SBJ graphic by Amanda Miller

Supply Chain Squeezing Margins, Stretching Timelines (Sponsored Content)

This content brought to you by Prosperiti Partners LLC

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A month into the pandemic shut down, more than a third of respondents to Springfield Business Journal’s second Economic Growth Survey expected life would return to a “new normal” in two months or less. Roughly 10% predicted it would take 10-18 months.

Eight months in, no one really knows, but the fallout of COVID-19 to industries that rely on a smooth supply chain is clear, says Titus Williams, president of Prosperiti Partners LLC. Since March, obtaining imported materials has ranged from impossible to delayed, with increased costs becoming the norm.

“The ones that are more affected than others are businesses that still have a significant amount of demand – but availability of those goods is not there,” he says.

That includes construction, electric, roofing, plumbing and other related industries, plus supply-reliant businesses like restaurants.

Some industries have turned to domestic sources, even with higher costs.

“To shore up their supply chains, they have to purchase from a supplier that they have confidence is going to be able to deliver on a timely basis, to meet their customers’ needs,” says Williams, who has experienced the issue with his own businesses.

For example, pre-coronavirus, Williams’ companies quoted new construction projects. As a matter of practice, they don’t tie up capital by purchasing supplies before needed. Then COVID-19 hit.

“Now, the supply warehouse is not able to get those components. Or when they are able to get them, the prices are significantly higher,” Williams says.

As a result, either projects are delayed or margins narrow.

“And that’s just one example of how a disruption in supply chain can throw off significant amounts of projects all across the U.S.,” he says.

Jan Stahle, sales manager for Harry Cooper Supply Co., sees it firsthand.

International sources have reduced availability. Domestic sources are experiencing delays.

“Some manufacturers were shipping products within 10 business days. Now, it’s seven to eight weeks,” he says, pointing to one reason, especially on the domestic side: “A lot of these factories have had to cut down on personnel and gone to two or three shifts because of the 6-foot distance. So, they are very much behind.”

To ensure availability, contractors are willing to pay more from domestic sources, with the consequence of narrowing profit margins. Williams says long-range economic consequences could include changing consumer habits. People may simply accept lower-quality items, for instance, picking up more fast food versus going out to sit-down meals, hurting some local restaurants. Or they may maintain lifestyles at higher costs, racking up debt or reducing savings.

Either way, fewer people would have available funds post-pandemic.

“This has actually been in the works for quite some time but not to this degree,” Williams says. “I think (the pandemic) has exacerbated it. I think what’s going to happen is that people are not going to buy homes and will be more likely to be renting for a majority of their life.”

It could still turn around, he says. For one thing, the supply chain stabilizes, more well-paying trade careers like construction, electric, plumbing and HVAC will be in demand, and opportunities to learn those trades could grow. Still, Williams wonders if an unstable supply chain could eventually lead to inflation.

KC Mathews, chief investment officer for UMB Bank, doesn’t think so – at least in the next year or two. Mathews agrees the supply chain is an issue for large and small businesses, although, like Williams, he says some disruptions predate COVID, starting in 2018 with tariffs and customs regulations. Then, as China locked down its economy with the pandemic, Mathews says ships were anchored and imports bottlenecked around the world. Fortunately, he adds, logistics have improved globally though disruptions still occur for some industries like construction, which imports a majority of building materials including lumber, plumbing, electric, glass and aluminum.

With margins being squeezed, Mathews says there may be pockets of industry-related inflation. But he isn’t concerned about consumer inflation on a macro level with the Consumer Price Index at 1.3%, unemployment at 8.4% and anticipated productivity gains through increased automation investments.

“That puts downward pressure on inflation,” he explains.

It also could depend on when the virus gets under control, Mathews adds. If the economy expands faster than expected and interest rates go up, that becomes a yellow flag.

“Then, we need to keep a closer eye on inflation,” he says.

In spite of COVID-related supply chain issues, Williams thinks communities like Springfield are in better shape than some.

“We are very lucky to live where we are, in my opinion, because we have a good, wholesome, well-rounded economy,” he says, citing the mix of white-collar and blue-collar jobs. “If other communities were like us, the U.S. would be in a lot better shape.”

This content brought to you by Prosperiti Partners LLC.