‘A perfect storm’ for Irish manufacturing

Irish supply chains are certainly experiencing the worst perfect storm in living memory says Bank of Ireland’s head of Manufacturing Sector Conor Magee.

A perfect storm is defined by Merriam Webster Dictionary as: “a critical or disastrous situation created by a powerful concurrence of factors” or by Oxford as: “an occasion when several bad things happen at the same time creating a situation that could not be worse.”

For Bank of Ireland’s head of Manufacturing Sector Conor Magee these situations sum up precisely the predicament facing the Irish manufacturing sector as soaring global demand creates storm like conditions.

“Capacity was shut down during Covid and now you have factories reopening with lower capacity levels than pre-Covid matched with a pent up and higher demand profile”

“Irish Supply chains are certainly experiencing the worst perfect storm in living memory. Supply shortages continue into July at historically high levels driven by the events of high demand, Covid, Brexit, container shortages, and transport bottlenecks.”

In his latest sectoral analysis as part of the June Sector Development and Insights report from Bank of Ireland, Magee noted Bank of Ireland economic pulse data for Industry hit a near record high of 96.8 in May. This is up 2.5 on the previous month and a massive 39.9 year on year, underlining the continuing surge in manufacturing as economies reopen and the vaccine roll-out gathers critical mass.

Challenges facing Irish manufacturing

Manufacturing continued to hit new highs in terms of orders and output in May as the last three months PMI (purchase managers’ index) trajectory starts to resemble a classic hockey stick curve.

“The impacts of these underlying causes of supply chain shortages will impact Irish manufacturers in different ways dependent on the profile and eco systems of their supply chains,” Magee said.

“For example SMEs with high dependency on UK suppliers will be hardest hit by Brexit related delays whereas SMEs dependent on Asian supplies will be hit by container delays and long haul transport bottlenecks.

Magee noted the various challenges facing the Irish manufacturing sector:

Production output constrained in short term: “Against a backdrop of buoyant demand supply shortages will continue to be a bottleneck to customer demand levels. Typically Manufacturers sign contracts with suppliers which provide for immediate response to single digit demand increases. On the other hand higher demand increases require complex capacity rampups which can take eight weeks or more to reach desired output levels.”

Lead times increase: “Until ramp up plans to new output levels are fully operational lead times will increase dramatically and only hitting a tipping point as demand and supply moves towards equilibrium.”

Working capital requirements: Inventory levels will increase to match forecast demand, and longer cash conversion cycles will increase working capital requirements accordingly.”

Recruitment: “Recruitment in manufacturing sector has grown for nine consecutive months driven by buoyant demand and this continued increase will no doubt lead to greater competition for talent and accordingly wage inflation.”

Customer Retention: “Solid ramp up plans, real time supply chain visibility, and transparent communications will ensure customer retention despite longer lead times.”

Leadership and People Wellbeing: “Manufacturing SMEs are very stretched right now and so strong leadership with due care to wider teams wellbeing as they navigate these turbulent times is crucial for success.”

Inflation: “The perfect storm described above is driving prices across the board in one direction. Component price inflation has increased month on month in H1 to record levels. Much of this is being passed successfully to end users with little resistance on the back of strongly claused supply contracts and undisputed evidence of price increases.”

Double-digit price increases

Magee says that there are materials shortages are across the board.

“Steel, timber, resin, packaging, chemicals, and semiconductors are all in short supply and demand is driving double digit price increases. Capacity was shut down during Covid and now you have factories reopening with lower capacity levels than pre-Covid matched with a pent up and higher demand profile. Customers will received commodities based in many cases on a quota system based on previous demand volumes.”

He said that a return of capacity to match demand levels is somewhat commodity dependent.

“Depending on investments required it may take from between 6 to 18 months. Steel is expected to improve toward end of H2 whereas semiconductor chip manufacturing is forecast to be a bottleneck out to end of 2022.”

Double-whammy of Brexit and Covid

Magee said there is no doubt that Irish SMEs have been heavily impacted in very negative way by the double hit of Covid and Brexit.

“Brexit has imposed additional paperwork burdens, longer supply times, amplified an already  massive shortage of truck drivers (estimates for UK alone are in excess of 100,000), and added additional costs.

“Likewise Covid has triggered greater safety requirements, lower productivity rates, massive supply chain disruptions and associated inflation costs. But there are also many unexpected positive consequences from these shocks which sometimes get forgotten.”

Unexpected positive consequences

These include:

Acceleration of Industry 4.0: “No longer nice to have, and spurred on by Covid, manufacturing will embrace with greater speed the benefits of digitised end to end supply chains giving great real time data visibility. Higher levels of automation will help with social distancing requirements. A greater and more customer centric online platforms will cause an opportunistic shift from B2B customers to B2C customers.”

North/South trade surge: “Despite all the negative narrative around the NI protocol one of the great winners has been NI/ROI trade. In first four months of 2021 we have seen a +40% increase in exports to NI and a +61% increase in imports to the Republic of Ireland.”

Import substitution: “In a similar manner Irish Manufacturers will benefit from import substitution and technology transfer back to home site. Import substitution can benefit Irish SMEs in two ways: UK supplier replaced by an Irish equivalent or a new EU customer selects Ireland over a UK partner.”

Remote working: “While not ideal for the cut and thrust and problem solving nature of manufacturing, many support functions will continue to enjoy shorter commutes, a degree of remote working and overall better wellbeing and productivity.”

Greener and Platooning Freight Solutions: “HGV driver availability a problem before Brexit, has now reached crisis point. A high dependency on eastern European Drivers who have returned home due to Brexit and or Covid have left a shortage in excess of 100,000 drivers which in the short term is threatening fresh food supplies as well as other goods. This crisis will surely focus on the underlying issues of attracting talent, better training programmes, lower insurance costs and provision of better work life balance for HGV drivers.  In parallel and in the context of the green and digital agendas, the ENSEMBLE (ENabling SafE Multi-Brand pLatooning for Europe) consortium funded by EU, will implement and demonstrate multi-brand truck platooning in Europe over the next years. It is important that Ireland and in the context of its upcoming 10-year Haulage Strategy currently in the works, can take an active part in this low carbon haulage solution.”

By John Kennedy (john.kennedy3@boi.com)

Published: 8 July 2021