SPRING UPDATE: Welcome to our quarterly newsletter!
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By Chris Kuehl
Managing Director, Armada Corporate Intelligence
The short answer is probably yes.
The real question is how long will this situation lasts. It has been one of those “perfect storm” situations (forgive the tired phrase). There are three factors that have combined to create significant shortages in almost every category one can imagine. There are shortages of silicon chips and lumber and even Grape Nuts cereal.
What gives? The first factor is that demand has exploded after nearly a year of slumber. The consumer is coming out of hibernation at a record rate and that process will continue to accelerate as more and more of the lockdown is lifted or altered. The second factor is related to this surge in demand. The suppliers were universally caught with excess inventory when the lockdowns hit – there was no warning and no time to reduce that inventory. This led to some caution and reluctance when it came to ramping back up. There was a strong desire to make sure the surging demand was both real and sustainable. The sense is that this demand is real enough but sustainability remains somewhat in question.
This leaves the third factor and perhaps the most important and hardest to address. The supply chain has been wrecked and recovery seems pretty distant.
There have been three aspects of the supply chain that have been affected by the pandemic. The first is production itself as many companies are still not back to their normal pace. For example, the sawmills have not yet resumed the usual three shifts and can’t produce the lumber in demand. The second issue is shipping. Many cargo ships are stranded for one reason or the other. Seafarers can’t get vaccines and that limits where they can dock. Of the nearly 1.4 million people working these ships, 900,000 are from developing nations and unable to get the vaccine. Even into the second quarter of 2021 it is estimated that 40% of global cargo is stuck.
Finally, there is the port congestion that stems from the pandemic and the Suez Canal incident. Ships are waiting over two and three weeks for an opportunity to unload their cargo and ports are filling up with product that is arriving too late for retailers and wholesalers to use. These are all factors that will resolve but not all that quickly. Demand will start to shift towards more traditional patterns as consumers use up their savings and producers will start to ramp up to meet demand for fear of losing market share to more aggressive competitors.
It is predicted that “normal” returns by the end of summer.
Chris Kuehl, PhD is the NACM Economic Advisor and Managing Director of Armada Corporate Intelligence. In addition to providing the Credit Manager's Index, Chris often contributes articles to NACM National and NACM Heartland.
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Success story:
Pivoting in a time of uncertainty
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After a particularly difficult sales meeting, Jennifer Leachman, president and CFO of Leachman Lumber made a decision to communicate with their clients weekly about lead times and pricing.
It wasn’t the decision that was newsworthy, but it was the why. In the year since the world shut down for Covid, lumber and construction materials have been not only scarce, but the prices have increased in many cases more than 200%. The sales team had been fielding angry phone calls almost daily from upset customers, which was causing frustration internally.
“At a meeting with other lumber professionals, someone shared their weekly customer email. It was a list of the most popular products, the current lead time plus pricing compared to the previous week,” Leachman said. “It was so simple, yet our sales team was initially apprehensive about sharing this type of information. After some convincing that it might stop some of their more frustrating conversations, we put together the Market Memo, which included same information as the sample. However, we decided to build on it by offering commentary about meetings we’d been involved in, as well as links to stories that discuss why the industry is where it is. We’ve even done a year over year comparison, which showed increases anywhere from 100 – 300%.”
Customers quickly responded – with enthusiastic support. Leachman noted with a laugh that many of the customers said thanks, but asked where this has this been.
Part of the delay was an ongoing hope that improvements would come as Covid cases decreased and an effective vaccine was created. Even as both of those things have happened, it became apparent there were other issues impacting the construction industry, particularly the homebuilding sector.
For example, even as prices have risen steadily for the past year, the demand has risen with it. The prevailing belief is mortgage rates could rise to 4% and new home prices could rise another 20% and there would still be high demand for lumber products. It appears for every project put on hold, there are at least two waiting in the wings.
As for supply, there are many things at work. Many plants shut down during COVID and have yet to reopen for a myriad of reasons. Several key U.S. ports have ships backed up for miles. This means the product is not being unloaded in a timely fashion to be transported to final destinations. Outside of the pandemic, there are mills in Canada shutdown because of the Mountain Pine Beetle, which killed enough trees it would cover an area as large as New York state. Essentially, all these factors are creating a super cycle that is unlikely to see a correction until 2022.
So how does this impact the credit department?
Leachman said overall her accounts receivable is in good shape. Like many companies, she has not seen an uptick in delinquencies, but noted the same companies that had problems before the pandemic still are problems today.
It’s the one-off requests that cause her frequent re-evaluation of the credit policy. For example, a few clients have wanted to prepay for a job to secure pricing. While that seems like a good thing up front, the long-term ramifications must be evaluated. In another case, the company doesn’t invoice a project until the materials shipped. A customer wanted to be invoiced before the items shipped in hopes of securing better pricing.
“It’s all a delicate balance right now,” Leachman said. “We’re working hard to ensure our members are getting the best pricing but many things right now are beyond our control. Those are the things we need to communicate. And, right now, our customers seem to be appreciating it.”
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2021 NACM Credit Congress:
Enjoy two events for the price of one
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Carroll Anderson recognized with
2021 NACM Heartland Credit Professional of the Year
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Carroll Anderson has served on the NACM Heartland board of directors longer than most people are in the workforce, are married, or committed to just about anything.
