- Supply chain issues have been a problem for businesses all year. For example, freezing temperatures in Texas made it difficult for chemical plants to meet the growing demand for products such as PVC.
- Even the largest companies, such as plumbing distribution giant Ferguson, are suffering from the shortage.
- However, the company has managed its supply chain well and delivered strong third quarter results with sales growth of nearly 25%.
- Ferguson executives and a spokesperson shared some of the company’s concerns and how the distributor is handling them.
The global supply chain is so closely intertwined, so closely linked, so frighteningly fragile, that a few seemingly disparate events can be closely linked. Think of it as a new twist on the butterfly effect.
The latest example is how a freezer in Texas earlier this year resulted in a shortage of polyvinyl chloride, or PVC. That short supply, in turn, created a host of problems for plumbing distributors and other businesses in this space, whether they are upstream or downstream.
This disruption comes at a time when the global supply chain is already experiencing a host of slowdowns, as MDM outlined last month in “Supply Chain Snarls Threaten to Temper Strength of Economic Upswing”.
Supply chain disruptions include a freighter stuck in the mud outside the Suez Canal, clogged shipping lanes, unprecedented demand for products, a global imbalance in containers, a national shortage of truck drivers and, of course, a pandemic that continues to rage across the planet. albeit at a slow pace.
All of these factors have led distributors to work doubly hard to get the product from their suppliers and from their customers without raising prices so much that it hurts someone else’s profits.
“There are always issues, but none have slowed down the supply chain to the same extent as it has in recent weeks and months,” said Brian Buselow, supply chain director for Raleigh, North Carolina-based HVACR distributor ACR Supply. “Usually you have one problem at a time, and those things can be solved. In today’s world, several things happen at once.”
The recent freezer in Texas was an unexpected one, but has had a huge effect on PVC production. John Schiegg, vice president of supply chain services for Houston-based homebuilder David Weekley Homes, told the… Wall Street Journal that the problem worsened when PVC pipe manufacturers warned customers of a significant delay in the delivery of materials.
“We had no idea how much was coming from the Gulf Coast area,” Schiegg told WSJ reporters in the article, “Texas Freeze Triggers Global Plastics Shortage.” “I tell people it’s going to get ugly. There will be a major battle for materials.”
Response from Ferguson Reactie
Not surprisingly, that struggle has made its way to wholesale distribution, which sits in the middle of moving goods from supplier to end customer. Industry is an important cog to keep this country’s economy moving, and that role in the supply chain has never been more important than during and after the pandemic.
One of the companies dealing with material supply issues is Ferguson PLC, the plumbing distribution giant with global annual sales of nearly $22 billion, most of which comes from North America. Ferguson is based in the United Kingdom, while the US branch is located in Newport News, Virginia.
When MDM reached out to the company for comment, Christine Dwyer, Ferguson’s U.S. director of communications and public relations, said the reason for the crisis is the economic upturn as business emerges from COVID-19.
The demand is good, but it is sometimes difficult to match it with sufficient supply.
“Economic recovery is driving rapid growth in the building and construction markets,” she says. “Manufacturers are working hard to keep up with demand, but are facing unprecedented material shortages, product price increases and ongoing supply chain disruptions.
“Ferguson is not immune to inventory and supply chain challenges. However, the strength of our DCs, the overall supply chain and supplier partnerships put Ferguson in a strong position. We have implemented several mitigation strategies, including close contact with our suppliers to predict shortages. We have invested in inventory and are actively managing existing inventory to best serve all our customers.”
Just as it was during the height of the pandemic — and just as it was during any expected or unexpected disruption — communication with customers amid this material shortage is critical, Dwyer says.
“We also regularly update our customers and do everything we can to get the product they need,” she says. “We ask them to place orders as soon as possible so that we can better understand product needs and only order what is needed for the project to better manage our inventory. Significantly larger than normal orders require special approval. Finally, we publish a monthly newsletter for our Ferguson.com customers explaining market and commodity conditions so they understand the current landscape and make informed decisions for their business.”
Ferguson posts eruption quarters
While Ferguson is saddled with PVC shortages, the company is navigating as can be expected.
The company recently reported that third quarter revenue increased 24.5% from the same quarter a year ago to $5.9 billion, while trading profit increased 65.4% to $579 million. Adjusted EBITDA increased 61.2% to $603 million.
The company’s U.S. performance is starting to gain momentum as COVID-19 eases for much of the country. Ferguson said the company’s strong sales growth included 20.1% organic growth in the US, boosted by successively rising retail price inflation and easing last year’s sales equations.
In the summary of the 3Q results, Ferguson said: “Demand in the US market accelerated during the quarter as the US economy continued to reopen.”
“Ferguson has made its Q3 announcement forward as we delivered strong revenue and earnings growth that exceeded expectations,” said Ferguson CEO Kevin Murphy. “Our employees continued to provide excellent service and support to our customers despite increasing pressure in the supply chain, raising concerns about product availability. We were pleased with strong earnings growth and margin expansion as a result of continued operational efficiency and the pass-through of acute price inflation as the US economy reopens. We thank our 30,000 employees for their exceptional contribution to these results.
“Revenues grew strongly during the quarter and continued into early May and we are pleased with the momentum in our business.”
Based on better-than-expected third-quarter results, Ferguson now expects group trading profit in FY2021 between $2 billion and $2.10 billion.
But what about the hiccups in the supply chain?
During Ferguson’s 3Q call, Murphy didn’t specifically mention the PVC problem, but supply chain disruptions remain a hot-button issue for any distributor, whether they’re generating $20 billion or $20 million in annual revenue.
For larger companies like Ferguson, scale remains an advantage. That’s something companies like Ferguson, Grainger, MSC Industrial and others have discussed as a differentiator when it comes to delivering products on time, even as costs increase for the distributor.
“We’ve also … used the scale of our supply chain to maintain unparalleled product availability for our customers at a time of great scarcity,” Murphy said. “Manufacturing supply chains are struggling to balance increased demand with labor and transportation pressures.
“We believe this has led to a customer pull towards Ferguson. As we continue to gain equity costs, these recent developments have also created some uncertainty for our customers, not least about the medium term impact of limited product availability and rising We remain very focused on ensuring high availability for our customers and will continue to take advantage of our economies of scale and business model.”
One area where a distributor can differentiate – and size doesn’t matter here – is through digital investments. Ferguson, to his credit, remains “committed to investing in digital capabilities across our supply chain to better serve our customers,” Murphy said. “We are aware of the inflationary pressures on the cost base in areas such as transportation and wages, but we believe we can get through it appropriately.”
Murphy said Ferguson also remains committed to improving supply chain hiccups through its people and its processes. Even when the current material shortage is remedied, even when the pandemic no longer leads to a clogged supply chain, disruptions are sure to occur. The companies that appeal to them in advance are more likely to get through unscathed.
“It’s about having the best people in relationships with the best digital relationships, a world-class supply chain sourcing organization that provides that fill rate, and then making sure we drive that product strategy, both for margin and for make sure.” we’re improving that best filtering,” Murphy said. “We think it will stay that way in the long run.”