By Tom Mackay, Partner at Synergy Consulting Inc.
COVID-19 exposed the need to refocus Global Supply Chain(GSC) critical metrics related to material supply options, such as manufacturing costs, skills shortages, salary, transportation while not losing sight of sudden changes. It is the worldwide Supply Chain(SC) interconnectedness that needs adjustment for pricing, supply disruption, and materials costs.
Another factor is the Inflationary pressures in countries across the world, how it limits manufacturer’s ability to manage increases and adjust
to the paying customer’s the cost increase for these goods and services. For example, UK Consumer Prices Index reached 7.4% on October 13th, 2022, and UAE’s inflation rates touched 3.7% on August 17, 2022. Globally the cost of doing business has been definitively influenced by the consequent rise in interest rates and currency fluctuations on cost of capital to SC manufacturers and sub-suppliers(subs).
For example building materials increased prices by 20.4% YOY, rising 33% since the start of the pandemic in the Middle East alone. Oil and gas energy price increases were passed onto manufacturing and equipment suppliers and consequently, there has been a significant increase in the transportation costs (in some cases nearly 300% per container).
“Energy costs globally have impacted manufacturers which in turn pass these increases through to the Customer.”
Companies are focusing substantial management
time to better understand GSC metrics such as staff shortages, salary cost increases, raw materials, machinery costs, storage, transportation, and the consequent cost of supply of goods and services.
Another challenge in the power market is the Competitive Bid and Tendering Process used by Customers for projects. Equipment manufacturers and subs are providing increased pricing based on the reduced pandemic production volume. Pricing and supply
options are being stretched to meet demand required by global power markets while increasing interest rates are being used to counter inflationary costs with limited effect.
Three questions directly affecting the ability to develop and keep power projects pricing competitive:
1. Will Customers agree to pricing is only valid for a couple months in any bid?
2. Will all increased costs be now passed to the end customer due to the cost of capital, inflation?
3. How long is this disruption going to last and is this GSC adjustment to be the new norm?
The pandemic worldwide caused disruption, slow response to exit, coupled with inflation, interest rate, and energy price increases has created the Perfect Storm. All of these issues factored into any new global power project result in the Customer bearing the full impacts on cost. Pricing impacts need to be discussed and developed between manufacturers, customers, and end users to readjust expectations for new projects worldwide.
This disruption is here to stay!…… at least for 2 years
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