For 55 years or so – and we don’t squabble about a year or two – our affiliate has been blessed with the wisdom and guidance of a truly great individual. So, when the board decided to create an award recognizing an outstanding credit professional, it was obvious who it needed to be.
“Heartland has a lot of ‘seasoned’ leadership and we thought it would be nice to recognize those who have selflessly served the association over the years,” said Ty Knox, NACM Heartland board member. “Andy embodies all that a great credit professional should be, and has offered that expertise to the board for so many years. We decided it was only fitting Andy would be the first recipient of this award.”
Carroll, or Andy to his friends, grew up in a small, northeast Iowa town. His route to Des Moines was through a summer construction job in Granger, when he met his future wife at a VFW dance. After graduating from Luther College, he accepted his first and only job at Iowa Paint Company where for the majority of his 45-year career he was director of credit. In addition to his day job, Carroll also had several outside interests to keep him busy today.
This experience has made Carroll an asset. “Carroll has experience as a corporate credit manager, personally holds a variety of investments including real estate and has a tax advice and preparation business,” said Kevin Quinn, COO of NACM Heartland. “His business experience and advice on our board has been invaluable.”
Throughout his career, Carroll said he was ruled by his conservative nature. “I understand risk and a good judge of character,” he said. “I was pretty firm in my extension of credit. I did my homework and wouldn’t let a sales guy talk me into something.”
In fact, he was so effective, Carroll noted the president of Iowa Paint often made the comment, “I have one ‘Boss’ and that is Carroll Anderson. I never override his credit decisions.”
Carroll also credits NACM Heartland with helping him with good credit decisions. He said in those early years, like it is today, the exchange of information was important and the NACM groups had great information.
“I really liked John Neiman, who ran NACM Heartland at the time,” he said. “I suppose that’s why I got involved at first. It was a vibrant organization with great events and those valuable groups.”
He has stayed involved and on the board over the years, he said because he really enjoyed the people. “My wife and I have made good friends at events like Credit Congress. Plus, what would I do? I don’t play golf, but I fish. I eat right, exercise and this keeps my brain active.”
And, the board is happy to have him.
“He offers the board a wide variety of knowledge,” Knox said. “We especially look to him for insight into tax issues. His perspective is invaluable as we propose ideas and initiatives. The fact that he continues to serve long after retiring from credit management should tell you a lot about his character.”
As he looks at the challenges and opportunities that face credit professionals today, he has some thoughts to share.
- Don’t be in love with credit scores because it doesn’t tell the whole story.
- A person’s character says a lot about his risk profile.
- Don’t take no for an answer.
- Keep a financial cushion.
- If you want a good, comfortable life, you are in charge of making your own breaks.
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Ask the Board: When is the best time to write off bad debt? How does it impact your customer relationship?
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Steve Stahl, Credit Officer
Great Western Bank
The banking industry has different rules that we must adhere to. When we have unsecured loans, we send demand notices via legal counsel at 30 days past due. Collection calls and letters continue up to 90 days past due. At that time, the loan is written off. It is up to the credit department, based on size of balance, whether or not to place it with a collection agency.
If the loan is secured, there is much more that goes into the decision. If the customer is working with us to resolve the issue, we get a signed, written plan of action from the customer. If we agree to the plan and the customer does not follow that plan and communications cease, we send a demand notice and go down the path of repossession of collateral or foreclosure. Deposit accounts (if anything is left) can be offset upon expiration of the demand notice.
If the customer is not working with us, we initiate repossession/foreclosure at 90 days past due. Additionally, on agricultural loans, we need to address mediation before final action can be completed.
In most cases, our relationship is over.
Carroll Anderson, Retired Credit Manager
The write off should occur at the end of your fiscal or calendar year closing.
The impact with the customer is immaterial since you probably will not do business with them in the future.
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Calendar
MAY
5-13 Webinar: How to structure a credit department
5-17 Heartland Steel Meeting, Kansas City
5-20 NACM and FCIB Present Author Chat: Jeremy Graves
5-26 Webinar: NCS Mechanic's Liens and Bond Claim Seminar
5-27 NACM Heartland Construction Meeting, Polk City
5-28 Application Deadline for the July 26 Test Date
JUNE
6-8 NCS Webinar: Peruse It or Pitch It? A Trade Creditor's Guide to Bankruptcy Court Documents
6-9 NACM Heartland Board Meeting, Johnston, IA
6-10 NACM Heartland Bio-Fuels Meeting, Johnston, IA
6-15 NCS Webinar: Building Payment Security with Preliminary Notices
6-17 NACM and FCIB Present Author Chat: Dr. Lisa M. Aldisert
6-22 Trends in Securitization and Impacts of COVID-19 and Natural Disasters
6-24 NACM Heartland Construction Meeting
JULY
7-4 Independence Day - Enjoy the blessing of freedom and independence
7-6 NCS Webinar: Equipment UCC Filings
7-7 Webinar: Compliance policies & handling business disruptions (emergencies)
7-13 NCS Webinar: Post 2010 Amendments, Article 9 of the Uniform Commercial Code is Popping Up in Courts
7-20 NCS Webinar: Bond Claims and Public Construction
7-21 NACM Heartland Construction Meeting, Omaha
7-22 NACM Heartland Construction Meeting, Des Moines
7-26 Certification Exam Date: July 26
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