The disrupted economy

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Two and a half years after COVID-19 was declared a global health emergency, the pandemic continues to disrupt worldwide supply chains. The result has been shortages of needed parts and materials and higher costs for manufacturers, construction companies, farmers and other businesses in the Rochester region.

“Across the board, we have seen supply shortages, increased lead times and price inflation,” says Derek Darling, president of the Sidco Filter Co., which makes industrial filter elements and housings.

Bottlenecks at U.S. ports, increased demand for consumer goods, too few truck drivers and other conditions have contributed to the problem. Faced with shortages of the parts and supplies they need, local businesses and farms have had to stockpile raw materials and supplies, find substitutes for important electrical components, and alter their operations. In some cases, these measures have cost them profits.

Dealing with scarcity

CooperVision, a major producer of contact lenses, at times has been unable to find the paperboard it uses to package some of its products for sale.

“During the pandemic, much more online shopping occurred, which drove up the demand globally for cardboard significantly,” says Mike Lanzone, the firm’s global sourcing manager. “Paper mills have not been able to keep up with demand.”

Theresa Lundhal

The resulting shortages have sometimes forced CooperVision to switch gears, packaging another product in place of the one it originally planned to prepare for sale.

“We’re able to put other products down the packaging line while we wait for the packaging we ran out of,” says Theresa Lundahl, senior vice president of global supply chain at CooperVision. “(That) hasn’t directly impacted customers, but it impacts the efficiency of the operations.”

Scarcities of packaging materials haven’t hurt the company’s bottom line, though its employees have had to work harder to limit the impact.

“Our sourcing teams and our logistics teams put in long hours, and really worked with out key suppliers,” Lundahl says.

Optimax Systems can’t obtain the glass it needs to make optical systems and components as easily as before the pandemic disrupted supply chains.

“The availability of the material is not there,” says Thomas Starin, the firm’s controller. “What we previously could get in a matter of weeks is now a lead time of months, if not a year or longer in some cases.”

Thomas Starin

In addition, the cost of the material has increased by 10 percent to 20 percent since the pandemic began, depending on the type of glass. In rare cases, the price has skyrocketed as much as 50 percent.

Despite those price hikes, Optimax proactively purchases and stores the supplies it needs, or could need, for projects. The firm, which had about $1.5 million of supplies on hand before the pandemic, now has more than $4 million in stock. That has tied up company funds.

“There’s an opportunity cost associated with that,” Starin says. “We could be utilizing those funds in other ways if we didn’t have to hold material.”

The higher prices for raw materials, coupled with increases in labor costs, has prompted Optimax to raise its prices.

“We’re trying to match our price increases to where we’re seeing the cost increases,” Starin says.

Supply issues

Sidco’s primary concern is a shortage of the steel it needs.

“There are not a lot of raw steel producers in the United States and so much of what we get originates overseas,” Darling says.

Getting that steel to the U.S. has become more difficult since the pandemic led to holdups at ports. In late 2021 and early this year, the number of container ships waiting to dock more than doubled, peaking at 150 in February.

The transportation delays have made planning difficult.

“For a while there, suppliers were unable to provide delivery dates at all,” Darling says. “When suppliers are not able to be consistent, it creates more work, because we have to have much more communication with suppliers and customers to be able to plan and execute.”

In addition, the costs of Sidco’s raw materials have risen dramatically.

“We bought sheets of galvanized steel at $40.25 in November of 2020,” Starin says. “That same sheet cost me $102.21 in April of this year.” 

Despite rising costs, Sidco increased its stock of raw materials by 30 percent, added employees and raised its workers’ pay. Darling says the measures have been successful but carry a price tag.

“We have seen significant profit erosion, and we have been trying to do price increases to keep up, but are lagging the pace of the market,” he says.

Supply problems also afflict the construction industry. Of the commercial contractors surveyed by the U.S. Chamber of Commerce at the end of 2020, 71 percent reported being short of at least one of the materials they needed for their projects. Within that group, 41 percent laid the blame for their shortages on the pandemic.

Local builders have attacked logistics problems in a number of ways. LeChase Construction Services LLC, the largest construction company in the state outside of New York City, tracks the availability of the materials it needs, and uses the information gained to guide project planning.

“We like to help guide our supply teams, as well as the (project) owners, when they’re designing projects,” says Peter Muench, vice president of preconstruction. “What materials are more market-available?”

Working with disruption

Even with careful planning, the firm has run into supply chain problems in the middle of construction.

“We’ve had a commitment on time frame or material and price, and then in the middle of the stream we get a notification about an increase or a delay,” Muench says “Those are very disruptive.”

LeChase has been forced to find workarounds to deal with such situations. When the delivery of the transformers that a factory’s plans called for was delayed, the firm found more powerful ones that would serve as well.

