In the supply chain universe, change is the only constant. Disruption was a cornerstone of the COVID-19 pandemic, and it has only continued since. That’s not to say supply chain disruptions affecting companies today are the same as they were three years ago, though. But as the world evolves, so do the challenges it poses.

When certain sectors experience disruption, others have more stability; nevertheless, the supply chain environment has proven itself cyclical. The manufacturing sector is no exception to this predisposition and as such, functions as a microcosm of this cycle at large.

“Supply chain disruptions continue to crush access to the assets manufacturers need three years on,” said David Normandin, president and CEO of Wintrust Specialty Finance. “The availability of raw materials, the reliance on specialty equipment, and the logistics that come with a robust, multi-stage production journey from source to vendor to manufacturer to customer all bring countless opportunities for disruption that continue today.”

Despite uncertainty that exists at different points of the supply chain, there are steps companies can take to ensure their contingency plans create the least disruption possible. Examining the manufacturing sector’s response and evolution illuminate how.

Pandemic ripple effects

Put simply, supply chains work until they don’t. Along with the rest of the world, the manufacturing sector discovered that the longer the supply chain, the more easily it can break down. 

“As the world came to a halt, a lot of the orders manufacturers were putting in for assets necessary to the function of their business were getting delayed 12 to 18 months,” said Jeff Wolinski, president and CEO of Wintrust Equipment Finance. “They weren’t getting the equipment they needed, which caused a domino effect — they put down payments on equipment at higher interest rates anticipating they’d only pay that interest for a few months’ time, rates skyrocketed, and they found themselves paying more while waiting for the equipment.”

As the value of assets was driven sky-high and the cost to acquire them rose, manufacturers were left in the lurch. In response, they resorted to buying used equipment such as trucks and trailers, Wolinski explained, a tactic that proved costly. 

“They were paying extra interest on down payments; they were paying for equipment they thought they’d return over a longer period of time,” Wolinski said. “Then interest rates rose, and it was kind of a perfect storm for all our customers.”

The perfect storm didn’t last, though. Vendors eventually could access the raw materials they needed to build their inventory back and lead times leveled out, but did so just as demand dropped significantly. 

“On the other end, we’re seeing values fall significantly for specific assets that you frankly couldn’t get before,” Normandin said. “Companies are now canceling orders because the supply chain has caught up to the point that the price they agreed to buy assets at was 20% higher than what they can buy them for today. That shift is impacting how manufacturers are thinking about the acquisition of assets, especially in the context of current economic conditions.”

The ramifications of supply chain disruption

Beyond limited flexibility, heightened costs, and being unable to acquire the assets needed to foster business growth, the ramifications of supply chain disruption can be extensive. 

“Manufacturers acquire equipment as an investment in their deliverable to customers,” Normandin explained. “When that’s not possible, it means that they can’t fulfill the needs of their customers, or they have to hedge those needs.”

To account for this, manufacturers have begun structuring agreements with customers that explicitly state their ability to deliver products or services is contingent upon their ability to acquire the necessary assets or the price of said assets. 

“In business, it’s important that there’s a sense of certainty,” Normandin continued. “Making sure that you can deliver on the expectations you set with your customers is important because it impacts their confidence in your ability to meet their needs and ultimately determines whether they want to do business with you or not.”

Strategies to minimize impact

It takes very little to disrupt a supply chain. Fortunately, there are tactics that companies can employ to adapt to an ever-changing world ripe with challenges, while minimizing impact in the process.

• Diversify sources, suppliers, and financials: Diversification is a concept ringing true with many companies as they come up for air during a time of relative stability and assess how best to mitigate risk going forward.
  
  In the manufacturing sector, diversification is coming to life across business functions, spanning materials sourcing and supplier partnerships. Because of the light shined on the various opportunities for disruption that exist, manufacturers that had been sole-sourcing were left in clear need of change. Having multiple sources and suppliers can reduce costs associated with production delays and improve the operations of the chain. So too can diversifying financing partners, Kirk Phillips, president and CEO of Wintrust Commercial Finance explained.
  
