The post-pandemic metal fabrication supply chain

Manufacturing supply chains are changing, but the fundamentals of risk mitigation haven’t for metal fabricators. Getty Images

The lockdown recession is unique in modern times. The pandemic and the widely varying governmental responses to it have raised all sorts of uncertainties on both the supply and demand side of the equation.

The shocks occurred like a one-two punch. First came the supply shock, where many fabricators dealt with canceled orders not from lack of demand but because OEMs couldn’t get other needed parts for the final product. Some manufacturers were shut down because they weren’t deemed essential. Others saw supply shocks from overseas, especially Asia. Then came the second punch, this time on the demand side, as unemployment spiked dramatically. OEMs reacted by reducing or halting orders altogether.

The shocks didn’t occur evenly across the economy. The COVID-19 recession has shuttered some businesses and yet boosted others. This has meant that businesses serving multiple industries, including custom metal fabricators, have seen demand shift to different sectors as the country haltingly reopens, shutters, then reopens again. The pandemic has brought about a strange new normal.

How will supply chains evolve, and what can metal fabricators expect this year and next? The industry might see new arrangements regarding “who fabricates what, who buys what, and who controls what” among the different tiers of the metal fabrication supply chain. The exact arrangements will depend on the products and associated risks involved. Regardless, new levels of supply chain transparency will be the new normal.

About Transparency

Donald Bly knows about the importance of supply chain risk management. He’s a managing director and partner at New York-based Applied Value, a management consulting and investment firm that works with large OEMs across manufacturing. The firm owns Sourcing Value, a new digital platform designed to help steel buyers optimize their spending, as well as Division 5 Inc., a structural fabricator near Atlanta that focuses heavily on the warehouse and logistics sector, a space that’s had robust demand throughout 2020.

“That business really has not been affected by COVID-19,” Bly said. “Sales and volumes [at Division 5 Inc.] have remained strong, which is no surprise, considering a lot of the warehouse market is driven by e-commerce, which continues to grow.”

Compare that with the automotive sector that’s recovering from a near total work stoppage for much of the second quarter. “Automotive is down. White goods are more or less flat overall, with an initial dip and then some rebound since DIY retail stayed open. So business activity totally depends on the industry,” Bly said, adding that all this variability makes maintaining supply chain visibility even more important.

“If I make washing machines, ideally I want to have visibility all the way through the tiers,” Bly said. “Where are components coming from, and from which suppliers? What are the inventory levels, and what are the lead times at each step in the supply chain?”

The need for transparency started to ramp up with the raw material tariffs in 2018, and the need is only growing stronger with the pandemic. “It all comes down to supplier management and optimization,” Bly said. “You want the plumbing set up for multiple supply chains so you can turn on the faucet here or there, depending on the timing.”

That ability to turn on the correct faucet just the right amount is key. For years OEMs have been working to simplify their supply chains. To do that in some cases, they’ve reduced the number of faucets (suppliers) to just a few large, highly reliable ones. This in part has helped make some of the largest metal fabrication suppliers even larger.

The COVID-19 crisis might spur more dual sourcing. If the disease reemerges in a certain locale and everyone at a certain plant needs to go home, will another supplier elsewhere be able to pick up the slack? Such dual sourcing, Bly said, might add a bit of supply chain complexity, but it won’t be the only tool at a purchasing manager’s disposal.

“OEMs might want to have more suppliers, but not for every single category of component and every single supplier,” Bly said. “OEMs will prioritize [component categories] as to what will make the most sense.”

It goes back again to supply chain transparency, not just between a fabricator and its customer, but also wherever value is added within the entire supply chain. “To reduce risk, OEMs will want to have better transparency and, depending on the situation, another level of control, even multiple tiers below [the top tier of the supply chain],” Bly explained. “A fabricator that’s a tier 2 or 3 supplier could have a direct relationship with the OEM.”

Bly described a hypothetical supply chain in which a custom metal fabricator supplies welded subassemblies to an assembler, which then sends on components for final assembly at the OEM plant. “The goal for the OEM is to know where every single component comes from all the way through the tiers.”