Thomas Muench

“What we’re doing is upsizing the gear,” Muench says. “It was a little bit more expensive, but it cut delivery time in half.”

LeChase cleared the substitution with its customer and the project’s design team and installed the transformers, allowing that part of the project to go ahead.

Asked whether supply chain problems have affected LeChase’s bottom line, Muench would only say that the firm has not posted “record profits.” He does admit that solving the pandemic’s logistical challenges has been a strain.

“It’s taken more of a physical toll on project managers and people in the field, designers,” Muench says. “A lot of times, that time is not recoverable.”

Faber Builders Inc., which builds communities of custom homes, has also had to work hard to find the components and materials it needs.

“We have run into tremendous supply chain issues over the past 24 months,” says Bernie Iacovangelo, the firm’s co-founder and CEO.

Richard Battisti, Faber’s president, once had to search far and wide for electrical service boxes that some of its homes required.

“I was reaching out to people in Canada that are in the electrical business,” he says. “I was reaching out to people in Tennessee, but they were all having the same problem.”

Richard Battisti

The company finally found electrical service boxes that fit its needs in Erie and Pittsburgh, and then had to send employees to pick them up. The boxes, which were more complex than required, added as much as $500 to the cost of each house that was under construction. In some cases, Faber had to absorb the additional cost instead of passing it on to its customers.

Supply issues have also affected siding manufacturers’ operations, creating problems for their customers.

“The manufacturer is saying, ‘Well, we can only get so many plastic resins … therefore we’re going to eliminate this one product from our line,’” Iacovangelo says. “It might have been the product that you used standard in your (home) specification sheet.”

At such times, Battisti tries to help the affected customer pick a color or type of siding that is more readily available.

“That adds work, that adds time to the construction of the home, and sometimes it forces a customer to make a selection that wasn’t their first,” Battisti says.

Even when the desired parts or materials are available, delivery often takes much longer than normal. Windows that once arrived a month after being ordered can take as many as 20 weeks to get to job sites.

Managing costs

As wait times have increased, so have the prices of goods. In 2019, lumber cost no more than $375 per 1,000 board feet.

Bernie Iacovangelo

“Over the past 12 months, it went up to $1,800 per 1,000 board feet,” Iacovangelo says.

Higher materials costs have forced Faber to raise prices on some new homes.

“You’re looking at approximately a 36 percent increase over the last 18 months,” Iacovangelo says.

Supply problems have also hit Monroe County’s farms, denying them normal access to the parts and materials they need to raise their crops.

Ron Breslawski grows corn, soybeans, wheat and apples on Charles Breslawski Farms LLC, a 2,500-acre spread he co-owns in Hamlin with his wife, Vicki. Before the pandemic, the replacement parts he needed to keep the family operation’s fleet of 31 field tractors, dump trucks and tractor-trailers running would arrive within three weeks of being ordered. Not any more.

“I placed (orders) in December, and some of the stuff didn’t come in until March,” Breslawski says.

That’s actually an improvement. Parts that Breslawski ordered in December 2020 didn’t arrive until the following August.

Shortages of diesel fuel—driven by the pandemic, Americans’ reactions to it and the war in Ukraine—have also caused problems for Breslawski’s farm.

Large numbers of Americans avoided traveling in 2020, driving gasoline consumption down by 13 percent. U.S. oil companies responded by reducing their refining operations by 4.5 percent.

As the pandemic’s effects lessened, people took to the road again for work or pleasure, increasing the demand for fuel. Despite that increase, refiners did not boost their output. The nation’s capacity to refine crude oil into fuel and other products was projected to fall just below 18 million barrels a day, the lowest level since 2014. Russia’s war with Ukraine led to sanctions of that country’s crude oil and diesel exports, making the situation worse.

Both the drop in domestic refining and the reduction in Russian crude have reduced the availability of diesel fuel and driven up its price. As of Aug. 4, diesel was selling for $5.75 per gallon in the Rochester area, almost $2.50 more than it cost a year earlier. For Breslawski, whose biggest tractor burns up to 32 gallons of diesel an hour, the price difference means a great deal.

“We have 4,000 gallons of off-road (diesel) fuel on our farm, and we ran them tanks out in 10 days,” he says. “We refilled them, and the second time they were out in seven days.”

Other petroleum products are also in short supply. In February, Breslawski’s distributor told him that he was limited to selling no more than 4,000 gallons of motor oil a month.

“He said (that) he would get me some, couldn’t guarantee the price, and didn’t know how much he’d be able to get me,” Breslawski says.

The grower recently ordered 250 gallons of lubricating oil but received only 150 gallons. That’s not much when vehicles require as much as 12 gallons per oil change.

