A bit over 18 months have passed since the majority of the globe locked down due to COVID-19. As we continue to acclimate and adapt to the ongoing pandemic, we see some signs of recovery. The manufacturing and packaging industries, however, continue to struggle in many areas. These struggles have required procurement executives to become more agile and diverse in their approach to finding the most cost-effective packaging while also problem-solving when others come up short.
At the start of the pandemic, we addressed the most significant changes to the supply chain. Many of these issues have been mitigated, yet the manufacturing sector still struggles with shortages in packaging, low inventories, reduced labor force, and a looming shipping crisis.
Here is SRM’s line of sight into what is happening to US supply chains in the age of COVID-19.
Supply Chain Stretched for Packaging
Since the beginning of the COVID-19 pandemic, imbalances in supply and demand have been a prevalent facet of the supply chain. Shipping supplies have also been affected with rising prices on a tight supply of corrugated boxes and wood pallets:
- According to the Bureau of Labor Statistics, the price index for corrugated and solid fiber box manufacturing climbed to 375.3 in June 2021, an increase from 342.0 a year prior.
- The index for wood container and pallet manufacturing also increased to 208.5 in June 2021 from 155.1 the same time the year before.
Both current indexes are record highs.
We speculate that the corrugated packaging increase is caused by heightened consumer spending on e-commerce that requires cardboard boxes. The trend in e-commerce spending is expected to be permanent, yet packaging inventories remain low. This also plays a role in raised prices across paper grades, including those used in corrugated packaging.
The increase in the index for wood containers and pallets is almost certainly due to increases in lumber costs, sustained throughout the pandemic partly due to a sudden increase in demand and a large reduction in the labor force.
Manufacturers Struggle to Grow Inventories
High demand and extended supplier lead times have caused factories to draw down inventory levels after a growth period earlier in the summer.
High demand was illustrated by the continued growth of new orders and customer inventory levels coming in too low. The sector’s expansion has been held back by transportation issues and hiring difficulties partly because of coronavirus economic mistakes.
Purchases continue to roll in, but the lead times are longer because of shortages of raw materials, low numbers in labor forces, and logistics challenges. This has caused price increases and high lead times in manufacturing materials.
Although these factors are creating pressure points, the challenges are being navigated through supplier diversification and inventory management. Plus, according to an ISM report, the employment index in the sector grew three percentage points in July, which should impact production numbers.
A Crisis of Shipping Supplies
Key areas of the supply chain are experiencing shipping container shortages, issues with freight space, longer detention times, and facility closures, causing retailers to wrestle with higher freight costs and constraints to shipping capacity.
Many of these shortages are from the past year when retailers adjusted their buying amid store closures and a drop in demand. In response, carriers took capacity out of play by halting the use of container ships. Yet US consumer demands increased before shippers and carriers were prepared, causing a ripple effect in slowed lead times.
Other contributors include the shutdown of major ports in China and significant producers in India, creating a substantial global shipping backup and causing manufacturers worldwide to play a long game of catch-up.
All of this is occurring as retailers and brands are preparing for the holiday season, forcing them to consider a limited and costly set of options. They will need to pay for skyrocketing freight rates that do not guarantee timely product delivery or face shipping delays.
Balancing Out the Coronavirus Economic Effects
So, what happens next? At SRM, we believe in embracing the long view by staying focused on the horizon and anticipating the new business models that will emerge. Throughout the pandemic, SRM has helped clients balance out the coronavirus economic effects by encouraging our clients and prospects to re-evaluate their business models and adjust to the environment in which they must now operate.
Our approach to business engagements is built around a shared savings model. We take budgetary pressure off of procurement while offering relief to bandwidth as well as reinforcements in several areas where the pain is acute, including MRO, transportation, and packaging contract evaluations.
As we are see in SRM’s other industry verticals, hunting season for cost savings is now open. The “new” normal is happening right now in the context of our future in business as well as in our personal lives.
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