Construction and building materials are experiencing a perfect storm of supply chain challenges. Natural disasters, production and shipping setbacks, labor shortages, pricing escalation and global political instability have all contributed to material cost inflation that threatens project budgets and productivity gains.
Many built professionals are hoarding materials to mitigate the impact of price escalation and uncertainty. However, storing materials is expensive, raises safety concerns and increases handling costs.
Supply Chain Impacts
Construction industry supply chain management encompasses every step from raw materials sourcing and procurement to the delivery of finished building components. The industry is impacted by the availability of workers, the pace of work and the ability to deliver building materials on time. Efforts to reduce waste, source materials in environmentally friendly ways and manage energy costs may also impact procurement and supply chain decisions.
Construction project planning and scheduling practices must account for the impact of critical material shortages, price escalation and long lead times. This includes establishing detailed materials lists for all projects with expected quantities and ensuring all parties involved know what is at risk. In addition, implementing communication processes that allow all team members to efficiently relay information upstream, downstream and across the construction site is essential to mitigating supply chain impacts.
Material prices and supply chains have been impacted by a variety of factors including the COVID-19 pandemic, Russia’s March 2022 invasion of Ukraine and ongoing economic sanctions. With the potential for these challenges to continue and even intensify, it is important for contractors to develop strategies that are resilient against disruptions.
Construction material suppliers are working hard to keep up with demand and to maintain production levels as best they can. However, inventory remains low and prices are still climbing. As a result, the value of unfilled construction material orders is at an all-time high. In nominal terms, these unfilled orders reached $84 billion as of late April 2022.
Supply Chain Challenges
The price of many building materials has soared, putting a strain on construction projects. The cost of lumber has risen 90% over the last two years, steel has gone up 128%, and copper is 61% more expensive than it was this time last year. This is compounded by rising transportation costs and inflation in general.
The combination of these trends is leading to a greater need for supply chain resilience and better coordination among all participants in the building process. Increasingly, contractors are developing proactive plans for procuring building materials that are both safe and sustainable to minimize the impact of shortages and supply chain issues on their projects.
One way they are doing this is by partnering with subcontractors and suppliers early on in project design to identify and communicate material availability issues. This can help ensure that construction schedules are developed realistically and a timeline for fabrication and delivery is included in the budget.
Another way is by leveraging technology to improve their supply chain management processes. This can enable them to get a better handle on inventory levels, forecasting, and quality control – particularly for high-priority materials. It also makes it easier for LBM businesses to connect with their supply chains to track key metrics like on-hand inventories, replenishment lead times, and order fill rates.
Alternative Supply Chains
Historically, construction companies used to focus on having the most efficient supply chains, keeping inventories low and relying on just-in-time delivery schedules. As a result, many sourced their materials from global manufacturers to save on storage costs and ensure they had supplies at all times, even during seasonal slowdowns.
This has made them vulnerable to supply disruptions from unexpected factors, such as the COVID-19 pandemic. In the aftermath, companies have had to find alternatives for a variety of products and materials that were impacted by the pandemic and rising fuel prices.
For example, anecdotal reports indicate builders shifted from hollow-core interior doors to solid-core options, acrylic bathing fixtures replaced standard plastic ones and raised-panel sectional steel garage doors lost market share to side-hinged wood models. This shift has led to a more distributed supply chain, where construction companies are sourcing and purchasing materials from local and regional suppliers.
This strategy may be more expensive, but it can prevent a delay in building projects and help keep costs down for clients. It is also a good idea to create relationships with alternative suppliers for specialty products, so they’re ready if the primary supplier is hit by a shortage or is forced to raise their price. In addition, using software that allows for better estimation of materials can lead to more accurate ordering, reducing waste and maintaining project timelines.
Supply Chain Resilience
Supply chain resilience is the ability to withstand and recover from disruptions. It involves creating redundancies in the supply chain, such as keeping extra inventory or maintaining low capacity utilization, but it can also be a more structural approach, like redesigning the entire supply chain to improve the flow of goods and services without compromising efficiency or cost. This approach is similar to how engineers design subway systems and other complex infrastructure.
In the building materials industry, we have already seen a growing shift from one material supplier to a stable of alternatives that can step in during times of supply chain volatility and shortages. This new model is allowing contractors to increase flexibility and customer service while reducing stock-carrying costs.
However, building resiliently can take time, especially in the face of short-term challenges. To get there, companies need to reconsider outmoded strategies and begin the hard work of implementing structural change.
For example, a contractor could ringfence a subgroup of its supply chain team and charge them solely with building long-term resilience. That team can take responsibility for planning, simulating and responding to extreme disruptions and reevaluating just-in-time strategies. It can communicate with upstream suppliers and track materials from point of origin to the jobsite, checking them in against submittals to ensure the correct materials are arriving.