22/07/2021 - 07:41 am

Reality Check

We’ve got to accept that the current economic climate will endure and price alterations are just one necessity, says Doug Stitt, president and CEO, The Caldwell Group Inc.

 

I’ve been asked a lot recently how business is post pandemic, but it’s naive to suggest that we can only see Covid in our rear-view mirrors. True, much of it is now in the past – we can’t be shocked by it again – but we’re very much still in its clutches. I prefer to capture this era as ‘post 2020’, the spring of which is really the point in time when the bell went to signal the start of Round 1.

So, how’s business post 2020? Positive but choppy, I say.

There’s no doubt that the current is strong and there are large waves out there, but with a sturdy, sea-worthy vessel and a crew to match, these are waters that can be safely and successfully navigated. You might even be able to ride on the crest of a wave or two, but you’ve got to accept certain realities, the most important being that this isn’t going to blow over quickly. If your Q3 plans are based on a normalising of market conditions, you might want to get the CEO, CFO, COO… and co back around the table.

 

Rough terrain

The businesses that are making significant progress against Covid, and economically, are more accepting that the geographical and commercial terrain is uneven. It’s also true that many companies don’t operate in a micro-climate anymore, or one that is limited to tight and definitive boundaries. Given this interrelation between markets, the impact of Coronavirus isn’t completely aligned with a region’s infection or vaccination levels.

It’s nearly impossible, in fact, to account for all the variables that are impacting businesses and projects today. For example, we are expanding our robotic welding fleet. The cell is built in Tennessee but the robotic arm is built in Japan. As many companies are seeing, freight from overseas is backed up and therefore the robotic arm for this project will be delayed. It wouldn’t matter if we lived in a zero Covid zone with 100% vaccination coverage. Even if you had a crystal ball the vision would be cloudy.

The extent to which people were forced into emergency action mode post 2020 means it’s impossible to return to normal operating procedures. Some industries rolled through Covid fairly well but many were impacted by a sharp contraction in demand and then a pretty rapid return of sizeable demand. Many businesses likely reduced inventory not knowing how bad the impact was going to be. When orders started to roll back in, companies didn’t have the finished or raw materials to meet demand and therefore started to quickly add back capacity and invest in raw materials and inventories.

 

Driving factors

With that cycle happening in countries like the US as the economy opened back up, it has driven demand and prices up. Companies relying on global supply chains have seen significant back-up and delays in their ability to get necessary materials, whether it be chips for cars or foam for furniture. As firms that normally bought foreign materials, such as steel, can no longer freely get the product, they are looking for more local solutions.

This ‘crowding-out’ of local buyers of course drives up the price of materials in these markets. Lumber mills and metals producers that slowed down during Covid, or were forced to shut down, have had to work hard to bring equipment and people back online, which takes time. Further, as companies have attempted to bring back labour or add to workforces, they have found it difficult to add qualified help, thus, seeing what I call a ‘bidding-up’ of labour costs.

To consider these realities is to resign oneself to an extended period exposed to the elements. It certainly appears as though some companies are choosing to see this as a short-term issue and don’t seem to be actively trying to adjust their prices significantly. We believe this will be a multi-quarter economic impact and are working to coordinate as best a possible with our vendors and customers. To do otherwise would be denial.

 

Face facts

Good companies are being proactive and communicating as much as they can. This isn’t a short-term bump that you can ignore, and I’d urge all business leaders to communicate that to suppliers, partners, customers, end users, and so on. Never mind comparing notes on how business is post pandemic, let’s get there first. Anyone buying any kind of material right now is seeing significant increases in costs so there’s no point in trying to pretend it doesn’t exist. If there are going to be price changes, we feel we are a better partner if we talk about those things as they occur rather than just showing up after a few months with a massive bill. Of course, companies can’t do that all the time but now is the moment to embrace it.

The most fruitful CEO-CFO-COO conversations as H2 2021 advances are based on strategic and data-driven planning. Think about it this way: all types of steel are not changing at the same rate, at the same time. Therefore, our goal is to, as much as possible, raise prices surgically versus a blanket approach across the board. Some of our products are largely built and correlate with the price of plate steel. We try to coordinate these price changes based on commodities and ideally change products that include other materials based on how they are being influenced.

As always, good companies—and people—shine brightest in a crisis and executing such strategy relies heavily upon the systems in place and personnel in the wheelhouse.

 

Long Covid

Of course, it’s one thing to nod in agreement – acceptance, even – in the boardroom, but successful implementation of a long Covid strategy requires a business to take its entire community with it, further highlighting the importance of communication. Many businesses in the lifting industry work to a supplier-manufacturer-distributor-user supply chain model so it’s important that there is cohesion between all levels. A chain is only as strong as its weakest link, they say.

People understand, in large part, what’s happening right now but perhaps it is difficult for some to put things into perspective. We have a local business, for instance, that was hit with 45% material increases in one shot. You look at that example and say, ‘Why was there no communication and movement by their vendor beforehand?’ There is no doubt that things are changing quickly but in 99% of cases you would think the pathway through could be less abrupt. Ideally, companies are communicating actively with their vendors on increases and then crafting that information into something they can honestly and constructively portray to their customers. This takes time, planning, and commitment, but it’s resources well invested in the long term.

Just like any time you are trying to adjust prices due to inflation or exogenous events, nobody is happy to hear it. Beyond that, though, one of the things we are experiencing is many companies, even if accepting of price changes, have a difficult time updating their systems and, in some cases, redistributing price lists to their customers. Due to how rapidly prices and availability are changing, many companies have stopped or slowed communication via printed mediums because they will likely be out of date by the time the ink is dry.

Hunker down

While accepting that we’re in a prolonged adjustment phase, it’s reasonable to ask when we might finally be able to put the pandemic behind us. Unfortunately, it’s not easy to answer. From a larger, macro perspective, the duration is really dependent on many factors. The usual variables apply, such as economic growth, etc., but now you have also got a number of unknowns in the mix, such as:

The global pandemic

Unprecedented economic stimulus around the world

And, potentially, an inflation environment that we haven’t seen for decades.

As you start to drill down to a more micro level, certain questions persist: when will we see certain industries in Covid-impacted sectors come back online fully? When will shipping and logistics flows level out? And how much capacity will industries like steel bring into the mix? Wow, these answers would be valuable. All of these critical factors will dictate how inflation and economic growth will be shaped, or constrained, in the next 12 to 24 months.

Yes, months—not hours, or weeks. Hunker down.


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LHI October 2021

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