Chain Reaction: How the supply chain bottlenecks affect the Canadian automotive industry
Bought a car and still waiting for it? What about that treadmill that still hasn’t showed despite the fact it was purchased months ago. Better get used to it. At least for a while say pundits, because here’s another new normal for you to adjust to: broken links in the supply chain, that is.By Carter Hammett
Maybe the toilet paper was our first clue.
You might recall back in March 2020 shortly before the first widespread lockdown when just about anything in a container or plastic wrap went flying off the shelves as panicked consumers scrambled to stockpile goods. Fortunately, retailers stepped up to the plate, putting ceilings on consumer purchases and positioning themselves more than adequately to replace supplies.
As time went by more and more news stories gradually started to creep up about frustrated consumers who purchased things like kitchen appliances only to wait months and months before they ever showed, if materializing at all. Indeed, stories about cargo ships idling at sea, shipping containers sitting for weeks, months, on docks with nobody to move them and dire warnings that presents under the tree might be a little more scarce this year all started to accumulate and form a picture as enlightening as it was frustrating.
The picture that emerged was of cracks exposed in a supply chain unprepared to deal with global pandemics; without an emergency response plan to sidestep backlogs of supplies and materials needed to fill a swelling Western demand for laptops, boats and workout gear.
But it wasn’t just household goods that salivating consumers were lining up for. The pain points cut across multiple industries as well. Among the hardest hit included manufacturers forced to cut back production of both vehicles and parts.
So how did all this start? When will it end? Will it ever end? And how have these distribution hiccups which have caused massive disruptions, and triggered price increases on everything from gasoline to food caused us to evaluate a system’s effectiveness?
Let’s find out.
The automotive industry has been hit particularly hard by supply chain bottlenecks. Many Canadian auto manufacturers were forced to shut down plants while others announced product reductions. General Motors closed its plant in Ingersoll Ont. early in 2021. Toyota meanwhile chopped 40 percent of its global production while Ford cut truck production in October.
Other automakers cut production during the first two quarters of 2020 because of projected sales shortages. In an attempt to thwart the spread of the virus among workers, most major North American manufacturers—including those outside the motive industries–suspended operations. This in turn caused shipping companies to reduce their output in response to the anticipated shortage of moving goods.
And yes, while industries like tourism and restaurants were indeed hit hard, others experienced a surge in demand for things like home appliances, gym equipment and technology as more and more workers moved into remote employment. Money that ordinarily would have been spent on things like travel got redirected into home-based ventures.
The need was so high it basically put a choke hold on the distribution system since factories couldn’t obtain all the materials necessary to meet the demand. As if that weren’t enough, shipping containers were suddenly stuck—in places they shouldn’t have been. China sent huge numbers of PPEs and medical equipment to different places around the globe but an abundance of shipping containers wound up in countries that usually don’t return product back to China, so these piled up. The lack of available containers then drove the cost of shipping up.
Canadian ports weren’t hit as bad, that is, until the terrible mudslides and floods that decimated critical access to roads and rails in southern British Columbia. With highways and bridges wiped out or underwater, food and fuel deliveries were severely disrupted.
“Global supply chains have been stressed since before COVID and we’re increasingly seeing long-standing weaknesses in our supply chain systems being exposed,” says Pat Campbell, vice-president, strategic initiatives, with Supply Chain Canada. “This situation has been caused by a number of factors which have compounded upon each other. Examples of non-COVID-related pressures are the ever-given blockage that brought this key global trade route to a standstill for over three months. Wildfires, hurricanes, and other extreme climate events have also contributed to disruptions. The importance of protecting workers through social distancing impacted productivity among warehouse workers, truck drivers, rail and port workers. All of these factors were compounded by high consumer demand.”
When the chips are down
Another major factor contributing to the bottleneck has been a global shortage of semiconductors. Just about anything containing these chips became virtually impossible to obtain. This is a key reason why so many people have been waiting months for kitchen appliances and other household items. (The mounting demand for electronic devices triggered a shortage of the integrated circuits that makes so much of our stuff work.)
Toyota, which knows a thing or two about supply chain efficiency, realized that a lack of these tiny yet critical chips could prove to be a key link in the process and actually squirrelled a six-month supply away just as competitors were slashing orders for fear a certain pandemic would hamper demand.
That six-month cushion evaporated quickly and with it, so did such details as power steering, windows, digital displays, safety features and entertainment units.
“There’s an overabundance of demand on chips,” says Pedro Antunes, chief economist with the Conference Board of Canada. “This may have been disruptive, but with the addition of COVID restrictions, it created an excessive demand we didn’t really expect.”
It’s an observation which Pat Campbell agrees with.
“There are chips in nearly everything electric you own, from your phone to your computer to your car. There are even chips in items you wouldn’t expect, such as your washing machine, refrigerator and electric toothbrush. But these tiny parts that power so much of our lives are now in critically short supply.
“As the world shut down because of the COVID-19 pandemic, many factories closed with it, making the supplies needed for chip manufacturing unavailable for months. Added to this situation was increased demand for consumer electronics that enabled many workers to shift to working from home, students to learn from home and everyone to remain connected. This demand caused shifts that rippled up the supply chain. Orders began to pile up as manufacturers struggled to create enough chips to meet the new levels of demand. A backlog began to grow and grow and grow.”
But wait…that’s not all
Other variables have to be acknowledged too. As of this writing the Omicron variant is proving itself to be one tough combatant as it has taken a stranglehold on major production outlets in Malaysia and Vietnam.
