on supply chain risk for all materials plastic. After citing a litany of blockages, bottlenecks, disturbances, Suez Canal shut-downs, etc., Vakil writes:
"The final blow was the winter storm in February that struck the Gulf Coast. Texas is home to the world’s largest petrochemical complex, which turns oil and gas and other byproducts into plastics. Almost 100 critical chemicals and derivatives used widely across many products and industries are processed in Texas. It will take more than six months to correct the imbalances caused by the storm. Given these problems, the grounding of a container ship in the Suez Canal on March 23 could not have come at a worse time.
"Surges in demand are widely expected to occur in the United States and other countries as vaccinated consumers venture out and spend their stimulus checks. But companies may not be able to take full advantage of this opportunity: Purchasing managers surveyed by the Institute for Supply Management last month anticipated worsening supply-demand imbalances in a variety of areas as the U.S. economy continues to open up. Many of their companies already face depleted inventories up and down their supply chains, price increases, higher rates of delinquent shipments, and longer lead times for orders. From the vantage point of sourcing experts who are managing suppliers, the outlook is grim: They expect disruptions to last for longer than 12 months."
This Financial Times piece, "Global supply chains face months of disruption from Texas Storm," reported by Justin Jacobs and Harry Dempsey, gets at a violent disruption to the chain whose ramifications are only now coming to light, and will impact the better part of the summer and fall for critical path product and materials lines.
"Jonathan Jaffe, the chief executive of Lennar, one of the US’s largest homebuilders, warned of shortages of resin and other petrochemical products needed for paint, engineered wood and insulation, echoing concerns from other construction companies about delays and rising costs."
Our TBD Dream Team supply chain and sourcing guru, Kenzai USA owner Ken Pinto did some digging on the enormity of the resin production stress and shock. He looks at two factors at work as a force of imbalance and dislocation.
One is the impact of the freeze, and the other – a reflexive response to a "living-with-Covid" mid-pandemic coping trend, particularly among corporate and commercial workplaces working to restore on-site operations to a new normal level – is the new demand for protective plastic shields.
Ken Pinto estimates that a 2,200-square-foot home uses an average of 1.7 metric tons of acrylic resin-based materials and products. At current housing starts levels of about 1.4 million, for both multifamily and single-family, demand for acrylic resin at the subcomponent level would exceed 2.4 million metric tons of the ingredient.
While normal U.S. capacity for acrylic resins is in the neighborhood of 55 million metric tons annually, the February Texas freeze and the new demand stream for pandemic-related plastic shields is already impacting access to building materials supplies.
Word is, Ken Pinto relates:
"The plants in the Houston, TX area, which control 92% of US production of resins, are operating at 50% capacity and have notified their customers, our construction material manufacturers are on allocation. They can only order 50% of what they ordered last year. None have offered estimates when capacity back will return to full swing. It's going to be a tough summer ahead for residential construction."
Here's a number of anecdotal downstream impacts, not even reflecting the full brunt of the acrylic resin constraints only now coming to light in the system.
- One multiregional private top-25 ranked homebuilder we know has a current customer backlog that stretches into the first-quarter of 2022, and simply refuses to take new orders at its communities until it secures capability – materials, products, and trade crews – to work through its existing backlog of orders.
- A couple of other sizable privately-held homebuilding operators have acknowledged having stopped adding names to their interest lists pending greater visibility into start-to-completion cycles and future-forward materials pricing.
- Word is that one Oklahoma-based homebuilding company is settling with buyers by handing over the keys to a new home with a voucher for customers to go out and try to buy their own appliances at retail or via Ebay or Amazon.
- It's also said that one big builder in a mid-Southeast Atlantic coastal market literally voided 120 contracts with customers as volatile materials availability, skyrocketing lumber, plywood, and EWP prices, and a general, red-alert lack of visibility wreaked havoc with per-unit pro formas, and pushed the entire portfolio into a deep-red zone of operating costs versus agreed-upon prices.
- We've heard that a Pennsylvania-Ohio home building operator, downstream of the pandemic-intensified shortage of drivers of concrete trucks, has begun to pencil slab and foundation work-arounds that would essentially circle back-to-the-future of dimensional lumber pilings for new home construction.
- Some deep-pocketed big builders are doing what they can to corner, stock, and warehouse supplies of materials and products they know are either in short supply or headed there.
- Lumber yards everywhere report shortages of counter people, and short on warehouse workers, can't move product in and out of the yards at higher velocities for sustained periods to keep pace with demand.
- Container ships – in the Port of Los Angeles and Long Beach – unable to be offloaded and reloaded for voyages back to China, are now sometimes routing back across the Pacific empty of cargo.
- Due to the spate of West Coast wildfires over the past few years, which burnt out large supplies of younger, smaller log trees, the ready-to-harvest stock in large forests is older, bigger, and – therefore – requires more skilled, experienced, and trained loggers, not to mention more equipment for loading and unloading the larger freight.
- The list of impacts of these stressed and shocked balances goes on, and on, and on.
Frustrated, angered, anxious, wavering, indignant customers ... You know what? Everybody has them right now. These negative emotions can and do become an opportunity, when sellers, construction supervisors, and other customer touchpoints make themselves trusted-advisors, rather than order-takers and transaction managers.
An error now – and one that would play out destructively almost universally among builders – would be to frame this challenge as an ultra-competitive fray, one enterprise against another. A second error would be to frame what is a worldwide convulsion in sourced material resources as a "we are victims, and there's nothing we can do about it" issue.
The big opportunity is to view this as a plight your consumers, your customers in the channel, and your partners in community building face together.
We heard tell of an enterprise here or there, working through a company-wide current-market-conditions retraining of all points of customer contact.
Up and down the value stream, trust, whether one wants to acknowledge this factor or not, is the pivotal discovery, learning, and action point for builders and their partners to navigate through want will be a tricky, bumpy, uncertain path through the next several months.
Be like ants.
Harvard Business Review contributor Joerg Esser, PhD, notes:
"What management should do is loosen their hold and give the organization the freedom it needs to work effectively. The idea is that management should stick to defining what they want to achieve and let the organization focus on how to achieve it. This process of loosening your grip — while not letting the company descend into chaos — can be tricky. It needs to be based on a clear set of principles, backed up by science.
"My approach is inspired by complexity theory, which builds on the work of U.S. theoretical physicist and Nobel laureate Philip Warren Anderson. One of the key concepts in complexity theory is “emergence”: The idea that complexity arises from simplicity and that small things form big things with properties different than the sum of their parts when interacting as part of a greater whole. Just a few simple principles allow you to build systems where macrointelligence and adaptability derive from local interactions and knowledge. In other words, the challenges may be great, but the solutions are often small.
"Many examples of this occur in nature. For instance, ants build living bridges when searching for food, construct megacity-like colonies, and protect themselves against threats collectively. If the colony is flooded, for example, some of the ants use their heads to plug holes, while others absorb water with their bodies to drain the floodwater."
The alternative? Losing customers. And, potentially, losing a multiplier effect customer opportunity that comes with gaining, and retaining trust. That means adaptiveness and collaboration in a time of adversity.