Shipping, Covid-19 and inflation challenges rival supply chain issues when securing capital equipment.
When I made my 2022 capital investment plan, I never thought it would be my 2023 capital investment plan. However, with a couple minor exceptions, equipment will be put in service during 2023, not this year as originally planned.
I thought I was the exception, but in conversations with colleagues, I realize I am the current norm. A trio of events had the combined impact of making what should be simple investments in machinery and equipment anything but.
The most talked about, problematic event has been the strained supply chain. I am not sure exactly how much of the problem getting machinery and equipment is directly attributable to the supply chain, but it has indeed had an impact. When obtaining lead-time quotations, availability of parts, chips, etc., are always the culprit cited for the long length of time to build the equipment, whether a complex custom-built item or simply a copier for the office.
That is only half the story, however. Shipping times to get equipment from location of origin to your facility are also taking significantly longer than before. It doesn’t matter if the machine is shipped from Asia, Europe or North America, or if the delivery is foreign or domestic; availability of planes, trains or container ships is as stretched as the supply chain of parts. Events taking place in Ukraine are exacerbating availability of raw materials, parts and shipping options.
Navigating the Covid world has also had its impact on the ability – and especially speed – to select what machinery and capital equipment to purchase. When compiling a capital budget, it is easy to say you need a drill, image, press or pick-and-place machine, but doing the due diligence to select the correct machine is something quite different. Historically one could attend trade shows, visit sites, see the equipment in action and run test jobs to see the results – all activities most efficiently handled by in-person visits to possibly multiple locations. In the Covid world of Zoom, WebEx, etc., doing the necessary due diligence required to select the best piece of equipment and then get approval to invest considerable sums in capital equipment has become much more challenging and a far lengthier process.
In particular, a process to select, prove out, and negotiate the purchase of a piece of equipment that in the past might have taken weeks now takes up to a year – and that is before pulling the trigger to commence the order. Companies that once let an equipment supplier and potential customer in to see a piece of equipment and run samples now may not allow visitors. Capital equipment manufacturers may have sold the demo equipment normally available for running tests. Equipment manufacturers’ sales and demo staffs may be working remotely – with no equipment available – and limited access to their factory to conduct sales demonstrations. Altogether, unless you are buying a duplicate of what you already have, the selection and due-diligence process rivals the supply chain issues, consuming valuable time in the equipment selection and procurement process.
The final challenge is inflation, which is relatively new but may become significant. With demand so high for all sorts of industrial and consumer items, and with the supply chain in such a strained state, the cost of components, raw materials and, therefore, the finished product is escalating at rates not seen for decades. When budgeting a capital expenditure, and completing the (long) process of selection and due diligence, finding out the cost is five to 10% or more higher may necessitate rethinking the equipment or timing of the investment. For any purchased capital investment via a loan, lease or line of credit, rising interest rates inflate the total cost of investment.
As much as inflation has impacted prices of new equipment, it pales in comparison to the impact inflation has had on the used equipment market. With lead times for new equipment stretched so far, a premium is now paid for readily available used equipment in good condition. In fact, it has been reported some used equipment is selling for more than it costs new. The lack of availability of new equipment, coupled with long lead times for new machines, is compounding the effect of inflation. As supply chain difficulties continue, inflation may become the biggest challenge in planning specific capital investments and preparing a capital budget.
So, regrettably, I am looking good for putting 2023 capital investments in service, but not so for 2022. I guess it’s time to plan for 2024 … or maybe even 2025.