November 11, 2021

Poll Question 090221

In the News

 

 

Supply Chain Crisis: What’s Getting Worse, What’s Getting Better, and What You Can Do About It

Annacaroline Caruso, editorial associate

Several experts have voiced that the supply chain crisis is here to stay at least into the next year, so it is critical that creditors prepare to deal with these challenges for the long haul. “In the short term, supply chain disruptions are likely to continue in 2022,” according to Credendo. “However, any new setback could prolong it until 2023.” Some existing weak links in the supply chain are getting worse and new problems are beginning to surface, while federal agencies and businesses work to solve the crisis. 

Getting Worse

Aluminum, copper and plastic are just a few of the several commodities listed as increasing in price, according to a recent report from the Institute of Supply Management (ISM). Only one—wood—was listed as decreasing in price. Those same commodities, along with others such as adhesives, rubber and steel, are goods listed as in short supply. Demand for our products remains strong, but we continue to struggle to secure enough raw material to keep our manufacturing lines running,” said one ISM survey respondent.

ISM’s October supplier deliveries index indicates longer lead times in both the manufacturing and service sectors. “We have to forecast six months out for basic supplies and one year for larger international equipment orders,” said another ISM survey respondent in educational services. 

Now, warehouses are starting to run out of space to store the backlog of goods. Warehouse vacancy in the U.S. has reached a record low of 3.6%, according to data from CBRE, an American commercial real estate firm. Even if materials start moving more quickly along the supply chain process, warehouses will be too congested to store more products. 

“In an efficient supply chain, you want about 15% availability of warehouse capacity in these markets and across the country,” Craig Fuller, CEO and founder of FreightWaves, told ABC. “At 3.6%, these warehouses are operating beyond their available capacity to even function properly.”

Getting Better

While the supply chain mostly remains congested, a few small wins may help slowly move trade in the right direction. Government officials and private companies are both actively looking for solutions. For example, the U.S. agreed to lift tariffs on steel and aluminum imports from the EU, starting Dec. 1, to help ease tensions and remove some pressure on the already-overwhelmed supply chain. 

Supply chains were also a hot topic at the G20 summit as leaders from the around the world agreed to “foster greater international cooperation on near-term supply chain disruptions,” according to a statement from the White House. 

The new $1.2 trillion infrastructure deal passed by Congress on Friday also could help build supply chain resilience by using some of the money to update infrastructure. “Now that we have seen how vulnerable these lines of global commerce can be, we cannot go back to business as usual,” President Joe Biden said during the G20 summit. “This pandemic won’t be the last global health crisis we face.”

What You Can Do

Most solutions will take time, but there are some ways to ease the pressure in the short-term. Experts recommend increasing communication as both a customer and a supplier. Be honest about a timeline for materials so your customers can prepare to purchase goods earlier than normal to ensure they arrive on time. 

“While there’s really nothing entrepreneurs can do to improve global production delays, they can manage customer expectations,” wrote Muraly Srinarayanathas, a Forbes Expert Panel member, in a Forbes article. “Sharing realistic shipping dates before purchase will ensure customers understand a given timeline from the start and are not disappointed in the end.” 

Now is also the time to pay close attention to your contracts and how they hold up against supply disruptions. For example, it will be critical to have some backup in case a customer refuses a delivery of goods due to lack of storage. “Taking a balanced approach when developing such terms is likely to gain more traction because if you are impacted then your counterparty is likely to be impacted also,” reads an article from the National Law Review. “Building in some mutuality and good faith discussions based on objective criteria and data will likely yield the best results.”

Using UCC Filings to Secure Your Transactions

Bryan Mason, editorial associate

Banks are the primary user of UCC Filings, and the financial institutions incorporate many of the credit principles such as the 5 Cs of credit—capacity, capital, character, conditions and collateral–used by trade creditors. However, when banks lend on commercial loans, collateral is often the most important, said Chris Ring, of NACM Secured Transaction Services (STS). 

“Trade creditors know that collateral is important, but they often skip past it for three primary reasons,” Ring said. First, they are uninformed about how to collateralize a transaction; second, they deem the collateralization process as cumbersome; and third, they are not incentivized because they have never experienced a large write-off in a bankruptcy.

In this week’s NACM STS webinar, UCC Filings: If You’re Acting Like a Banker, Think Like a Banker, Ring focused on addressing the first two reasons and explained how creditors can use them as a tool to establish a security interest with customers. “UCC filings are a good way to collateralize your receivables,” Ring said.

There are two primary types of UCC Filings, blanket and purchase money security interest (PMSI). “All trade creditors can take advantage of a blanket filing and PMSI filings are used by trade creditors who are selling inventory or equipment,” Ring said.