  “A lot of companies, by their nature, tend to run lean from a cash flow and liquidity perspective,” Phillips said. “We’re starting to see them come under stress if they don’t have that excess liquidity or a rainy-day fund to tap into. We preach it all the time to our customers: Make sure you’re diversified financially, because not all your sources are going to be there at the same time.”
  
  
• Explore new methods of transportation, reshoring, and vertical integration: Companies are seeking out opportunities to shorten supply chains, including via revamped transportation methods, reshoring and onshoring, and through vertical integration.
  
  “As the supply chain is diversifying, routes to the end-customer are evolving,” Phillips said. “Instead of goods arriving in the ports of L.A. and being put on a truck, rail car, or plane to be shipped halfway across the country, we’re starting to see smaller ships coming into East Coast ports like New York, New Jersey, Charleston, and Jacksonville to get closer to the end-customer. That’s changing the dynamic of transportation, from warehousing to distribution.”
  
  Similarly, by asking themselves what they can do domestically, or in Canada or Mexico, and moving some or all manufacturing back to North America, companies are building additional protection by diversifying how they’re getting assets where they need them. Another effective way of expanding what can be controlled is bringing another stage of production in-house.
  
  “We had a company in logistics and transportation that was buying its transportation equipment overseas, instead of manufacturing it domestically,” Phillips said. “Along with many others, they experienced a shortage of equipment amid high demand from customers and needed a solution. They found a local manufacturer of the equipment they sought and actually bought that manufacturer to guarantee supply.”
  
  
• Set realistic growth expectations: Businesses need to make sure they’re hedging production timelines with their customers so they can deliver products and services on time. This means being cognizant of what they can’t do — sometimes not taking business is better than taking business and being unable to fulfill an obligation. This approach begets a slower pace of business than many are accustomed to, but it has proven to be an effective means of addressing and managing supply chain disruption.
  
  “Assessing and predicting risks is individual in application,” Normandin said. “An intimate understanding of your business allows you to predict outcomes, and it’s what separates the top 5% from the other 95%. Those with the intuition to understand how things will affect the relationships they have will be best equipped to ensure they’re getting good information and data to feed into that analysis.”
  
  
• Build contingencies into contracts: Companies need to be able to have the flexibility to respond to changing conditions in a way that allows for business continuity. This means looking closely at how their contracts are structured and taking steps to protect themselves preemptively.
  
  Take an equipment lease, for example. What supply chain breakdowns taught us was that companies need to build contingencies into the back end of such contracts. If they can’t return the equipment on time, they could end up paying 150% of its cost when they initially thought they’d pay 75%, and still need to buy a new piece of equipment on the back end.
  
  “There are going to be circumstances that are going to be beyond your control,” Wolinski said. “Five years is a long time in this world; a lot can happen. It’s possible something you thought was clear cut before isn’t so much, actually. At the very least, look at the back-end provisions of your contracts to ensure you’re not going to fall victim to exorbitant fees when it comes to the end of the term and you’re unable to return the equipment.”
  

Despite its ripple effects still being felt, the pandemic’s impact on supply chains wasn’t all negative. Our collective conceptual understanding of supply chains and the role they play in receiving our goods as end-users improved drastically. Of course, this happened by way of exposure to disruption.

“People are much more aware of the supply chain now,” Phillips said. “They understand the risk because they lived it, and they’re taking the necessary steps to reinforce weak links however they can. There are some changes taking hold that are establishing more certainty in supply chain management. It’s creating challenges for some, but it’s certainly creating opportunities for others.”

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Wintrust Commercial Finance and Wintrust Equipment Finance are divisions of Wintrust Asset Finance Inc. Banking products provided by Wintrust Financial Corp. banks.

Wintrust Specialty Finance is a division of Beverly Bank & Trust Company, N.A., a Wintrust Community Bank.