How We Got Here: The Aluminum Shortage
If you work in the healthcare supply chain, you’re likely all too familiar with the myriad of shortages that have led to production halts and backorders in recent months. Healthcare organizations have been left scrambling to procure critical items (syringes, blood collection tubes, and canisters to name a few) as manufacturers contend with delays from their own suppliers.
While the majority of our time is necessarily spent reacting to these situations, it’s equally important that we investigate and understand the root causes of shortages in order to build proactive supply chain solutions in the future.
In Inzuri’s first installment of our How We Got Here series, we explore the current aluminum crisis impacting a range of DME products including crutches, walkers, and canes. We also discuss supply chain strategies to procure supplies during a manufacturing shortage.
What’s causing the shortage?
Demand for Aluminum Cans
Major breweries across the country are increasing their aluminum consumption as they switch from glass bottles to aluminum cans in order to reduce costs. Cans are cheaper to fill, weigh much less than bottles, and are easily stackable making them a cheaper alternative for both production and transportation.
At the same time, consumer demand for cans has also risen. The pandemic has facilitated more drinking in the home, an arena where cans largely dominate. An explosion in the popularity of spiked seltzers (i.e White Claws) has also created a greater need for aluminum. And when you consider that the Coca Colas and Anheuser-Buschs of the world own basically every drink, it’s no surprise that aluminum producers are locked into lengthy production contracts that leave less aluminum for everyone else.
China Cutting Back on Magnesium
Magnesium is an essential element in the production of aluminum. When the two metals are combined, they create a much stronger alloy that is suitable for use across a number of industries including automobiles, construction, food packaging, and aerospace.
Over the past couple of decades, China has gradually gained a 85% monopoly in the production of the world’s aluminum. This is largely due to cheaper labor costs and their mastery of a new process to extract magnesium from the earth (the Pidgeon Process for the nerds among us).
To the dismay of aluminum manufacturers, Chinese officials have begun to significantly cut magnesium production in an effort to reach environmental targets. The Pidgeon Process is one of the most energy-intensive extraction methods and little can be done to make the process greener.
In the Shaanxi Province, which produces 60% of China’s magnesium, up to 50% energy cuts were mandated with deadlines just weeks in length.
The magnesium reduction has increased the raw cost of aluminum while also causing a cascading series of force majeures throughout the supply chain.
How long will the shortage last?
While analysts like Goldman Sachs see rising energy costs as a catalyst for sustained high aluminum prices, there is hope that some Chinese factories will begin to come back online throughout the year. The key in returning to normalcy will be switching to more environmentally friendly (or less environmentally damaging) production methods.
How do I protect against aluminum shortages in healthcare?
It’s critical for supply chain professionals to diversify their supplier base given the uncertainty in global production. Organizations that have formed relationships beyond manufacturers and tier 1 distributors have seen success in sourcing aluminum DME products.
While many manufacturers like Medline were on backorder due to factory shutdowns, some distributors were able to connect with established brands across Asia to step in to meet demand. There were even instances of unaffected factories increasing production to meet demand for crutches. This resulted in US healthcare systems working with non-traditional distributors to access millions of crutches while traditional channels remained constrained.
In general, broadening relationships with vendors that have a diverse list of procurement categories allows for greater supply chain resiliency when faced with unforeseen scenarios. In a future post, we will discuss some of the top strategies to add the right type of diversity to your list of vendors.