Question

Article:
American factories are running short of parts. Suppliers of everything from engines to electronic components aren’t keeping up with a boom in U.S. manufacturing, which has lifted demand in markets such as energy, mining and construction. As a result, some manufacturers are idling production lines and digesting higher costs. Many industrial companies have reported strong sales and profits in recent weeks, and the pace of factory hiring has more than doubled this year compared with the first seven months of 2017. However, deliveries from suppliers have slowed for 22 consecutive months through July, according to the latest survey of U.S. manufacturers by the Institute for Supply Management. More than one-quarter of respondents said it took longer for materials to arrive in July than in June. Machinery was the hardest-hit sector. These bottlenecks were evident in the earnings reports manufacturers delivered over the past few weeks. Terex Corp. said its mobile-crane-making unit incurred a loss in the second quarter as parts shortages hurt efficiency at its plants. “The reality of it is that elements of our supply base could not keep up,” Chief Executive John Garrison said on an Aug. 1 earnings call. Machinery giant Caterpillar Inc. and power-equipment maker Eaton Corp. are among those struggling to keep up with orders as supply-chain kinks join labor shortages and cost pressures from transportation and import tariffs as threats to the sector’s recovery. Eaton last week cut financial guidance for its $2.5 billion hydraulics unit as a result. Caterpillar said it is paying more for smaller or incomplete orders from suppliers that have struggled to meet demand. Interim Chief Financial Officer Joseph Creed said in an interview that castings—the metal building blocks for engines and other large vehicle parts—were in particularly short supply. Delays are forcing some manufacturers to curb output. Oshkosh Corp. idled production of its mobile cranes because of parts shortages several times in the past quarter. “We think we’ll probably continue to see some of that in the fourth quarter, although we do expect some progression,” Oshkosh CEO Wilson Jones said on a July 31 investor call. Like their customers, many suppliers to companies that make products including trucks and tractors shed workers after the financial crisis. Now some suppliers say they are struggling to find skilled staff and remain hesitant to ramp up production because they worry a machinerysector recovery that began in late 2016 is now drawing to a close. Leggett & Platt Inc., a maker of the part that moves the pronged metal lifts at the front of forklifts, acknowledged it is struggling to meet “very, very strong” demand for parts from its recently acquired Precision Hydraulic Cylinders business. Leggett, based in Carthage, Mo., is paying its workers more in overtime to expand production hours and is considering more permanent measures to increase capacity. Aerospace and car companies are also compiling big order books and experiencing supplier delays. Boeing Co. recently had more than two dozen partly finished 737 airliners parked outside its Renton, Wash., assembly plant and an adjoining airport awaiting engines and other components. A shortage of specialized workers including welders and truck drivers is exacerbating the crunch. The number of job openings in manufacturing climbed to 482,000 in June, the Federal Reserve Bank of St. Louis said Tuesday, the highest level in 17 years. A monthslong crunch in supplies of some basic electronic components is also cascading through the manufacturing sector, as more industrial equipment is linked to the web to provide data that can be used to predict maintenance and replacement needs. Most of those components are manufactured in Asia, where producers are already working flat out to supply the consumer-electronics sector. “The electronics supply-chain environment remains challenging and we continue to see constraints across several component categories,” said Mike McNamara, CEO of Flex Ltd. , a maker of so-called smart-technology products. “The lead times have significantly lengthened and we see increasing shortages,” he said on the company’s earnings call last month. “The good news is that demand is really strong,” said Tom Derry, chief executive of the Institute for Supply Management, which publishes a closely watched monthly survey on U.S. industrial conditions. “The irony is we reached the limits of our ability, in the current configuration we have, to keep up with demand,” he added. Years spent making supply chains as lean and efficient as possible are hurting big customers now as demand climbs, industry consultants said. “Suppliers have not been willing to jump on adding capacity because they’ve been burned badly before,” said Shiv Shivaraman, a managing director at consultant AlixPartners LLC who advises auto and machinery makers on supply chains and production processes. “You will see many people limping for a while.” Some companies are stockpiling parts to head off future challenges, potentially exacerbating the supply pressures. “We built some inventory last quarter because we had seen the lead times extend and we are trying protect our customers,” said Andrew Silvernail, CEO of Idex Corp. , a maker of pumps, valves and meters that is based in Lake Forest, Ill. Still, executives expressed confidence that booming order books will encourage suppliers to boost output, either by increasing wages to attract staff or investing in more capacity. “We are getting better. Our suppliers are getting better. We’re doing a much better job of shortening lead times,” said Craig Arnold, Eaton’s CEO.

Questions:
1- How do fixed costs and lengthening delivery times for component parts combine to reduce a manufacturers' profitability?
2- How do the lengthening delivery times and an increasing pace of factory hires combine to impact efficiency ratios?

Answer 1

1. Fixed costs and lengthening delivery times for component parts reduces manufacturers profitability in the following way :-

A. Due to lengthening delivery times , manufacturers are forced to reduce their output because of lack of proper availability of input required for those input. As a result they start producing output in smaller lots as a result of which they are unable to achieve economies of scale and their cost per unit rises.

B . Lengthening delivery times forces manufacturers to keep more stock or inventory of raw material with them . This requires more storage space required to keep all those raw material. Further, a big chunk of capital is tied in the form of capital for which we pay interest. These all increases fixed cost of the manufacturers in the form of higher charges for more warehousing facilities and more interest cost to be paid for capital tied in more inventory.

In this way, both fixed cost and lengthening delivery times combiningly reduces manufacturer's profitability

2. Because of lengthening delivery time manufacturers are not able to produce output to the required level and is not able to achieve full utilization capacity of their plant and has to shed off their workers. Later on when there is increase in demand and some corrections in supply chain they gave have to produce more output for which they require more workers to produce all those required output. This leads to more factory hiring and introduction of a bunch of unskilled labourers as finding out skilled labour is very difficult as a result of which efficiency level of factory is badly hurt.

In this way lengthening delivery times and increasing pace of factory hires combiningly impact efficiency ratio