AN OVERVIEW OF INDUSTRY DYNAMICS & The EFFECT ON LEAD TIMES
SEPT 21, 2021 BY JIM KERSTEN
When you run a manufacturing company, the last thing you want to hear from customers is “When will I get my order?!” It should be a given that the date we confirm is the date the order ships. We track the metrics to ensure we are meeting customer expectations. Well, that seems to have gone out the window lately and I want to take a few moments to discuss the market dynamics behind what has become an excessively long, erratic production and shipping process for labels.
In the early days of the pandemic (can you believe we are talking about the “early days”), during the small blip in time where the world stopped, many people stayed at home and the economy came to a dramatic halt, our “just-in-time” world just didn’t know how to react. Supply chains stopped moving and then got log-jammed when they started up again. Reliance on foreign sources of supply for many products made the situation even worse as containers either didn’t ship or sat in domestic ports waiting to be unloaded.
Then, the short shut-down was followed by a paradigm shift in how we live our lives which placed significant demands on U.S. manufacturing and distribution. The U.S. label industry, which barely slowed down, expanded rapidly as general manufacturers revved back up and the need to get products directly to consumers’ homes became the dominant focus of many large companies. My early concern that I may not have been able to keep our DLS team busy and productive was quickly replaced by the need for extensive overtime to keep up with the demand for labels. During this time in the fall of 2020, our raw material suppliers began to show signs of not meeting their commitments and lead times extended from what was normally a few days to what quickly became a couple of weeks. Even though we got ahead of this by adjusting our ordering patterns, the slowness in receiving material forced us to extend our normal 2-week lead times to 3 weeks.
The rapid growth also presented some short-term capacity issues for us so we ramped up our hiring, bringing on production and staff members that resulted in our adding over 23% to our full-time team. This was on top of the significant number of temps we brought in to help with our production effort (assuming we could even find temp workers). And sensing the label growth we were seeing was a market shift, not just a bubble of activity, we added to our production capabilities by purchasing new production equipment for all our plants. So, moving into 2021, we felt we were in good shape to turn lead times around even considering the slowness of acquiring raw materials.
But, just as the U.S. was getting its feet underneath itself, a big storm hit the South and Southwest in February of 2021, creating another blip in our “Just-in-time” economy. This grounded many basic commodities to a halt. We, and our competitors, cleaned out all the raw materials our suppliers had available, and we again had a gap develop between supply and demand.
In the meantime, the movement to ship products directly to customers’ homes continued to build steam as large companies like Amazon, Walmart, Target, and others maintained their laser-like focus on home-deliveries. The need for label products had never been stronger which put a significant strain on our raw suppliers who utilize significant pieces of capital equipment to produce raw materials for labels; ramping up investment for additional production takes many months, if not longer.
Our raw material providers struggled to catch up with production; lead times for raw materials became 4 to 5 weeks as they just could not get the paper and chemicals they needed to produce label stock. As most major chemical companies enacted the force majeure clauses in their contracts related to service level agreements (SLA’s), the supply chain for raw materials regressed even farther.
In late Spring 2021, the emergence of the Delta variant also affected raw materials as skilled operators are needed to run the sophisticated label coating lines and when someone got sick, there were no “drop-in” worker replacements. The above pushed our production lead times out to 4-weeks.
If you notice, I haven’t even brought up shipping and logistics yet. Transportation has been a growing problem going back well before the pandemic, and with the rapid growth of distribution needs, it has just become a logistical nightmare. The rising costs are bad enough, but that doesn’t fix the problem of a shortage of drivers, trucks, and workers at cross dock hubs. Even when we get the supply chain for product issues remedied, transportation will continue to be a major issue, both domestically and internationally.
All this time, demand for label products has continued to rise. The variable image market which makes up most of our DLS business usually grows at a rate of a few percent a year (right around GDP pace). The growth rate today is now running at a 25%+ annual increase clip. Just over the past few weeks, our raw material suppliers have again slowed down deliveries and, in a couple of major instances, have instituted allocations of stock based on last year’s ordering numbers. Think about that for a minute, the allocations are based on 2020 when volumes in 2021 are up over 25%. That is not a good combination for being able to service customer needs.
Compounding the issue is the fact that raw material suppliers of labels are missing their ship dates with no warning. For example, material expected to arrive on a given day doesn’t show up and in following up with the supplier we learn it will be another two weeks even though we were told the order was on schedule. Now, these are large, good suppliers who are historically very reliable. It shows how stressed their business is right now. With raw suppliers now taking 6 to 7 weeks to ship most raw materials, including commonly used commodities, it doesn’t matter how much we order, the suppliers will slow down or cap what they send. We, and our competitors, all face the same situation. So, now our lead time for production is pushing 8 weeks. We are certainly beating that timeline when we have available stock, but we need to plan our production around material delays.
We speak with the management teams of our suppliers on a regular basis. They all have backlogs which are 4 to 6 times normal. And, with Fall and Winter being their busiest times, we don’t see relief coming soon. The consistent message we hear from all suppliers is to expect the situation to get worse as we approach year-end 2021. They all hope this will be the bottom of the pit and they will start crawling out of it next year. In general, the suppliers don’t see any real improvement until late Q2 of 2022.
Currently, we have adequate staff and equipment to produce product at a growing pace but are in a constant waiting game for materials. We have significant orders outstanding that have been delayed or reduced through allocations. Once the supply chain begins to correct itself, DLS is in an excellent position to get product produced quickly as we have the capacity to handle it. Our goal is to work our way back to a 2-week production time as soon as we possibly can.
So, for the next couple of quarters at minimum, there will be ongoing delays to produce labels. Expediting orders will be possible only when material for a specific job is available. We are going to press immediately upon receipt of raw material.
Regarding pricing, we have seen two significant increases on the paper side this year along with several increases on the film side. Also, the chemicals used to top-coat label stock (both TT and DT) are increasing in cost. Finally, a shortage of workers is driving up labor costs for us and all other companies. We are forecasting inflation to continue to affect the cost of labels with another round of increases expected late in 2021 or early 2022.
I know this situation is frustrating for you, our customers, but then again, everyone in almost every industry is frustrated right now. Rest assured DLS has made substantial investments in both people and equipment to be prepared for the significant growth we are seeing today and are forecasting for the future. Once raw materials become more readily available, we are in a great position to get product to you and your customers quickly.
So, “when will you get your order?!” As soon as we receive material, it will be put into the production queue for completion. In the meantime, counsel your customers to plan farther ahead, order early, expect delays, and recognize that you and DLS are doing everything we can to support their needs.
I hope you found this information to be useful.