What Can Be Done About Transit’s Supply Chain Challenges?

Second, the Producer Price Index (PPI) published by U.S. Bureau of Labor Statistics, which measures the average change over time in selling prices of certain products including buses, railcars and construction projects, is no longer experiencing a predictable cadence.

“We've had these indices that were fairly predictable, but even toward the tail end of the pandemic, we saw inflationary pressures that have never been seen in this industry,” Melleady explained. “The traditional indices, PPI, are not reflective of the increases that we're seeing and with hyperinflation, there are a number of manufacturers that became upside down on the contracts that were priced long term.”

According to APTA, the PPI for Transportation Equipment (Truck and Bus Bodies) increased by 14.6 percent between March 2021 and March 2022. APTA notes inflation experienced over the course of a year is now occurring in a single month.

“There must be some shared perspective on what escalation looks like over time in order for price to be predictable to the end user and risk avoidant to the manufacturer or construction provider,” Melleady said. “It is financially impossible to project what pricing will be in four years. I would strongly urge the folks who are involved with procurement, and the folks who are involved with any bid process to look at ways to implement legitimate escalation clauses that mitigate that risk over time for the manufacturer and provide certainty for the end user.”

Melleady, who has decades of experience working on the private and public sides of the transit industry, has witnessed the industry find its unified voice to shift views of what transit service is and can be and raise awareness that delivered record levels of investment. Collaboration will again be required to lift the industry out of this challenging situation.

“There is no end user that doesn't want a manufacturer of an asset to not be healthy. We've seen that movie before, where a manufacturer doesn't successfully navigate the costs associated with a project, and they aren't around to support that product,” Melleady said.

In the short term, Melleady believes having an open dialogue between end users and the manufacturers would benefit both and ensure the sustainability of the manufacturing base.

“It is mutually beneficial to sit down and talk reasonably through these challenges with a level of transparency that [end users and manufacturers] feel comfortable in making necessary adjustments,” Melleady noted. “The FTA made it clear it’s acceptable to do this using federal dollars.”

Earlier this year, the FTA issued a letter addressing contract modifications and outlining what is permissible under current law and regulations. The letter notes the ability of parties in an existing federally funded contract to modify the contract for a variety of reasons, including price adjustments. FTA’s letter directed further questions to its regional office team.

Longer term, Melleady would like to see the U.S. Bureau of Labor Statistics indices restructured, and he believes APTA provides a platform for the industry to work together on this effort.

“Longer term, the indices should be more of a leading indicator and not a trailing indicator of inflation, and secondly, the indices that exist for bus, rail and construction projects should be restructured to contain newer technologies and the realities that are certainly contained within those specific indices,” Melleady said.

In addition to making sure these indices are bucketed properly, Melleady says the second factor is the trigger date, noting the time between Notice to Proceed (NTP) and a project start date could be years.

“The NTP and the trigger of the pricing should be connected to an index, which incentivizes both the manufacture and the end user to set and agree upon a date. Adjusting a contract according to an agreed upon index is the way to make sure pricing is reflective of time,” Melleady explained.

Despite the immediate challenges, Melleady, a self-described optimistic thinker, sees a brighter outlook, as well.

“We will work together to get through the immediate challenge of supply chain disruptions and hyperinflation and longer term, I'm optimistic about the manufacturing base and our ability to support mobility in this country,” he said.

Shift Toward Adaptability

Gary A. Smith, CPIM-F, CSCP-F, CLTD-F, has more than 40 years in supply chain management and is a recent retiree from the transit industry. He continues to speak on supply chain, conducts training and shares his expertise in thought-provoking articles, including a trio of pieces published in Supply Chain Management Review examining supply chain best practices post-COVID.

“If you look at successful organizations in the private sector, they are the ones that have world class supply chains, and mass transit needs to take a page from their playbook because we need to keep our buses rolling,” Smith said.

Keeping equipment moving was a goal Smith described as sacred when he worked in transit, and he explains a resilient, adaptable supply chain is one way every entity in the public sector can deliver on a similar goal.

“Supply chains need to change,” said Smith. “Adaptability equals agility plus resilience, where resilience, is the ability to absorb a change quickly and agility is the ability to pivot and come up with a new way of doing something.”

Smith recommends eight steps to build a more adaptable supply chain:

1. Create end-to-end visibility in the supply chain;
2. Investment in technology that supports this visibility;
3. Continuous improvement should be implemented throughout the entire company;
4. Planning should be emphasized over forecasting;
5. Supplier and customer bases should be segmented;
6. A supply chain risk analysis plan should be developed;
7. Transition away from transactional purchasing toward procurement and collaboration; and
8. Implement sales and operations planning as a process to balance supply and demand.

“Supply chain is one of the ways to be able to control. While we talk about cost reduction, we really need to focus on reducing risk in the supply chain, which means knowing your suppliers – from tier 1 to tier 3 - and knowing their issues as well. It’s all part of creating end-to-end visibility and reducing risk,” Smith said.

Smith notes there is not a “magic bullet” to solve supply chain challenges concerning risk and visibility but does say there are various software platforms available that are worth the investment to assist in the endeavor. He says sometimes convincing the right people this is an investment worth making can be a challenge because the platform is not customer-facing.

“It’s hard to get people excited about a system no one sees or to convince them of the ‘bang for the buck’ versus, for example, a new train or something that gives you better lighting on a bus. The result is public sector systems that are a generation behind,” Smith said.

While the decision to investment in supply chain management systems comes from the top of an organization down, implementing continuous improvement is a way to build resilience from the bottom up and provides common processes and language that can improve internal and external collaboration.

“Continuous improvement is something people can wrap their heads around, and it’s not just supply chain that can be improved. Mechanical and administrative processes can be improved, and it’s a relatively easy thing to teach. Continuous improvement gives everyone the same language, so you can really communicate," Smith said. "In the next decade, due to things like climate change and [the retirement of] baby boomers from the workforce, we’re going to be in state of continuous disruption, and how quickly a problem can be dealt with and how an organization is able to adapt will determine what companies survive."

For mass transit organizations, the question will be how much more effective or less effective they will be, and the supply chain is a key to that.”