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Wheels of commerce are rolling, but COVID-19 fallout still causing kinks in supply chains

Besides boats and semiconductor chips, experts say houses, furniture, appliances and major electronics are in short supply.
Credit: The Denver Post
JOHNSTOWN, COLORADO - FEBRUARY 28: Eric Smith, GM and co-owner of Colorado Boat Center, is pictured in the store's main showroom on February 28, 2021 in Johnstown, Colorado. Various supply chains have been affected by the year long pandemic and boats are a part of this and the increased demand for boats has created a shortage. Eric Smith and his father Tom, co-owners of own boat center were expecting the worst at the start of the pandemic but instead sales have boomed in 2020 and demand hasn't slowed down into 2021. "For the first time in 30 years we ran out of boats last year," Eric Smith said. "We've pre-sold 80% of our allotment for the year already. We are taking preorders for 2022." Boats and recreational vehicles are among the goods whose sales have skyrocketed during the pandemic as people have turned to the outdoors for socially distanced activities. (Photo by Helen H. Richardson/The Denver Post)

DENVER — When COVID-19 started spreading and state and health officials restricted nonessential businesses and activities, the owners of the Colorado Boat Center in Johnstown sat down and wrote three different budgets to prepare for the economic fallout. 

"None of them forecasted anything like what we did. They were all worst-case scenarios," said Eric Smith, general manager of the family-owned dealership. 

The worst didn't come. Instead, business in 2020 boomed and hasn't slowed down. 

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"For the first time in 30 years, we ran out of boats last year," Smith said. "We’ve presold 80% of our allotment for the year already. We're taking preorders for 2022." 

Boats and recreational vehicles are among the goods whose sales have skyrocketed during the pandemic as people have turned to the outdoors for socially distanced activities. 

But the soaring sales are also indicative of the idiosyncrasies of the pandemic-induced recession. Pent-up consumer demand is colliding head-on with the impacts of lockdowns and factory shutdowns that occurred to curb the spread of the disease. More of the wheels of commerce are turning again and the distribution of vaccines is feeding hopes of returning to some sort of pre-pandemic normal. 

However, supply chains that deliver cars, boats, raw materials and other items are still feeling the effects of the COVID-19 crisis, resulting in limited supplies and waits for goods. Experts and business people aren't sure when that will change. 

The latest kink in the supply chain is a global shortage of semiconductor chips that has led Ford to cut production of the F-150 pickup, one of the country's best-selling vehicles. President Joe Biden has ordered a review of critical supply chains and wants to explore boosting manufacturing in the U.S. 

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"I think we got caught flatfooted, thinking this was going to be a long drawn out downturn in manufacturing, production. The data suggest just the opposite," said Gregg Macaluso, a faculty member of the master’s program in supply chain management at the University of Colorado-Boulder Leeds School of Business. 

Unlike the financial crash of 2007 and 2008, consumer demand during the pandemic has "shifted in ways that no one predicted," Macaluso said. 

"They acted like we were getting ready for another cold winter, like the Great Recession," he added. "So they started to shutter (plants) and within 60 days a new pattern of demand that they didn't expect hit and they got caught flat. Now they’re chasing it." 

Macaluso said when the economy took a dive about a year ago, manufacturers across a variety of categories slowed or ceased production and laid off workers. "Then unexpectedly in May, demand started to rise and it hasn’t stopped since." 

Data from the Institute of Supply Management shows a growing gap between orders and delivery by suppliers. A rating of above 50 indicates demand is exceeding supply, Macaluso said. The rating was 58.2 at the end of August and rose to 68.2 by the end of January. 

The decades-long move of a lot of production to other parts of the world makes responding to quickly changing conditions more difficult. Economists also point to what they call the "bullwhip effect," when small changes at one end of the supply chain get amplified as they ripple through, sending distorted signals. Macaluso likened the effect to the telephone game. 

