Manufacturers back to building inventory

Before the COVID-19 pandemic rocked the world, factory workers were humming along, assembling products just after components were delivered. It was called “just-in-time” production. It was efficient, predictable and cost-effective.

Today, companies are scrambling to find parts, lock-in purchases — and hopefully prices — and work around estimated delivery schedules. It is a vastly different world.

For example, three years ago, people touring the Boeing 737 plant in Renton, Washington, saw 737s creeping down long assembly lines where wings, engines and tails were mounted on fuselages. Parts came from around the world and were added systematically, at the right time.

The fuselages were fabricated in Kansas, transported by rail to Washington. Other components arrived in containers by sea, rail and truck. Since each 737 was different, custom parts were added as the aircraft moved down the factory floor.

Success of “just-in-time” production hinged on timely deliveries. The benefit to companies was that they didn’t have to keep large inventories, which are cumbersome and costly.

COVID blew a big hole in that supply-chain concept. Manufacturers are still scrambling to find parts where and when they can. They’re back to building inventory and it is adding to the costs of production and to product prices.

Shortages are driving prices even higher. In April, our inflation rate was 8.3 percent.

“America’s supply chain, once the focus of highly specialized professionals in logistics, shipping, trucking and ports management, is now a common story on the nightly news where we’re told of shortages,” Mike Ennis, Association of Washington Business (AWB) said. It all translates into higher prices at every level.

Components shortages hit small manufacturers hard.

Rankin Equipment, a fifth generation family business in Union Gap, Washington, not only distributes farm implements, but its manufacturing subsidiary, Northstar, makes them. It is a custom manufacturer of specialized equipment designed primarily for tractors and loaders — equipment used in fields, orchards, horse arenas and hop farms. Dave Rankin, the company’s owner, said steel used for implementing frames and supports has increased by three-to-five times in the last two year and competition is fierce.

Some hard-to-get parts are hydraulic pumps with operating equipment Northstar manufactures. Shipping costs have skyrocketed as well. Costs for a container from Italy have jumped three-fold to as much $25,000.

Manufacturers depend on trucks. The price of fuel for heavy-duty trucks has increased by more than $2 per gallon since January and, in many areas, diesel has surged past $6 per gallon, according to the U.S. Energy Information Administration. In California, the average price is $6.46 per gallon. Many truckers are adding fuel surcharges to stay solvent.

On top of costs, manufacturers such as Rankin face a shortage of skilled workers. For example, many welders are approaching retirement age, with fewer replacements entering the workforce. The American Welding Society predicts a deficit of 400,000 welders by 2024.

Bringing inflation under control, avoiding worker shortages and returning predictability for manufacturers, large and small, requires immediate attention of our elected officials. For example, stabilizing gas and diesel prices are things they need to address now.

“Many industry observers are questioning the old “just-in-time concept of buying parts right when they’re needed and keeping inventories low,” Rankin recently told Washington Business Magazine. “But now with all of these lead times extended out, in many cases you have to go ahead and commit and get it locked in, get it bought, so the price won’t go up, and so you can get the merchandise.”

Will we return to the just-in-time production system? Not in the foreseeable future. There is much work to be done to keep our “Made in America” products competitive.

Don C. Brunell is a business analyst, writer and columnist. He retired as president of the Association of Washington Business, the state’s oldest and largest business organization, and now lives in Vancouver. He can be contacted by emailing theBrunells@msn.com.