Kinks in Multi-family Supply Chain Make a Case for Spend Management

The economic fallout from the pandemic plus a quagmire of untimely events is kinking the global supply chain, spotlighting the importance of solid spend management and vendor relations in the apartment industry.  

When the pandemic hit the multi-family supply chain more than a year ago, a big concern for property management companies was the availability of personal protective equipment and sanitizing products. More than a year later, as restrictions loosen and the industry welcomes a return to normalcy, the attention has shifted to other staples that are in short supply.

The economy’s steady reopening is creating a high demand for essential products for apartment make-readies, repairs, and improvements that were already scarce because of factory shutdowns and reduced production attributed to COVID-19. And it may not be until the end of summer or early next year that inventories return to normal.

Suppliers are scrambling to keep everything from AC condensing units to plastic buckets in stock during what analysts say are the biggest disruption to the global supply chain in decades.

A tsunami of logjams in production and shipping has affected more than three-quarters of global supply chains. And buyers are paying a premium, stressing construction, renovation, and maintenance budgets.

“It’s the perfect storm,” says Roger L. Bowman, Vice President of Merchandising and Replenishment at AZ Partsmaster, a major multifamily supplier. “I’ve been doing this a long time, and neither I nor folks I know in the industry have ever seen anything like what we’re dealing with today.”

Stress on the apartment supply chain

A confluence of global economic disasters, with the pandemic mostly to blame, has reduced inventories of lumber, HVAC products, paint, chlorine, foam insulation, appliances, water heaters, plastics and other products essential to multifamily. Some products are no longer in production.

Factory closures and limited capacity in the months following COVID-19’s arrival initially dented supplies. Impacts from a Louisiana hurricane and the winter storm in Texas in the ensuing months exacerbated an already tough situation.

In August, Hurricane Laura caused a fire that destroyed stockpiles of a chemical necessary for making chlorine. About six months later, ice and extreme cold on the Gulf Coast affected Propylene Oxide plants in Texas and Louisiana, causing shortages of plastic resin.

While factories are back at work along with many parts of the supply chain, getting products to market is another story.

Imports from China and other countries are slow to arrive because of big backlogs at U.S. ports. Ports in Los Angeles and Long Beach, California, which are the western U.S.’s key entry points, are backed up with container ships because of distancing and restricted work schedules. Delays were compounded by the Ever Given, a massive container ship that was stuck in the Suez Canal for six days in March and brought traffic to a standstill.

All of this comes on top of a supply chain that was already shaken by tariffs levied four years ago by the U.S. on a wealth of imports.

The convergence of these factors, along with an economy that chugged at 6.4% in the first quarter of 2021, is creating notable stress about supplies in the residential and commercial real estate sectors.

The good news is that multifamily projects that were mothballed are back in motion. The bad news is that orders are piling up, and deliveries are lagging.

“The demand fell off the cliff,” says Bowman, a 26-year veteran in the supply industry. “Then  came back stronger and faster than the supply chain could respond.”

Prices skyrocket amid short supplies

Economics 101 suggests that a tilt in the balance of supply and demand often results in pricing volatility. And that’s ringing true. AZ Partsmaster has already had up to two price increases for some products, including water heaters, since the start of 2021 and additional increases are expected before year-end.

“There’s literally nothing we sell today that would cause me surprise if I came in to work to find its price had gone up, lead time had gone up or availability has become sketchy,” Bowman said.

Prices for raw materials like lumber, copper and aluminum have skyrocketed.

Mill closures early in the pandemic are being attributed to a 228% increase in framing board lumber prices since April 2020 as building permits ramp up. According to the U.S. Census Bureau, permits have increased 64% from April 2020 to March 2021.

High lumber prices are adding at least $24,000 to the price tag of a typical single-family home, says the National Association of Home Builders (NAHB). So concerning is the situation that NAHB is working with Congress to address factors that are contributing to the surge in prices.

Since the first of the year, Copper prices have risen 30% and aluminum is up 65%.

AC condensing units are also in short supply. A shortage of microchips used in the newest HVAC products (as well as computers) is partly to blame. Aftermarket condensing units, most of which are manufactured in the U.S., are also hard to find after a run on them early in the pandemic.

Prices for water heaters are about to boil. A.O. Smith Corp., citing increases in materials and shipping, recently announced an 8.5 % increase to go into effect in June – the third this year.

Bowman notes that shortages and high prices for such major components in apartments could force maintenance teams into a fix-first-replace-later mentality. Whether or not they attempt to stockpile parts and build large on-site inventories remains to be seen. However, some AZ Partsmaster customers have been more active in the last 30 days with their purchasing.

The company is working diligently each day to stay on top of pricing and maintain suitable supplies.

“Management companies are approaching this in different ways,” he said. “When the day is done, the majority of management companies are going to rely on their suppliers to have the products they want when they need them. Our purchasing team is going to extraordinary lengths to ensure we have a consistent supply of product. Just-in-time) inventory management is long gone; we are committed to deeper inventory levels to smooth out the bumps this new normal has created.”.”

Spend management and vendor relationships

Bowman believes manufacturers may continue to narrow product offerings as production ramps up, leaving fewer options for property managers seeking supplies.

COVID-19 taught many manufacturers how to redefine production processes to accommodate distancing and become more efficient. Along the way, some products that didn’t make sense to produce were shelved, a practice that could have a lasting effect.

Labor shortages, freight issues and depleted raw materials have reduced paint inventories at least until Memorial Day, according to a major multifamily supplier. The lack of vinyl and resin, which are used to make paint, is forcing manufactures to produce only core products.

Higher prices and reduced supplies will continue to affect property management budgets, likely for some time. Companies with established vendor relations and solid spend management practices have an advantage navigating damaged supply chain issues, says Jennifer Lester, Director Vendor Management for RealPage.

Establishing relationships with vendors that have enough buying power to maintain inventories can reduce the impact of increases and shortages. It’s simply good business.

“It is more important now than ever to have a good relationship with your vendor partners,” she says. “During these unprecedented times, vendors are taking care of their established customers to ensure they have what they need to keep their communities maintained. Vendors see the value in these relationships and work harder for them.”

Bowman is optimistic that the kinks in the supply chain will work themselves out in time. As for when things normalize, it could as early as late summer or early fall for some products, and well into the first quarter of 2022 for others.

For now, he and AZ Partsmaster are keeping a close watch on product availability and pricing.

 “We’re investing in people, processes, and technology to ensure we are in stock and priced right,” Bowman said. “Being singularly focused on the multifamily market will separate us from our competitors, many of whom split their efforts between property management, hospitality, and retail. It is going to continue to be a challenging year, but our team is up to the task.”

RealPage Spend Management software is the preferred solution of many leading property management companies, including the NMHC Top 50 property owners and operators. To learn more, visit the Procurement Suite page.