POlaris Industries, with a near-record backlog of RVs and dealerships asking for more, is bringing in its own “SWAT teams” — what it calls employees trying to fix supply chain issues.
At a time when it takes extra months to obtain essential parts for everything from recreational vehicles and retail products to industrial filters and medical devices, Minnesota companies are devoting every possible resource to the problem and hope that customers will understand the resulting higher prices. .
The problems — along with inflation on base materials such as steel and rising wages — added $100 million in costs to Polaris operations in the first quarter. They added hundreds of millions to Target’s costs.
And it has caught up with the profitability of most public companies in Minnesota, which has weighed on their earnings or profit margins. Target missed a huge profit on Wednesday, sending markets plummeting as investors worried about what it all means in the long run.
For companies, that means working even harder to make operations more efficient, simplifying product design to circumvent parts shortages, and finding better and more suppliers, preferably closer to their factories.
“The reality is it’s not going to get better anytime soon,” Polaris general manager Mike Speetzen said. “And so we’re making a lot of those organizational moves more permanent. And that helps us make sure that we have the right staff and people who can drive the kind of hour-to-hour discussions that we have to have with our suppliers. “
The good news, at least for now, is that people are still buying, even if they have to pre-order off-road vehicles, cars or mattresses and wait several months for delivery. This means that companies that supply industrial filters, adhesives and other products that go into these products are also working overtime to fulfill orders.
Many Minnesota companies also entered the year with strong balance sheets — having reduced where possible and loosened their cash positions at the start of the pandemic, said Carol Schleif, Minneapolis-based deputy chief investment officer for BMO Family Office. As a result, they have money to invest in solutions.
“What we sometimes forget is how resilient our businesses used to be,” she said. “They prepared for a recession. The recession lasted a few months, [and when they had to] companies quickly changed their business model.”
For example, UnitedHealth Group, which tops the Star Tribune 50 list of public companies in Minnesota, saw its revenue rise 11.8% last year to $287.6 billion. The company’s forecast for this year calls for revenue of between $317 billion and $320 billion.
In total, the 50 companies on the list earned $58.9 billion, a 36% increase from 2020, on total revenue that rose 13% to $705 billion. In an uneven pandemic economy, 15 of the companies saw their profits fall in the four quarters that ended closest to December 31.
As Target officials forecast lower operating margins for the year, they pointed to the company’s financial health, with a focus on its balance sheet.
“As we weather these near-term challenges, we are fortunate to have an incredibly healthy underlying business that can weather the significant headwinds we face and emerge stronger on the other side,” said Chief Financial Officer Michael Fiddelke. on the earnings call.
But in the short term, Target CEO Brian Cornell said the company will have to “be balanced” in any price increases and give up some profits to retain market share, while inflationary pressures will add around $1 billion. dollars to the costs of this exercise.
Target has learned to be more nimble during the pandemic as consumer preferences have shifted, sometimes month to month. The company has sometimes had to charter its own freighters to circumvent supply chain blockages.
As the pandemic has accelerated changes in the way people shop, so too have changes in the global supply chain accelerated. China’s zero-tolerance policy on COVID-19, which has sometimes shut down its manufacturing sectors for weeks at a time, and Russia’s invasion of Ukraine have exacerbated measures taken by companies to expand their supply chain. supply to more geographical areas.
To respond, Polaris “SWAT teams” communicate with vendors around the world, including new backup vendors in various countries. Other teams are redesigning products to make them simpler or to use a different part the company can get, and redesigning operational schedules so they’re in sync when shipments are ready.
3M said it is using more real-time data analytics. Bloomington-based Donaldson is starting to stock up on parts as it can get them and turning to suppliers closer to its factories.
Andrew Adams, chief investment officer at Mairs & Power in St. Paul, said that before the pandemic, companies usually had a strong backup provider in case of an emergency like a fire or a burst pipe. Now they have three or four.
Tech firm Jaggaer surveyed Mexican vendors, who said between 2020 and 2021 they received 514% more offers from large U.S. buyers, according to The Wall Street Journal. Latin American suppliers saw a 155% increase. At the same time, orders to Chinese suppliers fell 9%.
Advances in automation, driven by labor shortages, will also help Minnesota businesses improve internal efficiency and source lower-cost components closer to home, Schleif said.
Donaldson, like many companies, takes it a step further with what is known as the “golden screw” concept. The global manufacturer of filtration products present in more than 40 countries tries to maintain regional suppliers for each of its sites.
The company has also been stockpiling parts, moving away from strict pre-pandemic “lean manufacturing” that focused on ordering only the volume needed in a given week or month. Now, when delayed parts arrive, increased inventory allows them to complete manufacturing processes faster.
In the quarter ended Jan. 31, the company increased inventory by 8%, or $36 million, said Sarika Dhadwal, director of investor relations at Donaldson. It also covered rising costs with above-normal price increases in January and updated its global enterprise resource planning system, she said.
Vigilance and communication are particularly important.
“Leveraging the power of day-to-day management, data and data analytics” while making operations more efficient is critical, said Monish Patolawala, 3M chief financial officer.
“Last year, we developed new sourcing and pricing tools and processes to improve agility, drive alignment and simplify our processes,” he said in April on the latest earnings call. company quarterly. “In addition, we are also enhancing our reporting and data analysis capabilities by deploying tools that model fulfillment, leakage and price elasticity.”
This operational efficiency is essential for industries where price increases can sometimes only be minimal, said Frank Jaskulke, vice president of intelligence at Medical Alley.
For state medical companies, it’s not as easy to manage on the fly. Designing components — even parts — could be part of the product’s regulatory approval, making it harder to find a new supplier, Jaskulke said.
So B2B groups similar to Polaris SWAT teams worked in Medical Alley on the supply chain issue. Small businesses don’t run production lines every day. A company received critical parts needed for a manufacturing run – which would have been prohibitively expensive to cancel – two hours before the machines were to start.
It’s necessary to retain efficiencies — and add even more — because medical companies don’t have as much leverage over price increases, he said. Many are defined in insurance plans and hospital contracts.
Myles Shaver, a professor of strategic management and entrepreneurship at the University of Minnesota’s Carlson School of Business, said global business “won’t settle into a new normal immediately” and will encounter intermittent pockets of problems. supply chain over the next few years.
Companies will therefore adapt, he said, just as they made changes during the energy crisis of the 1970s and early 1980s.
“They evolve,” Shaver said. “And some of the changes they’ve made, they see them sticking around for the long haul.”
Many factors could derail supply chain improvements.
Unionized West Coast dockers and stevedores began negotiating new contracts this month. China still has restrictions in place due to COVID-19. And the war in Ukraine is far from over.
But even if supply chains improve, inflationary pressures will persist. The prices companies pay for the parts aren’t expected to drop, Schleif said. The same goes for workers’ wages.
“Higher prices right now are in tough places,” Schleif said.
These factors have given rise to differing views on how inflation will affect the overall economy over the next few years, ranging from stability to stagflation with weaker growth or recession. Uncertainty has markets on edge, as evidenced by Target’s earnings report.
The key question, economists say, is whether demand will remain strong. If not, there will be pressure on prices, the only factor that manufacturers could rely on last year to cover much of the rising costs.
Speetzen, for his part, gets the message that it will.
“We review our dealer network quarterly, and there was one dealer comment that I think summed up the current environment well: ‘My business is thriving. Send us the inventory, and we’ll take care of the rest,” Speetzen said on the company’s earnings call. will have navigated the current supply chain environment.”