The Institute for Supply Management’s PMI for Manufacturing (Purchasing Managers Index) jumped to 60.2 in June, up from 58.7 in May and rising for the second straight month. Considering that anything over 50 represents growth, the 60.2 is a robust reading which means everything must be wonderful in the manufacturing sector, right? Well not so fast, Machine Boy. Literally, not so fast.
A closer look at the numbers shows some disturbing trends. A big jump in the Supplier Deliveries sub-index indicates deliveries from manufacturers to customers slowed tremendously in June.
The primary reason for late deliveries is a lack of manpower. Manufacturers assumed they would be able to expand capacity when they took the original orders, but because the economic recovery is widespread, all industries have been competing for the same labor pool. That left many companies short on workers.
Even if you have enough workers, there still can be problems (as will be discussed later) if your suppliers are short on staff. If your supply chain consists of 50 vendors, but 10 of these suppliers are delivering late, it’s going to wreak havoc with your production schedule and result in late deliveries.
Another reason deliveries are slow is lack of trucking capacity. Fleets managed capacity very conservatively after the Great Recession and that worked well in a slow growth economic recovery. But now that commerce has accelerated, there are not enough trucks and trailers to handle the amount of growing freight. Many companies have been forced to bid for trucks in the spot market for the first time in years. This is resulting in many late deliveries.
Class 8 Equipment Issues
The conditions causing delivery delays detailed above are severely prominent in the Class 8 equipment market. Specific numbers are difficult to obtain, but industry sources tell me that more than 30 parts are in short supply at truck OEMs. Most of the shortages are the result of Tier 1, Tier 2 and even Tier 3 suppliers not being able to hire enough workers to make the needed components and parts. Companies are in some cases air-freighting parts in from Asia to keep production lines running.
Word on the street is there are over 10,000, and maybe as many as 15,000, semi-completed Class 8 trucks parked, waiting for parts to arrive, so they can be driven off the lots. Component deliveries have been so slow that some of these trucks have sat for over a month.
There is no good way to predict when the supply chain will open up and all needed parts and components will be delivered on time. And even when the key components arrive, all these trucks will need to be delivered to dealers and fleets throughout the country. This presents a logistics nightmare since OEMs were having problems finding drivers to deliver the trucks before the supply chain bottleneck struck.
So ironically, the driver shortage is causing delivery problems in the trucking industry. The driver shortage has grown progressively worse since the beginning of 2016 and is reaching a critical point. With the unemployment rate at 3.8% and the competition for workers from other industries, it gets more difficult for fleets to hire drivers every day. A recent article in the Washington Post told the story of an 87-year old man who was offered a trucking driving job, provided he obtained his CDL. However, he turned down the $50,000 a year job because he did not want to spend that much time away from home.
Tariffs Enter the Picture
Most discussions of the new tariffs involve the impact on prices. However, my sources tell me they will soon negatively affect the supply chain in the short-term. Aluminum coils from China and steel stock from other countries have been diverted or delayed because of the tariffs. Soon U.S. manufacturers will need these materials to make parts, components and products – some for the truck OEMs. To a supply chain already performing poorly, the tariffs hitting at this moment just adds to the mess.
The Economic Impact
The lack of parts and components, for all industries, slows down production. The lack of trucking capacity slows down the movement of goods. At some point, this will slow down economic growth. Normally, you would expect the economic laws of supply and demand to balance things out. And this will happen, in the long run. In the short run, it’s about to get ugly.
