Backlogs – Why OEMs and Customers are not aligned

Backlogs – Why OEMs and Customers are not aligned

Backlogs are growing dramatically. OEMs see that, somewhat surprisingly, as a positive. But customers see backlogs differently.

It’s no secret – supply chains have impacted nearly every business on the planet. And the North American manufacturers of equipment have not been immune to that impact, either. 

For equipment manufacturers, the inability to meet market demand is described as a “backlog”. Measured like revenue, it’s often calculated by manufacturers as the amount of orders to be delivered within the next 12 months.

Why It Matters

To end users of equipment, equipment unavailability = lost revenue. 

  • To operate businesses well, end users need confidence they’ll have equipment when it’s needed
  • An increasing backlog negatively impacts this confidence

What The Heavy’s Data Reveals

The Heavy’s OEM Production Backlog tracker indicates that in Q4 2021 year-over-year backlog growth among our manufacturer cohort averaged 148% with JLG topping the group at 363% year-over-year growth.

Backlog growth is healthy if its growth mirrors revenue growth. But currently, The Heavy’s data shows revenue is significantly lagging backlog growth.

In Q4 2021, the growth of backlogs, when compared to quarterly revenue, peaked at 2.74 (current backlog / quarterly revenue), showing that backlogs are growing at nearly 3x revenue. 

So What are Manufacturers Saying?

Most leaders see the growth of backlogs as positive, often describing backlogs in positive, rosey terms. 

  • From Terex: “The majority of the backlog is really for 2022. So there’s a very limited amount that extends out to 2023 right at this point.”
  • From Manitowoc: The majority of the backlog is scheduled to ship in 2022.”

But backlogs also indicate headwinds in production. An increasing inability to meet market demand. 

Manufacturers Remain Confident

Despite backlogs growing for every manufacturer, OEM leaders remain confident, often communicating that confidence as a % of backlog to be delivered in the next rolling 12-months. Across manufacturers, we’re seeing a range of 70-85% to be delivered.

That confidence is being driven manufacturers believing they’re beginning to get a hold of their supply chains. This is being driven by three major factors:

  • a radical increase in the number of suppliers (often going from single digits to hundreds)
  • evolving designs to take advantage of an expanded scope of possible components
  • a general belief that supply chain issues will decrease after Q1 2022

Here’s how specific manufacturers are describing their supply chain evolutions:

  • From John Deere: One of the things we did do during the last couple months is we continued to bring parts in, parts and components into – to our facilities.”
  • From Caterpillar: “When the supply chain bottlenecks begin to ease, we expect to be well positioned to increase our production to more fully meet demand and gain operating leverage from higher volume

But Time Will Tell

Despite the positive comments from manufacturers, The Heavy’s data indicate backlogs will remain at current levels, if not grow, in the next few quarters as OEMs show a consensus signal of significant supply chain issues in Q1, Q2 2022. And even with an increase in manufacturing efficiency, current backlog to revenue ratios indicate that even the shortest time to work down backlogs is 2 quarters.

Dive Deeper

Data and Insights from The Heavy that can help you track production and backlog trends:

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