With healthcare equipment prices rising and lead times remaining long, there does not seem to be much light at the end of the tunnel. There are some glimmers of hope that things are improving, and that relief is on the way! The three key issues contributing to the supply chain issues are raw materials/component shortages, transportation/freight breakdowns, and labor shortages. All three have contributed to the price spikes and volatility in the industry.
Raw Materials and Components Shortages
The demand for healthcare equipment went up during the peak of the Covid-19 pandemic and supply was definitely hampered, making for longer lead-times and higher prices. The war in Ukraine further exacerbated the situation. Prior to Covid, 61% of steel was manufactured in China. China was hit extremely hard with Covid, closing down plants multiple times and cutting shifts from three a day to one. The price of steel has been especially volatile, increasing by 200% since March 2020. U.S. manufacturers also had shortages of nickel (used in the manufacturing of steel), Russia being the third largest producer in the world. Aluminum, chromium, plastics, and electronic chip shortages, all of which are mostly manufactured outside of the U.S., have contributed to the equipment supply chain woes.
The supply has slowly started to catch up to the demand and we are seeing lead-times stabilize as well as pricing. “The U.S. Supply Chain Index was back above neutral in July for the first time in almost three years on the back of continuing strong rebounds in inventories and capacity utilization” RSM, a consultancy, said in a report. The other good news is that the construction of new manufacturing facilities has soared 116% over the last year in the U.S. Massive chip factories are going up in Phoenix bolstered by the bipartisan passing of the CHIPS Act last month. Aluminum and steel plants are also being erected in states across the south. In January, according to an article in Bloomberg, a UBS survey of C-suite executives revealed that more than 90% of those surveyed said they were in the process of moving production out of China or had plans to do so. About 80% said they were considering bringing some manufacturing back to North America.
Transportation and Freight Breakdowns
Although there are still lines of freighters waiting to unload at most U.S. ports, the demand-led spikes seen during the pandemic that propelled containers prices into the stratosphere are now a thing of the past. The average shipping charge from Shanghai to Los Angeles for one container spiked at $20,000 during the pandemic. Last month it was down to around $7,000 and it is still falling. The pricing is still higher than before Covid, but the continued drop in pricing is good news.
There are still problems with railroad and trucking transportation in the U.S., mostly due to labor shortages. As unemployment rates continue to fall, these problems will continue albeit, we are seeing some improvements recently.
Labor Shortages and Costs
Continued labor shortages around the world are still a big problem and contributing to the other problems discussed above. All businesses, including healthcare facilities, are seeing big increases in labor costs due to the shortages and needing to retain good employees. A recent study by KaufmannHall shows that rising employee pay and other labor issues are the leading contributors to the historically high expenses in hospitals, up 9.5% YTD. These numbers mirror most industries, where the increased cost of labor is cutting into profits. This problem still persists and shows little signs of abating anytime soon.
Overall, the health of the healthcare equipment supply chain is improving and most experts in the field see lead-times set to improve by early to mid-2023. Pricing is still volatile, but we are definitely seeing a plateau and hope to see improvement by the end of 2023.
About CME: CME Corp is a full-service healthcare equipment and turn-key logistics company providing personalized support and service. With service centers nationwide, CME offers more than two million medical products from a total of over 2,000 manufacturers. CME is a healthcare system's complete equipment solution by providing product selection, sales, warehousing, assembly, staging, direct-to-site delivery, installation, and biomedical services for all its equipment.