"Labor shortages are also causing issues. Mexico -- the United States' largest trading partner -- is still being impacted badly by COVID," said Patrick Penfield, a professor of supply chain practice at the Whitman School of Management at Syracuse University. 

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Many U.S. companies are still experiencing staff shortages because workers are infected or are in quarantine because they were exposed to someone who is, Penfield said an email. Besides boats and semiconductor chips, he said houses, furniture, appliances and major electronics are in short supply. He expects the list of items to expand as more people get vaccinated and want to return to their pre-pandemic lives. 

"Consumers were saving money during the pandemic (if they were working) and are now looking for things to go back to normal and want to buy products," Penfield said. "Also, another impetus to spending will be COVID relief money that will be passed by Congress." 

People will likely see shortages of various consumer products similar to ones involving food and paper products early in the pandemic, Penfield added. 

One high-demand product hits home for Colorado-based Ball Corp. A global producer of aluminum packaging, Ball was among the companies trying to keep up as restaurants and bars closed and people bought more canned beverages to drink at home. 

The unprecedented surge in demand that started last year has created shortages of certain canned beverages, Ball Corp. spokesman Scott McCarty said in an email. He said the industry was poised for significant growth before the pandemic because of high demand for hard seltzers, and still and sparkling water. Another factor was a shift from single-use plastic containers to cans, which McCarty called "infinitely recyclable." 

Ball is tapping its global network of plants to minimize the short-term impacts. McCarty said the company is also expanding its U.S production by adding new lines in existing plants and building a total of three new facilities in Arizona, Pennsylvania and Kentucky. The new plants were in the works before COVID-19, but McCarty said the company is working to speed up some of the projects to increase supply as soon as possible. 

When it comes to cars and trucks, it's not clear when supply will catch up with demand. The problem is a global shortage of semiconductor chips that are crucial to making vehicles go but are also necessary for products that people working, learning and playing from home are using more of: laptops, tablets and smartphones. 

Automakers cut their orders for the chips because they expected sales to drop and semiconductor production lines shifted to other products, The New York Times reported. Then auto sales rebounded quicker than anticipated. 

Unlike the financial crisis in 2008, automakers idled production for a while and inventory decreased. 

"Then they all kind of snapped into action and immediately, drawing upon the lessons they learned in '08, started offering just completely once-in-a-lifetime-esque incentives like 0% financing for 84 months," said Lauren Donalson senior director of accounts-national for PureCars, which provides digital advertising for auto retailers. 

Demand outstripped supply in the second half of 2020 and auto dealers started seeing record profits, said Donalson.  "Just as soon as things were about to get back to normal, now we're faced with this microchip shortage and it's going to be a similar environment, where demand will continue to outweigh supply," she said. 

The cutback in production of full-size Ford pickups has gotten a lot of attention, but Donalson said the semiconductor chip shortage is affecting dealers regardless of their product. 

Since COVID-19 restrictions were lifted on Colorado dealerships, allowing them to reopen their showrooms, dealers haven't always had vehicles to display on the floor. 

"When our showrooms were closed, so were the factories, not only in the U.S. but around the world. When they were able to reopen, that didn't mean they got back to 100% production," said Tim Jackson, CEO and president of the Colorado Automobile Dealers Association. 

Factories are still dealing with coronavirus outbreaks, like everywhere else, Jackson said. As a result, he added, a Colorado dealership that historically would have 700 to 800 vehicles in the lot might have a tenth of that now. A dealer told him about a customer shopping for a certain model who wanted to buy a car right off a delivery truck that was pulling up to the business. 

In 2020, Colorado's vehicle sales overall were off about 12.5% from the year before, Jackson said. "But our fourth quarter was back to where it was, basically dead even with 2019." 

However, the tight supply of semiconductor chips creates more hurdles. Jackson said Toyota, the top-selling make in Colorado, started sending cars with just one key to save on chips and will likely skip providing a spare key for the next two to three months.

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