Hello from Western New York!
As always, we are grateful for our partners and for our ability to provide customers with high-quality air filters. This first quarter of 2021 has been an interesting time for our industry and global supply chains. As we all work in so many areas, I thought I would take this chance to share with you some of what we are seeing across our industry.
An Economic Whirlwind Unleashed. When supply is constrained and demand is ramping, things get tight. We have especially seen this in the steel and plastics industries. Steel manufacturing ramped down production toward the end of 2020 at the same time that overseas steel started to backlog. As a result, steel prices have risen 30-40% since January 1st. The February freeze in Texas caused mass shutdowns of chemical plants that provide raw materials critical to filtration manufacturing such as polyester, polypropylene, and components of urethanes.
Plastics like Polypropylene have seen their prices almost double. Sidco went out and bought a lot of these materials ahead of the storm but it is not clear how long these conditions will last. We have been working with more customers to reduce the use of metal end caps to eliminate this extra component and lower the cost of the filter. In most instances, the molded end filters perform better and we are able to supply a reusable seal plate in applications that need a closed-end installation.
Overseas Outsourcing Adds to the Chaos. As if supply and inventory issues weren’t enough, COVID has created a huge backlog at the major US ports. This has created a ripple effect in almost every other area of logistics. Some sea logistics have shifted over to air and truck companies creating capacity issues in these areas as well. There is now a major shipping container shortage created by the lack of movement. All of this continues to add heavy shipping surcharges onto everything. While many filter manufacturers pushed production overseas, we expect to continue to see a tightening of the market and lead times to extend. To bridge the gap in supply, more manufacturing will need to be done in the US. Sidco is the contract manufacturer for several OEM filter companies and is proud that our filters are made in the USA using American suppliers. I think these special attributes have helped us and our customers to keep rolling during these tough times.
Lean Manufacturing Makes Things Worse. Carrying lean inventories has been the prevailing wisdom in manufacturing over the last couple of decades. With all that has happened, that concept has been turned on its’ head. As we are seeing highly unusual supply restrictions, having enough inventory becomes a top priority to continued operations. As such, we are seeing a lot of filter manufacturing companies pushing lead times out to 90 or more days. Even then, these lead times are not solid because the supply chain is not reliable. Due to the wide variety of the products we make, and our commitment to a Standard Five Day Lead Time, Sidco has always carried a heavy inventory load to remain responsive to our customers. We continue to build our safety stocks and urge customers to set up inventory agreements or blanket orders to secure their supply.
Inflation? Smart economic minds are still predicting fairly reasonable inflation rates for 2021 and I find it hard to believe that these kinds of issues will quickly resolve. I also think this forecast is optimistic and largely based on gasoline prices – one area that has been in surplus as more people work from home. In our industry alone, an average of 4-5% pricing increases was seen almost universally at the start of the year. Many suppliers have gone back for a second price hike after seeing the steel and plastics increases continue to spike. There has never been a better time to work with customers on long-term agreements that will secure the supply chain for both you and your customers.
Let me know what you’re seeing. I would love to hear your thoughts on ways we can work together to keep customers running.
Derek Darling, President