Supply Chain and Inflation Challenges
January 25, 2022
As we begin a new year, our industry continues to face the challenges of inflation, supply chain disruptions, inventory shortages, and extended lead times. We are not alone. Logistical bottlenecks in the global supply chain are impacting many sectors of the economy. And while some experts predict a positive correction in 2022, it’s important for utilities to prepare for—and be cognizant of—continued interruptions in product acquisition and delivery.
The Impact of Inflation
According to the U.S. Department of Labor, the country’s rate of inflation increased at its fastest pace in nearly 40 years last month, up 7 percent from the previous December.
The utility industry is experiencing the impact of inflation at an even higher percentage.
The inflation rate on the basket of electric utility products RESCO distributes (distribution and transmission products) averaged about 10 percent in 2021. In other words, every product RESCO sells, the cost from the manufacturer of that product rose by 10% on average from January 1, 2021 to December 31, 2021. Like every industry impacted by inflation, this increase was entirely out of our hands and not specific to RESCO or our specific manufacturers.
The ripple effects of the current high inflation rate are occurring nationwide. RESCO members/customers, and all of the utilities around the country, have lost 10 percent of their buying power; in other words, if an electric utility in 2022 plans to buy or build at the same level as they did in 2021, the costs will be 10-percent higher. That sort of inflation can really take a large bite out of any utility’s work plan dollars.
Extended Lead Times on Many Products
Just as inflation is impacting utility budgeting and spending limitations, lead times are proving to be another challenge for utilities and manufacturers alike. They remain extended on many products, but single-phase and three-phase transformer lead times are the most concerning, as you can’t put in new electric service without a transformer. Essentially, production at the North American transformer manufacturers is maxed out for 2022 due to record demand.
Additionally, many transformer manufacturers are on an allocation with their customers, which means that they’re allocating a set amount of production—and no more—to their distributors and customers. While many are doing this to try and take care of as many customers as possible, it’s almost certain that the total demand from all customers will not be met.
Additionally, other products experiencing extended lead times include:
- Primary and secondary conductors
- Fiberglass enclosures.
- Certain day-to-day type of items, such as anchoring.
Fortunately, RESCO is effectively managing these challenges by carrying a record amount of inventory. This gives our members and customers the peace-of-mind that they can count on us for their product needs. (Keep in mind, however, that RESCO has a limited number of transformers in stock, and this will likely be the case for the remainder of 2022 due to record demand and limited supply.)
In addition to our inventory reserves, we’re also helping our members stay within their purchasing budgets by maintaining product pricing, thanks to our non-profit cooperative model. When demand increases, for-profit companies typically increase their pricing to maximize their margins. RESCO does not, which makes us the ideal partner for utilities’ product needs.
Communication is Key
Despite the difficulties utilities face regarding product inventory and purchasing, there are ways to minimize the impact on their own operations.
Above all, communication is key, as it’s the one factor that all utility providers can control and manage. Effective and regular communication to all stakeholders can go a long way to ensuring up-to-date product and delivery status and realistic expectations.
To accomplish this, RESCO recommends all utilities focus on ensuring effective communication with the following stakeholders:
- Internal personnel. Make sure your utility’s purchasing department is talking to your operations and engineering departments, which will help ensure a very clear understanding of upcoming projects and material needs. Conversely, these departments will need delivery updates from the purchasing department on product lead times and material availability when planning projects.
- Developers and commercial members. If a commercial development is being planned, the developers need to fully understand that lead times on products—such as transformers—have been greatly extended, and the expected timelines to get electrical service finalized (i.e., getting a three-phase transformer in place) might take much longer than “normal” years.
- Suppliers. Electric utilities should work closely with their suppliers and review their upcoming projects with them, so they can keep up to date on lead times and material availability.
In addition to effective communication, here’s a checklist to consider incorporating into your utility’s planning operations:
Ensure that all of your major capital expenditures orders—transformers, conductors, fiberglass/metal enclosures and other major materials—have been placed for 2022.
Make sure your operations, management, and board personnel are aware of the significant price inflation. This will help ensure that work plan budgets are adjusted accordingly.
Consider carrying more inventory for the next year or two to better insulate your utility in the case of unexpected storms or continued supply chain disruptions.
Communicate, communicate, and communicate even more. Not to sound like a broken record, but regular communication with suppliers, members/customers and developers will help you establish realistic expectations on lead times for completing new or upgraded electrical service.
Don’t let supply chain disruptions leave you feeling powerless. Consider the information and tips above when planning and managing your current and future purchases and projects.