CARLSBAD — An increasingly entangled international supply chain is upending commerce nationwide and San Diego County is no different.
Local businesses, such as Carlsbad-based MRIAudio and SafeSleeve, have clawed their way through weeks and months of supply-chain issues and delays due to gridlock at U.S. ports, exploding shipping costs, tariffs and China’s crippled manufacturing industry.
MRIAudio uses fiber-optics to provide noise-canceling technology, audio (music, podcasts and streaming radio) and wireless communications between patients and laboratory technicians during an MRI scan. SafeSleeve provides radiation-protected cases for cellphone, tablets and laptops.
However, MRIAudio’s CEO Spencer Howe, COO John Hornbrook and CFO Nichole Macedo, said the past 12 to 18 months has been a challenge. Delays and cost increases have led the company to find alternative solutions to build and ship its products after scrambling to find suppliers and distributors to manufacture their components.
“A lot of our parts were coming from Asia as of last year,” Howe said. “I think everyone started panicking so everyone doubled-down on the inventory they were buying, so the machine shops got overrun.”
Cary Subel, co-founder of SafeSleeve, said his company’s products and materials are controlled by the Asian market, thus the company is dependent on sound finances, cash flow and balancing inventory.
Another challenge for SafeSleeve is the release of new products every year, which forces the company to redesign products for newer versions of smartphones. And since the market is dominated by Asia, moving to domestic suppliers or manufactures increases the retail price at least three to four times, which Subel said is an unsustainable business model.
For example, an iPhone 13 case currently runs $59.95, which is a slight increase over the past two years, Subel noted.
“I would say ‘uncertainty’ is the key word,” Subel said. “Everything is changing on a dime. We’ve made an effort to mitigate by buying a lot of buffer with our orders. The concern with that is we like to be lean with our inventory because we are paying warehouse fees.”
Shipping costs have now increased at least three times greater than the cost of the product itself and air freight is five to six times higher. Inflation and rising oil prices have also put businesses on edge and led to higher costs.
Also, communicating with vendors in Asia is also a challenge, where it can take three to four days to fix a problem, according to MRIAudio’s representatives.
Compounding problems is the Chinese New Year, where the country shuts down for three weeks in February. However, after the new year, major Chinese cities and ports shut down due to COVID-19 outbreaks, thus causing further delays.
In January, Hornbrook scoured the internet and learned the country was besieged by power outages. Chinese factories were only open two or three days per week instead of the typical seven days due to the changes.
Howe and Hornbrook said some products took 30 days to receive now can take between six to nine months, which is why the pivot to a local supplier is paying off. With the moves, Howe and his company have been able to offset many of the costs.
In response, Hornbrook hired a San Diego-based machinist to help with manufacturing a key component of their devices and streamline the company’s supply chain.
“It was well worth the six to eight weeks that we spent,” Hornbrook said. “We have a standing order that I pick up the first of each month. To manage the transportation ourselves is probably saving $15,000 to $30,000 per shipment.”
Macedo said the company also found another unlikely source to help mitigate its supply issues: Best Buy. The big-box company has been able to secure several of MRIAudio’s components, such as iPads.
The partnership has eliminated shipping costs, Hornbrook said, thus making the financials “a wash” compared to if the company was fully committed to Asian supply chains.
About 35% to 40% of the company has moved to domestic sources, which will likely remain its primary sources, with China and Asia as backups.
Additionally, the company’s strategy has been to build up its inventory as another mitigation measure. And the move paid off. MRIAudio recently landed a surprise order from its biggest client, GE Healthcare, for 100 systems, which is 10% of the company’s annual total.
But U.S. cargo ships still wait on the ocean horizon in seemingly perpetual gridlock near the Los Angeles and Long Beach ports. And when the ships finally reach the port, shipments often take weeks to be delivered.
Further exacerbating matters, an impending dockworkers union contract may further disrupt the supply chain. According to media reports, 25,000 dockworkers at 29 ports have rejected an initial contract and are continuing to negotiate.
“The last time that happened there was a major shutdown,” Subel said. “I’m not taking anything for granted. I’m cautiously optimistic.”