“The 150 gallons got me the oil changes in the spring, but we’re just about out of oil right now,” Breslawski says.

Corn seed, fertilizer and other important supplies are also harder to come by than they were before the pandemic, and more expensive. Seed prices alone are expected to go up 10 percent by the end of the year.

“With the increase of cost this year, I don’t know where we’re going to come out at the end of the year,” Breslawski says.

Martin Schutt owned and ran Schutt’s Apple Mill until a few years ago, when he retired and sold the 65-acre Webster fruit farm to his son, Evan. He has continued working on the family farm and says important supplies have been difficult to obtain since the pandemic ravaged supply lines.

“We are told from our spray consultants in fertilizer that we need to order this stuff way in advance and be careful, because there is going to be a shortage when you need it,” says Schutt.

Fertilizer now must be ordered seven months before it’s needed, and pesticides are hard to come by.

“A lot of pesticides were made in other countries, and they couldn’t get to the docks to unload,” Schutt says.

If Schutt’s Apple Mill can’t obtain the fertilizers, pesticides and other supplies it needs for its crops this year, it might be forced to plant less of them.

“Instead of planting 25 acres of pumpkins, we may only plant 20 or 15 acres of it if we can’t get the fertilizer or the seed,” Schutt says.

In addition to working on his family’s farm, Schutt is president of the Monroe County Farm Bureau. From what he has seen, the pandemic has caused supply problems for many other county farms.

“It’s affected agriculture in all communities,” he says. “They’re doing the best that they can.”

Troublesome though supply chain problems have been for local businesses, they have had a few positive effects. Sidco has benefited from the closure of competitors that did not survive COVID-19’s economic impact.

“We have picked up a lot of their business, as we have been able to manage through labor and materials shortages,” Starin says.

Putting to work the lessons it gained through dealing with shortages, CooperVision is bringing alternate sources for the materials it needs on board. The additions could prove useful in the coming year.

“We expect that the folding carton supply (problem) is going to extend all through 2023,” Lundahl says.

Mike Costanza is a Rochester Beacon contributing writer. Jacob Schermerhorn created data visualizations for this article.

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One thought on “The disrupted economy

  1. The US has a once in 50-year opportunity to alter the strategic business ecosystem. Back in the 1960s, businesses in the US started to look to the East, Japan especially, and later China as a way to cut costs and increase profits. As those strategies evolved, a new era of “just in time” inventory management emerged. From a national security perspective, we should never have become intimately conjoined with China, a country that only wants to destroy us. They use the profits from supplying the vast majority of retail goods for American consumers to fund their ever-increasing military capability. We also borrowed trillions of dollars to fund our wars in Afghanistan and Iraq.
    Suppose our legislators had the will and foresight to help. In that case, businesses return to making many things we get from China and other Far Eastern countries here in North America; we would be far more secure as a nation. True corporate profits would suffer, as would shareholder value and return, in the short term. Still, the case can be made that not only did we import the COVID-19 virus, but we also were dependent on a country with a substantial portion of their manufacturing capacity reduced because of shutdown and sick workers. Many environmentally damaging pests, fish, and other parasites are also affecting our physical environment because of the lack of care regarding ship ballast discharge and shipping pallets, to name a few. We need a new business paradigm that forces American companies to make as many products as possible here in the US and Canada. We also need to look at how we measure economic health and move away from just focusing on stock market share sales and prices as a benchmark. It’s also clear that we must upgrade our railway infrastructure so that we can move more freight more cost-effective and quicker than using mostly over-the-road trucks. There is no doubt we will still need to have a trade relationship with the Far East, but we need to put national security and the ability to be self-sufficient as much as possible as our number one strategic priority. We need to focus more on energy independence and diverse energy production here at home, which must include a significant increase in building next-generation nuclear power plants, especially in the West, where for too long they’ve relied heavily on hydroelectric power, which with climate change is becoming less viable. Just imagine how many workers would be needed if we had orders for 100 or more new nuclear power plants. Many of our defunct or slow-growing heavy industries would get a boost. If we were to also build a high-speed intercontinental rail system that didn’t rely on the antiquated and congested existing rights of way, how many new jobs would that create, both skilled and unskilled?
    We have no one to blame but ourselves and the corporate overlords for the situation we are in. We need leaders with imagination, intelligence, and the ability to get their constituent audiences motivated and educated with a vision for a new America. By the way, many American CEOs and small business owners that survived the pandemic are now trying to quickly make up their losses by boosting prices and blaming transportation and supply chain issues. People are not convinced, especially with the enormous profits Big Oil has raked in on the backs of American drivers. And they are blaming other economic woes on Russia. There are plenty of bogeymen to blame, but the truth is that American politicians and business leaders didn’t have a plan B, and they all share in the mess we are now counting on them to clean up.

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