Supply chain headaches have also done much to highlight a labour dearth distributed across multiple sectors. Although Canada’s current employment figures are actually quite healthy, a shortfall of workers in agriculture, energy and transportation has been deeply felt.
Furthermore, a global shortage of truck drivers has further contributed to delivery delays. Here in Canada, there’s a shortage of about 18,000 drivers estimates Trucking HR Canada. But that figure’s expanded to escalate to 55,000 by 2023. Criticism lobbed at government officials include accusations that the feds aren’t doing enough to attract talent to the industry.
Part of the problem is that there’s not enough training dollars available to increase access to potential drivers. Licensing is expensive and can cost up to $15,000.00 depending on where in the country you live. On top of that the pandemic has thrown a wrench into driver turnover and early retirement which is contributing to further shortages.
The Canadian Trucking Alliance is gearing up to introduce a three-year recruiting campaign in an attempt to lure more drivers into the sector.
Things may be bad in Canada, but in Britain there’s an estimated driver shortage that clocks in at an estimated 100,000. That’s due to life after Brexit when thousands of eastern European drivers decided new rules weren’t worth the headache.
The headaches and delays within the system are indeed a global problem. And it’s triggered debate closer to home about an over-reliance on foreign suppliers and a shift away from a “just in time” model to a “just in case” model where the need to consider ramping up domestic production of semiconductors and other essentials on our own turf should become a reality.
“This is an interesting debate taking place across the automotive and other industries that rely on global trade,” says Pat Campbell.
“Future agile and resilient supply chains must ensure all links in the chain respond cohesively to demand changes and reduce latency times. This will require more visibility throughout the entire value chain. Visibility will require more data and analytics while simultaneously prioritizing information security. All of which will require a digitization strategy of the end-to-end value chains of key industries, such as automotive. “
For his part, Antunes says that he feels “it’s difficult to comment on how the industry will adjust but it’s perhaps wise to suggest that manufacturers consider reducing down to a lean-and-mean model. We need a reversal, not just in automotive but in general. It’s not just manufacturing, wholesale and retail. We’ll have to look at building something more robust in the future.”
Some pundits take it as a given that those that can will take the plunge and invest in production on home ground while also diversifying their sources of supply, or if not that, determining ways to make the existing system more flexible.
This debate coincides with both a rise in protectionism as the Biden administration tries to navigate the currently frosty relationship it has with China, and the current call for greener energy. In fact, China had been leaning precisely in this direction, but was caught empty-handed after massive electricity shortages caused the country to reconsider its restraints on fossil fuels.
China also controls most of the world’s rare-earth elements that are used to power such things as electric vehicle batteries and wind turbines while also controlling most of the world’s magnesium which is used in auto parts among other things. It has already demonstrated that it is not afraid to leverage this fact to its own advantage. This has hit Europe badly, although the US has largely been spared this problem because of contracts with Mexico and Canada.
In fact, Canada produces about one third of the minerals Washington has declared as essential to its security and much of these used by the auto industry. Obviously this could bode well for both parties in the not too distant future.
“The Battery Metals Association of Canada (“BMAC”) recently released its report entitled Maximizing Canada’s Battery Metals Sector, addressing Canada’s ability to build a “mines mobility” supply chain to contribute to the rapidly growing battery metals industry,” says Pat Campbell. “The report follows a virtual workshop held in March 2021 during which representatives from the Canadian battery supply chain addressed roadblocks hindering Canada’s effective participation in the global battery market and identified steps to overcome them. Our organization supports the work of BMAC.”
Whatever the outcome of our current situation, pundits appear to agree that the supply chain situation will eventually sort itself out.
Indeed, Antunes appears cautiously optimistic about the relatively healthy state of the Canadian economy.
“Our recent unemployment rate hit 6% which are record lows. The trucking industry has lots to be aware of—not just the supply chain but also transportation and energy prices and labour shortages across key sectors. There’s also the multiplier effect: You hit one sector and it creates a ripple effect to others. It affects purchasing, power, food, gas, transportation.”
And yet, he adds with a note of pride: “Through this pandemic I’ve been amazed at the resilience in the supply chain. It’s essentially been shutting down the economy. Despite some shortages, nobody’s going hungry. Going forward this shake up my actually generate productivity again. The adoption of technology has helped us to effectively manage the economy; Telehealth is one example of this.”
It’s a point of view echoed by Supply Chain Canada.
“It’s important to highlight how hard Canada’s supply chain professionals have been working. From extreme weather events to ensuring the delivery of goods during the pandemic, they have stepped up to the plate across the country and ensured that Canadians were well-supplied,” Pat Campbell says. “This has been a challenging time, but it has also been one that has highlighted some of the impressive work done across the country to keep our supply chains safe.”
Final thoughts from Supply Chain Canada’s Pat Campbell:
Supply Chain Canada members represent the wider profession that includes the breadth of supply chain roles such as sourcing, procurement, logistics, inventory, transportation, distribution, operations, sustainability, replenishment, and contract management. By working with practitioners, professionals and leaders across the supply chain spectrum, we are able to strengthen our collective capabilities and reduce vulnerabilities that may exist.
While supply chain has experienced challenges over the past year, we have also had many successes. Our ability to work together allowed us to quickly distribute PPE and vaccines to communities and people across this country. We saw, for instance, members of the supply chain sector come together to ensure that people were taken care of during extreme weather events in British Columbia. This is a sector that is filled with creative and entrepreneurial professionals, who put in the work to ensure accessibility for all Canadians.
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