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Equipment manufacturers adjust to battered supply chain

Just-in-time delivery worked well for manufacturers until COVID-19.
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Just-in-time delivery worked well for manufacturers, saving on costs. But then along came COVID-19, and it turned the global economy on its collective ear. Importantly, it demonstrated the flaw in the just-in-time manufacturing concept when paired with a global supply chain: its vulnerability to global disruptions.

WESTERN PRODUCER — About a decade ago I was with a group of journalists touring a new ag equipment manufacturing plant in Germany. As we made our way past a stockpile of raw steel, our guide pointed out that the storage area of that new building was only a fraction of the size of the one it replaced in the old building. There was no longer any need for a large warehousing area for inputs, because the company had adopted a just-in-time delivery philosophy. Parts or raw materials arrived only a short time before they were needed on the line.

“We use the Autobahn for storage now,” our guide said with a smile, referencing the many loaded trucks that were continually making their way to the plant.

Just-in-time delivery worked well for manufacturers, saving on costs. But then along came COVID-19, and it turned the global economy on its collective ear. Importantly, it demonstrated the flaw in the just-in-time manufacturing concept when paired with a global supply chain: it’s vulnerability to global disruptions.

Before COVID-19, manufacturers could source components from anywhere in the world where costs were lowest and have them shipped anywhere through an efficient global shipping network. It all went like clockwork, for the most part.

But Covid halted production in many factories, which stopped production in others that depended on inputs from shuttered plants, slowed transportation and generally threw a wrench into just-in-time manufacturing. Shipping costs skyrocketed too.

That drove retail prices for ag equipment through the roof.

Burned by those supply problems, some manufacturers have decided to keep larger material inventories on hand to cushion potential disruptions. And many have become leery of depending solely on a foreign supplier and have talked about “near shoring” and diversifying their sources of inputs, which means looking for suppliers closer to home. But that has proven to be easier said than done.

“We’re looking for other manufacturers, but it’s not an easy thing to pull off,” said Adam Reid, VP of sales and marketing at Versatile, He was one of several industry insiders speaking during Ag Equipment Intelligence 2024 Executive Briefing webinar in December.

“I think we’ve learned a lot on the supply chain side since Covid,” said Brad Arnold, vice-president of Massey Ferguson (Agco), North America, during the same web event. “But when it comes to a lot of the geopolitical challenges we’ve had as well, never say never, we have to flexible and aware of any challenges that may come our way.”

Among those components that had the largest impact on manufacturing during Covid was the shortage of semiconductors (microchips). There are only a few places that make them, and it’s a very specialized industry. Everything from toasters to airplanes now depend on them. Ag equipment is no exception. Taiwan has been the major producer of them until now.

But there is a growing threat to Taiwan from an increasingly aggressive China. An invasion remains a realistic concern. That could cut off chip supply entirely, at least temporarily.

“The future of our economy is very dependent on whether there’s going to be a war between China and Taiwan and what happens there,” said Daniel Rauchholz, founder of Farmada, a manufacturer of ag fertilizer implements in Salina, Kansas, during the same Ag Equipment Intelligence webinar.

“People don’t talk about it enough. But if you look at how many computer chips are in a car or tractor, or now on farm implements, it’s insane. And if a war breaks out, there’s going to be a major issue. So for us as a manufacturer seeing what happened after Covid we are very cautious. We want to still be able to be analog. You want to have the electronics, but you still want to be able to operate a machine if all else fails. You don’t want to be dependent on a little chip, for example, that you can’t get.

“I think that’s something we have to be very wary of in the future. We have to expect the unexpected. The world has changed since the war in Ukraine happened, and before that we had Covid.”

How important are chips?

The European Commission’s report estimates one trillion of them were produced globally in 2020. According to a 2022 survey it conducted, the demand for chips will double by 2030. The same survey revealed more than 95 percent of manufacturers surveyed were affected by the chip shortage and many expect that problem to last into 2025.

Recognizing the strategic risk to semiconductor manufacturing, the United States recently enacted the Chips and Science Act, which provided US$53 billion for research, workforce development and manufacturing investment to significantly increase computer chip manufacturing in the U.S.

In August the White House updated progress on that initiative, revealing it is also pursuing agreements with other countries that would diversify chip production, saying “The State Department has already announced partnerships with Costa Rica, Panama the OECD (Organization for Economic Co-operation and Development) to explore opportunities to collaborate on the global semiconductor supply chain.”

The European Union enacted similar legislation that came into effect in September. It too aims to increase chip production.

But the Chinese threat to Taiwan is just one geopolitical hot spot with the potential to again upset global trade. The Russian invasion of Ukraine has ended decades of European peace. And Russian officials continue to speak publicly in threatening terms toward other Eastern European countries, particularly those that used to be part of the Soviet Union. The risk of that war expanding is not beyond the realm of possibility.

And there is war in the Middle East — again.

Expanded global conflicts could once again throttle international trade and put manufacturers in a bind when it comes to sourcing components and raw materials. Scarcity of supply would mean more price increases. That has already been demonstrated by the Covid pandemic.

Smaller manufacturers could be particularly vulnerable to a risk of losing their supply sources as larger brands wield more influence with suppliers during periods of scarcity.

“To be blunt, it’s something we’ve been dealing with as a niche manufacturer,” said Reid. “When supplies got tight, we’re certainly not the biggest customer, we might not even be top three or five depending on what the component is, so we’re in line. There’s no easy solution to it at that point.”

Global manufacturing is recovering, and most executives at the major brands say they’re optimistic about future prospects as the sector returns to normal. But it is still not entirely certain what the new normal will be.

 

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