OEMs might accomplish this in various ways, one of them being by contracting directly with the lower-tiered suppliers, including metal fabricators. Fabricators might still send welded components to an assembler, which then sends them on to the OEM. But the assembler might act simply as a toll processor. In this sense, the supply chain would evolve into a kind of network. If, say, one fabricator needs to shut down—be it for a natural disaster, disease outbreak, or anything else—another fabricator in the network is contacted for help. Who makes this decision (the OEM, the fabricator, or someone else) will depend on the supply chain.

This kind of subcontracting happens today all the time, of course, especially when a fabricator runs into a capacity constraint. Bly’s point is that in the future, more OEMs will demand visibility and transparency. Shifts in production will be tracked, measured, and visible to everyone.

Reshoring and Nearshoring

Bly added that the need for such supply chain transparency is often missed in the reshoring and nearshoring discussion. Overseas work has been coming back from Asia for years, and the steel tariffs of 2018 and the pandemic of 2020 have accelerated those efforts. According to a survey Bly cited in a June webinar presented in partnership with Steel Market Update, 64% of manufacturing and industrial companies are likely to nearshore or reshore because of COVID-19 concerns. In that same survey, 53% of businesses reported difficulty receiving COVID-related supply chain information from their Chinese suppliers.

A change in geography does change the risk level, but as Bly explained, supplier location is only a piece of the puzzle. Transparency is still the name of the game. An opaque supplier relationship can have negative consequences, whether that supplier is down the street or an ocean away.

Tracking Financial Health

Transparency will include information related not only to where components are in the supply chain, but also the financial health of suppliers. “Many companies have supplier portals that contain static financial information,” Bly said, “but they lack dynamic models that are forward-looking.” An audit might give a snapshot of a supplier’s liquidity, leverage, efficiency, and access to cash. But how will this financial situation change over time?

Again, demand for such transparency has been building for years, especially in certain industries. But recent dramatic events have brought these concerns to the fore.

Make Versus Buy

The same goes, Bly said, for an OEM’s make-versus-buy decision. “The decision still will depend on the industry, the company, and the plant’s core capabilities. The point is that there will be more make-versus-buy analyses and evaluations.”

The variables in the make-versus-buy decision will remain the same, including available suppliers, shipping logistics, and the nature and mix of products being manufactured. But the potential of disease outbreaks or other external shocks around the globe will lead more companies to further scrutinize their decisions.

Bly added that the pandemic won’t lead to some massive vertical-integration movement. Bringing in a process that’s too far outside an OEM’s wheelhouse still won’t be practical in many cases. This will be particularly true with processes that require certain expertise, like high-end welding and other specialty fabrication processes. “OEMs still will want to focus on their end product.”

Fundamentals Haven’t Changed

The pandemic hasn’t changed the fundamentals of risk management in supply chains, Bly said. “Managing risk has always been part of the equation. It’s just that now there’s going to be a lot more focus on the importance of managing that risk, from top management all the way down.”

In March Phil Palin of the firm Supply Chain Resilience spoke in a panel at the MODEX material handling show in Atlanta, one of the last industry tradeshows to take place before the lockdown.

“It’s always been about not putting all your eggs in one basket and knowing where those baskets are if you have them spread out,” he said. “A fellow from Gartner Research talked to me recently and asked, ‘Did it really take all this to get us to the next step? We’ve been talking about supply chain diversification and risk management for quite a while, and now suddenly it’s the topic that’s top of mind.’”

Bly agrees, adding that risk management has been top of mind for years. “Remember the earthquake and tsunami in Japan in 2011? There was one company in the region that supplied one specific red pigment [for auto companies]. Essentially, no vehicles in the world could be made in certain shades of red after the tsunami. The problem was, no one knew about it until it happened.”

Hence the importance of supply chain transparency, be it through fancy web-portal dashboards or the simple sharing of information between supply chain partners. Fabricators that help customers on these fronts will help minimize risk and, ultimately, outshine the competition.