Supply chain issues starting to bite
01 October 2021 | National
HVAC contractors are being advised to expect delays and price increases over the coming months as the supply chain is faced with a perfect storm of factors domestically and abroad.
Raw material cost increases, container availability, shipping transit times, reduction in air freight, and demand from international markets are just some of the issues cited by manufacturers and suppliers who participated in a recent AMCA supply chain roundtable.
Despite participants being drawn from a diverse range of HVAC industry suppliers, the issues cited were remarkably consistent and the message the same.
Production issues finally starting to hit
In speaking about his company's approach, the Australian operations manager for a global manufacturer and supplier said they expected a supply chain shock last year.
"It's taken a while to work its way through the system, but it's finally hit us this year," he said.
Lockdowns, labour supply issues, and stricter safety protocols are all contributing to production slowdowns in major supplier markets, including China, Europe, and North America. Delays in intermediate goods—especially electrical componentry such as semiconductors and integrated circuit boards—also contribute to the problem.
"We see delays of six months and more," said the General Manager of another global manufacturer. "Jobs will be delayed."
Air and shipping freight delays
But supply issues and cost pressures extend beyond the point of manufacture.
The slowdown in aviation has significantly reduced air freight capacity, while the lack of shipping container capacity has impacted all industries resulting in a five-fold price increase since the beginning of the year alone.
"We can't get containers," said one roundtable participant. "We're having to book shipping capacity months in advance, and even then, there are no guarantees."
Longstanding relationships with freight brokers have proven critical up to now, but even these were being tested as logistics companies struggled to keep up with demand.
Regarding the competition for container capacity, a locally based manufacturer reliant on raw materials noted that brokers and logistics companies are no longer honouring longstanding commitments.
"It ends up being an auction," he lamented.
Even when container capacity can be secured, suppliers are seeing significant delays in transit times regardless of the country of origin or the shipping routes taken.
"We even experiencing trouble getting product from Auckland to Australia," said one company. "It's just so congested."
Skill shortages are also on the rise
Congestion issues and transit times are being further compounded by the onset of skill shortages both domestically and abroad.
For example, a shortage of dockworkers has led to delays in offloading from ships, further adding lead times and increasing risks to project schedules.
Skills are also in short supply within local warehouses and manufacturing facilities, ranging from mechanical assembly workers to forklift drivers.
"Finding people with a mechanical aptitude is a real problem," said the Managing Director of one company. "They're hard to find and expensive to keep," he said.
It was a sentiment shared by all roundtable participants, with one suggesting that finding workers was one thing, but finding the right skills is something completely different.
How is the supply chain responding?
Unsurprisingly, managing stock, meeting delivery timeframes, and holding prices are becoming increasingly difficult.
To counter supply issues, many companies are trying to carry more inventory while placing orders well in advance of normal.
"We're carrying around 40% more stock now than we were at the beginning of COVID," one participant reported, while another said they were ordering "around double" pre-COVID quantities.
However, such efforts have resulted in storage capacity issues, storage cost increases, and skills shortages while not addressing container availability or transit times.
"Even if we have the warehouse capacity," said one, "we're having trouble getting inventory into the country.
"We have very little control over delivery timeframes at this point. Even existing contracts are having to wait because of ships being delayed at Asian ports due to COVID protocols."
"We have more product on the water than we do on the land," said another.
Double digit price increases for raw materials
Compounding matters further are sharp, double-digit increases in the prices for raw materials such as aluminium, copper, and stainless steel.
While price increases are problematic, several roundtable participants cited the speed and unpredictability of the changes as their biggest challenge.
"We get very little notice," said one. "It makes it incredibly difficult to plan."
Another participant was even more concerned about the warning from some raw material suppliers that quotas may be applied if conditions don't moderate.
"If that's the case, it will get worse before it gets better," he warned.
Contractors should expect price increases
With such acute and varied pressures, suppliers also reported having trouble holding prices, with some having to quote projects multiple times within very short periods.
"Pricing is so difficult," said one, "because it's moving so quickly".
"We have live quotes out in the market, which we know will be out-of-date now."
Another issue is the uncertainty around the availability of stock post-tender. While suppliers are trying hard to sure up the supply of their entire product range, delays in production, container availability, and increased transit times are leading to uncertainty.
"We want to quote (tender) our entire range, but we can't be sure that it will be available when it comes to the negotiation phase."
As a result, all participants said they are trying to engage with their customers early and frequently to keep them informed.
"Contractors should talk to their suppliers, too."
One participant warned that the current circumstances could risk impacting long-term relationships if not managed carefully and with good faith.
"You spend years cultivating good relationships, but they can fray quickly when you're dealing with continual price increases and changing quotes."
But there is some good news
While current supply chain issues present real and significant short-term problems, suppliers expect demand to persist for HVAC systems, products, and services in the longer term.
Energy efficiency requirements and the trend towards NABERS, Green Star and WELL rated buildings are one source of demand expected to continue. At the same time, questions are being asked about what can be done to mitigate the risks of COVID transmission inside buildings.
"The whole world will be looking to improve ventilation," one Managing Director said.
While participants agreed that longer-term demand is likely to be a "real positive for the industry," they cautioned that supply chain issues need to be managed carefully in the short term.
"The whole industry needs to understand the cost and supply pressures being experienced at the moment."
Members Only | Upcoming webinar
The AMCA will be holding a webinar in the coming weeks on the contractual implications of current supply chain pressures.