The semiconductor shortage is a structural weakness in supply chain management, Cummins Inc. CEO Tom Linebarger says. Everything else the leading engine manufacturer needs in the supply chain crisis is like playing whack-a-mole.
“We have a fair bit of demand for our products, and we’re out of everything,” Linebarger told FreightWaves in an interview Wednesday. “Chips are by far the biggest problem but everything else is also problematic. When you think you kind of have solved the crisis, then another one pops up.”
COVID disruptions, trade tensions and run-of-the-mill unknowns are coalescing to create ongoing problems.
Watch now: The supply chain bullwhip
As a supplier to every major Class 8 and medium-duty truck maker, Cummins (NYSE: CMI) is practically indispensable. Missing microchips can stop a truck from being completed. Without an engine, there is no truck. Manufacturers accepted fewer than 10,000 new truck orders in November as the backlog to build swelled to more than 14 months, according to ACT Research.
A two-front struggle
The two-front supply chain struggle — semiconductors and everything else — keeps Linebarger’s purchasing teams running around the clock.
“There just is not enough capacity, specifically for older, larger semiconductors, which are targeted to cars and trucks,” he said. “That’s going to take a while to be resolved. It doesn’t mean you can’t produce more. It just means we’re not going to say we’re flush for probably two years.
“That assumes we actually convince the industry they need to build more,” he said.
The so-called everything shortage, worsened by COVID outbreaks and clogged ports, is short-term in nature, like the arcade game that features randomly rising moles and a mallet.
“In the game of Whac-a-Mole, you can say, ‘I can forecast exactly when that one’s going to be done, but this one over here I didn’t even see coming because who knew that this third-tier supply had a problem with their copper welding process that just tipped over,’” Linebarger said.
Another tentacle of the supply chain mess is commodity shortages and rising prices. Cummins ate a lot of additional costs for using airplanes instead of ships to get critical deliveries earlier in the pandemic. That was offset by money saved from employee pay cuts during the first wave of COVID in early 2020.
Sorry, we need to raise prices
Most long-term OEM contracts — about 50% of Cummins’ business — have built-in adjusters if the price of materials goes crazy.
“A whole bunch of other escalations of costs, freight costs, material cost increases are not programmatic, so we have to go to customers and say, ‘We need to raise prices on you during this period,’ and that’s of course a negotiation,” Linebarger said.
“In some places, we pushed through pretty quickly. Parts went right through. Gensets [engine and electrical generators used to produce backup electrical power] raised prices. On OEMs, we’ve done it step by step and we’re still in the process of doing that. So I would say we have not recovered all that by a long shot.”
“A whole bunch of other escalations of costs, freight costs, material cost increases are not programmatic, so we have to go to customers and say, ‘We need to raise prices on you during this period,’ and that’s of course a negotiation.”
Cummins Inc. CEO Tom Linebarger
Supply chain endgame: Control COVID or a recession
What is the endgame for the supply chain crisis?
“The thing that resolves it is either a much-improved COVID situation or significant reductions in demand, basically a recession,” Linebarger said. “Those two things would resolve the problem. I hope it’s the first and not the second.”
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