Regardless of which type of filing a creditor wants to use, UCC Filings are consensual and require both the creditor and debtor to sign a security agreement. Once the security agreement is signed, a UCC-1 financing statement must be recorded to create a secured transaction. Ring mentioned that STS has templates for security agreements that can be forwarded to trade creditors for review by management and counsel, and STS can help ensure that a UCC-1 financing statement is filed correctly.

Although it is called the uniform commercial code, Ring cautioned that each state ratifies the code in to law, and each state handles the UCC filing process differently. “It is important to become familiar with the UCC laws in the states in which you do business,” he said.

Ring also stressed the importance of verifying the corporate legal name of an entity that operates under a corporate veil such as an S-Corp or LLC. “Part of the 2013 amendment to the code requires that the corporate legal name match the name on the organic record [e.g. formation documents],” he said. “It is important to conduct a corporate certificate search to find the formation document.”

Lastly, Ring let participants know that he is available to consult with members and help them best use UCC filings for their companies. Subscribers to the Lien Navigator can watch the webinar in its entirety via the STS Construction Credit Academy to get more information.

10-Year Outlook for Global Construction Strong

Bryan Mason, editorial associate

Global construction output* is expected to grow by 6.6% in 2021 and 42% by 2030, driven largely by government stimuli and the demand for residential construction, according to Oxford Economics’ report, Future of Construction. “The global construction industry is set to lead global economic recovery from the pandemic over the medium-term and is expected to grow faster than the manufacturing or service sectors.”

On average, the report estimates global construction output will rise by 3.6% per year and global infrastructure construction by 5.1% up to 2030—more than what is expected for the manufacturing and service sectors. Increases in spending of accumulated household savings also may contribute to this heightened growth, the report says. 

Overall, the following economies are expected to experience significant growth by 2030:

  • Asia-Pacific—$2.5 trillion, a more than 50% increase, for a total of $7.4 trillion.
  • North America—$580 billion, about 32% more, for a total of $2.4 trillion.
  • Western Europe—$575 billion, a 23% increase, for a total of $2.5 trillion.

The report also identifies several factors that could help boost construction output up to 2030:

  • The demand for infrastructure and residential construction due to population and urbanization growth across emerging markets.
  • Increase in demand due to immigration into developed countries such as the U.S., U.K., Australia, Canada, New Zealand, Germany and other developed countries.
  • Demand for workplace construction where industrial and logistics space will be expected to grow online retailing and manufacturing due to growth in working age populations such as in India, Indonesia, Canada and Australia.
  • Urban centers regaining momentum following COVID-19 to support multifamily residential construction growth.

“The near-term outlook for the global economy remains clouded by a surge in inflation and supply chain bottlenecks, and the Delta variant remains a threat,” the report states. 

“Supply chain issues are not due to dissipate any time soon, so credit professionals will need to be prepared to assist their companies as best they can and be prepared to deal with payment issues that co-exist with supply chain issues,” said Chris Ring, of NACM Secured Transaction Services. He further suggests suppliers remain familiar with leveraging tools they could use when resolving disputes such as a mechanic’s lien. 

For public construction protects, Ring suggests that “material suppliers become critically familiar with the Miller Act and Little Miller Act statutes as they relate to having security on their receivables.” According to JDSA Law, the federal Miller Act, as well as the state version, the Little Miller Act, set forth bonding requirements for contractors and remedies for subcontractors and their suppliers should a general contractor default on payment and for the government should the contractor fail to complete the project.

However, climate change and the race to net zero remain “the greatest challenges” to the construction industry outlook, the report states. In addition, “The need to radically reduce the amount of carbon embedded in new construction will drive the growth of a deconstruction industry that reuses huge existing urban stockpiles of construction materials,” the report predicts.

Although these numbers and projections look promising, Ring cautions there are other potential risks, aside from supply chain issues, that may hinder the global economy from reaching this potential. “Appropriations will be an issue as local governments will be jockeying for the dollars available,” he said. Appropriation is a law set by Congress that provides government agencies with budget authority. “Also, fraud, waste and abuse can co-exist with large government contracts,” Ring added.

* A measure of the amount that has been charged to customers for building and civil engineering work carried out by construction companies. 

3 Skills New Managers Need to Succeed

Kellogg Insight

Making the leap from individual contributor to manager can be fraught with challenges: for the new manager, their direct reports and the organization as a whole. New managers tend to rise into their position based on past success, but few have the experience or training to effectively manage a high-performing team.

