Supply chain issues in the German construction sector are leading to higher purchase prices, longer waiting times, and increased resources devoted towards planning. Oxford Economics shares strategies for managing the threats

The supply chain disruptions triggered by the coronavirus pandemic, the blockade of the Suez Canal, and Russia’s invasion of Ukraine were historically unique for Germany’s construction sector. 

New research from Oxford Economics, shows how these supply chain disruptions affected construction companies in various ways and identifies strategies to help overcome them.

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Eurostat data shows that from 1960 to 2020 only 0.84% of construction companies reported that their activities had been restricted by material shortages or capacity bottlenecks. However, this share has risen to an average of 28% since 2021 and to a peak of over 50% at one point.

In addition to delivery difficulties  and material shortages, sharp price increases for raw materials, intermediate products, and energy also contributed to the challenges faced by construction companies.

In 2022, the producer prices of relevant intermediate goods in the construction industry increased by 22% on average compared to 2021, and by 14% in 2021 compared to 2020.

Key research findings

  • The study found that dominant effects were higher purchase prices, longer waiting times, and increased resources devoted towards planning. These longer waiting times meant greater difficulties in processing existing orders and a consequent need to forego new orders, which in turn led to a loss of turnover.
  • The research also found the industry’s supply chain was more globally intertwined than previously understood: the sector generates 40% of gross value added via imported services. Thirteen of the 57 imported intermediate inputs were found to be highly vulnerable.
  • Other industry-specific characteristics include a high level of manufacturing complexity, which leads to a large number of required products. Meanwhile warehousing is often difficult, meaning supply chain interruptions have a direct impact on production capacity.

How disruption is impacting businesses

The study found that supply chain disruptions affected construction companies in various ways.

Dominant effects included higher purchase prices, longer waiting times, and increased planning efforts. In addition, there were difficulties in processing existing orders and a consequent need to forego new orders, which in turn was accompanied by a loss of turnover.

The report said: ”Strategies for dealing with supply chain disruptions included looking for new suppliers and an increase in warehousing, where this was possible and made sense. However, many structures were maintained and changes in business processes tended to be limited.”

It says another common strategy was to pass on price increases to customers, which was possible mainly due to the very strong order books in the construction industry at the time.

Global implications

The research found that contrary to popular belief, the supply chain in the construction sector is globally intertwined.

The German construction sector imported 24% of all goods in 2018, and the import ratio for intermediate products originating from other sectors was 31%.

Furthermore, the further back the study traced the supply chain, the more the import dependency increased.

“While globalisation fundamentally brings cost and efficiency benefits, it can lead to increased risks and vulnerabilities”

Dispersion of supplier countries was wide. While Poland, Italy, and Switzerland were the most important supplier countries in tier 1, only non-European countries—namely China, Russia, and the US —remained in tier 3 of the construction value chain. 

The research identified the most important supplier countries across all tiers as China, Poland, the US, Italy, and France. 

The report said: “While globalisation fundamentally brings cost and efficiency benefits, it can lead to increased risks and vulnerabilities within the supply chain.

“This can be triggered, for example, by regulatory differences and geopolitical tensions, but also longer, disruption-prone transport routes that rely on logistical hubs (e.g., ports or airports).”

How to tackle the threats

Oxford Economics made several recommendations to the Federal Institute for Research on Building, Urban Affairs, and Spatial Development.

They say that construction companies should:

  • Control their supply chains as completely as possible with digital technologies —from procurement and logistics to delivery to the construction site;
  • Use digitalisation to detect disruptions at an earlier stage and react to them;
  • Secure greater supply of raw materials through domestic production;
  • Replace fossil energy sources with renewable energies;
  • Select their suppliers in a diversified manner as far as possible; and
  • Promote innovation for new future technologies.

The report said: “Opportunities arise from the fact that a functioning supply chain management will be an important competitive advantage for companies in the future, as availability is becoming more and more important in purchasing decisions, in addition to the sales price.

“It is therefore lucrative for companies to invest in efficient and reliable supply chains. Furthermore, digitalisation also represents a great opportunity to simplify processes and, for example, to be able to develop demand planning more precisely.

“Innovations in the construction industry, for example concerning the circular economy, are also opportunities to reduce the use of materials and thus also vulnerabilities to supply chain disruptions.”