Just over a year ago we sent an open letter to our customers advising them to prepare for some potential impacts from the looming pandemic. We anticipated a shortage on products many of us use in our daily life that may be impacted by the pandemic. Some were easy to see like nitrile gloves and N95 masks. Others were a little more obscure…like toilet paper!
We advised our customers to take a hard look at the consumables used in daily operations and to look at stocking up on those items. We anticipated a domino effect of products availability in the coming months. What we didn’t see is exactly how this was all going to play out or how much that impact would be. Now, a year down the road, we can look back and see what happened and is happening. We are hoping this blog will give you some insights into what might be happening in the near future and why we are expecting it.
Over the last year we have seen spikes in some product lines and drops in others. However, as the pandemic starts to wane and the economy starts to open up there has been a series of events that are putting additional pressures on the supply chains. The overall effect of these pressures has been an increase in prices following the increase in demand and the delays that have stacked up over the last year.
Higher oil prices
Oil prices moving higher are a mixed bag. It is good for the industry that struggled significantly over the last year. As these prices push higher it increases the costs of almost everything. Products that use oil or gas in their production have higher production costs. Every product utilizes oil in transportation. Our operating costs are increasing from increased fuel prices to increased utility costs. These higher prices increase operating costs at every level. In turn, that has added pressure to businesses to increase the price of their products.
Restrictions during the pandemic combined with stimulus money caused a lot of people to change how they spent their resources of time and money. People were restricted from travel, dining out, public gatherings and in many cases even going to the ‘office’. These restrictions left people with many hours of time they needed to fill. Along with more time available, many also had financial resources available that would have been spent on vacations, dining and other recreational activities. In response to this increase of time and money, many people took on substantial home renovations and remodels. Others took on smaller projects like adding a deck or painting. Others took up new hobbies or activities. These changes in behaviors of a large number of people put pressure on everything from steel, lumber and building supplies to more obscure things like fishing poles and bicycles.
As restrictions are lifted, we are seeing additional demand increases in other areas. One area that is most increasing is demand for increased staffing levels. After nearly a year of lower employment demand and almost continuous stimulus money, employers are finding it difficult to find employees who want to re enter the workforce. In many parts of the country, unemployment combined with expanded benefits, are providing payments to unemployed workers at or above the pay rate prior to the pandemic. This is requiring increased wages throughout the market. Employers may need to increase wages for existing employees to retain them and to attract those currently unemployed to return to the workforce.
As much as we want to think we don’t need others to operate, the reality is we do. Beginning in the late 1700’s to the early 1800’s we started to move away from an agricultural and craft driven economy and into the industrial revolution. Over the next 200 years people and companies became specialists in specific products, services and operations. In that past a builder would harvest the lumber, mill it and build a house over the course of months or even years. In today’s world, the ‘builder’ may never even drive a nail. Instead, they hire a multitude of contractors to perform different tasks to complete the house in months or even weeks. While this specialization greatly increased our efficiency and lowered costs, it also made every operation reliant on the performance of others.
This interconnectedness extends to every person, every business and every country in the world. At the beginning of the pandemic there were cargo ships loaded with product that suddenly wasn’t needed. Everything from oil to baseball gloves were plugging up distribution as people hunkered down. In the meantime, everyone suddenly needed lumber and appliances at levels greatly exceeding historic demand. We now had containers of product that would not even be unloaded due to limited demand. On the other hand, we had product setting at manufactures around the world that didn’t have containers to load product into. The process of getting the product and containers shifted around to fit the current supply and demand will take months, if not years.
Further compounding problems was the requirement for social distancing and contact tracing. Suddenly every business had reduced staffing levels lowering production levels. Shipping docks on the coasts as well as distribution hubs around the country had to reduce staff levels to keep people at a safe distance from each other. Reduced staff reduced the amount of product that could be moved through the center. If someone got sick it could lead to an entire group of people being required to quarantine, further reducing distribution. Right now, there are a record number of cargo ships setting at anchor off the west coast waiting to off load. Then when a container ship plugged up the Suez Canal and blocked cargo traffic for a week, the impact is amplified.
In short, every sector of industry is having bottlenecks. Mines for raw materials have reduced staff reducing production. Shipping docks and distribution hubs have reduced staff levels. Manufacturing plants have had to spread workers out and reduce staff levels. Large groups of people are kept out of work because one person became ill requiring an entire shift to quarantine for extended periods. Some businesses are required to or have chosen to offer ‘hero’ or ‘hazard’ pay for workers. Around the world the production levels and costs have been significantly impacted. Those impacts lead to higher costs and higher costs lead to higher prices across the board.
Today and tomorrow
Right now, we are experiencing price increases across almost every vendor we deal with. Lumber and steel are increasing daily (and even hourly in some cases). Increased wage demands are impacting every business. Lower availability is making finding some products much harder and in turn driving costs up.
In the short term we expect to see prices pressures to continue to push up. The most significant driver of costs are oil and labor costs. We don’t anticipate oil having another significant drop in the near future and labor costs will not be falling after they have been raised.
Our hope is that as we move through the different problems, we will see some prices stabilize in the next 12 months. Until then, we encourage you to check with us concerning current prices on most products. The market is very unpredictable right now and will remain so for some time.
Over the last year we have heard, and I have even said, we live in unprecedented times. While working on this blog it occurred to me. We have always lived in unprecedented times. The country and the world have changed ‘overnight’ many times. Many world changing events have happened, and will continue to happen in the future. Natural events like earthquakes and volcanoes to manmade events like war, Sept 11, the stock market crash(es), the moon landing and the development of the internet had impact that changes everything moving forward. In short, we need to be ready for unprecedented times as we live in them every day. I like the approach of Tony Robbins when he said “Stay committed to your decisions, but stay flexible in your approach.”