This is a huge problem for organizations large and small, according to Steve King, an adjunct professor of executive education at Kellogg and former executive vice president of human resources at Hewitt Associates, where he oversaw HR for the firm’s 25,000 associates.

“Senior executives count on frontline managers to make things happen,” King says. After all, the vast majority of a firm’s employees report into frontline or middle managers, not those at the top of the organization. Yet, executives often overlook frontline managers’ need for clear guidance and direction about change efforts.

Leaders often mistakenly presume that managers are already trained and proficient at rolling out changes with their teams—and that the benefits of the changes they are proposing are self-evident—so there is little need to explain or clarify things to managers and teams.

In King’s view, new managers need to master three critical skills to succeed in their roles:

Know What Kind of Team You Are Leading

Frontline managers need to understand whether their team is comprised primarily of individual contributors or whether it is highly collaborative. And then, they need to set goals accordingly.

“For example, a wrestling team and a football team have a very different kind of team dynamics,” King says. “They’re both teams; they just need to be managed differently.”

Some sales leaders set revenue goals for each salesperson and offer financial incentives for their individual efforts. Others set team revenue goals and reward the team when they collectively hit their target. Neither approach is inherently more effective, but the team approach drives greater collaboration.

Early in the pandemic, teams comprised of individual contributors were more nimble than highly collaborative teams because they had already established processes to work independently, come together as a group, and share information. Interdependent teams that relied on face-to-face interactions had to establish new ways to collaborate.

But individualized teams require special attention, too. Many frontline managers fail to articulate what King calls “metagoals,” or the shared goals among individual contributors. If individual contributors don’t see their work in the context of the company’s larger goals, it’s easy for conflict to arise. It may also be a sign that the team … isn’t really a team.

King recalls a manager tasked with coordinating three groups to work together on a project. After a lot of pushback from the groups, the manager realized they had failed to define their common goal. This led to a robust conversation where all the parties concluded that there was no common goal.

“In the end, the groups needed to act independently on three different goals,” King says. “They were, in fact, three separate teams. We’re trained to think ‘one organization, one goal,’ but that isn’t always true.”

Know How to Establish Clear Goals

The promotion from individual contributor to manager often comes with a reality check: Managing teams means dealing with tough interpersonal dynamics, from trust issues to personality clashes to competing ambitions.

“Many managers mistake these conflicts for personality clashes,” King says. “But more often than not, what presents as a relationship problem—people blaming one another, bad group dynamics in meetings—is the result of the manager failing to clarify the team’s goals.”

Managers also have to ensure that team members understand the process for achieving these goals—and especially which team members are empowered to make which decisions. By clearly stating which team members can decide on a course of action ahead of time, managers preempt disagreements.

Say, for example, two team members are tasked with handling a company’s marketing initiative. If both people think they have the right to make decisions about the tone of the outreach emails, their manager has set up a situation where conflict can easily arise. Being clear about who holds the “decision right” will decrease the likelihood of conflict.

King stresses that such alignment is especially key when the team’s goals shift. Managers should explicitly state what has changed and the ways these changes will impact the team, as well as individuals.

“Teams have learned this lesson as we’ve grappled with Covid,” King says. “Supply-chain issues have prompted changes in goals, which has meant changes in work processes and team-performance expectations.”

For example, if a revenue target shifts from $500K to $300K, the manager can say, “‘We have a new goal here. Let’s talk as a group about how we’re going to achieve it and what roles everyone is going to play in getting that done.’”

With goals in flux and work processes being revisited, frontline managers need to dedicate time to identifying any stressors that might bubble up under the surface and disrupt team dynamics.

Teams Need Feedback, Too

As customary as it is for managers to set clear, appropriate goals for their team members, those same managers often fail to provide regular, clear feedback to the team as a group. This is a missed opportunity for ensuring and advancing broader company goals—and for coaching the team on how it can achieve those goals.

King recommends bringing your team members together quarterly to give them feedback on areas including how they are progressing toward their goals, how well they are handling changes to work processes, or how they might have more successfully collaborated on a project.

“When I managed teams, I used those moments to let team members share their feedback on team performance as well as feedback to me about my management of the team,” King says. “The same parameters about giving good feedback apply to groups as to individuals: Be clear, concise, and specific with your comments. And make sure to come prepared with examples and plans for improvement.”

Incorporating team feedback into routines is a straightforward way for managers to improve their effectiveness and keep their teams engaged. At a time of high employee turnover, keeping your team on the same page can help prevent the frustrations that may lead to individuals heading for the exits.

“Frontline managers are the foot soldiers of talent management in organizations,” King says. “When managers get team management right, it’s to both employees’ and the organization’s benefit.”

Reprinted with permission by Kellogg Insight. 

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