The COVID-19 crisis is making it harder for some businesses to safely and affordably access the supplies and materials they need. Unlike a natural disaster, where interruptions to the supply chain can mostly be predicted, COVID-19 is affecting supply chains in unanticipated ways.
Not only are manufacturers, distributors, and retailers affected, but so are the businesses that serve them. Whether you’re directly or indirectly impacted, this article can help you better understand how the economy during this crisis could affect supply and how to best prepare.
As early as March, small business owners were feeling the effects of supply chain disruptions, and those disruptions continued. The problem extends across industries, including food and agriculture, e-commerce, retail, and pharmaceuticals. Items sourced from overseas present even more complex challenges, since different countries have different experiences and are recovering at varying paces.
Why the disruption?
If you’re like most business owners in the U.S., you probably favor a “just-in-time” inventory system, where businesses keep just enough supplies on hand to meet demand. The strategy frees up cash and avoids waste. But it means there isn’t as much flexibility when supply and material shortages arise.
Consider the food supply chain. People are purchasing less food from restaurants since the crisis started and buying more groceries instead. The grocery stores who order just enough to meet demand are experiencing shortages, while the food suppliers who sell to restaurants are experiencing a surplus.
It can take time for stores to find new suppliers and vice versa. We’re producing enough food to feed everyone, but this imbalance can cause price increases. Since we can’t predict exactly how quickly we’ll reach a new normal, there could be more disruptions in the future. What’s more, prices may fluctuate significantly due to changes in supply, demand, and global markets.
Is my business at risk?
Most industries can expect some level of disruption, and these interruptions may not be predictable.
For instance, a wholesale business may have switched from a supplier in China to one in Mexico. By summer, the same distributor may have had to switch suppliers again, since Mexico is experiencing a surge in COVID-19 cases. Meanwhile, Chinese factories are ramping up production again.
If you purchase supplies from another person or company, you’re likely at risk. The degree of risk can depend on the location of supplier, the relationship you have with them, and the type of supply you purchase.
To help plan ahead, monitor things as best you can. Get a better sense of the supply risks facing your industry by subscribing to magazines and email newsletters from trade groups.
Action: Read local news from the areas where your suppliers are located.
What you can do
If you can no longer get the same supplies at the same price or if you’re worried that could happen, there are some important questions to consider:
- Can you adjust your operations? If your business has enough cash on hand, consider adding inventory for the short term to protect against potential disruptions. Plan ahead by asking suppliers if you can stock up. Ask about discounts for orders exceeding your typical buy.
- Can you replace the supply with an alternative? If yes, take into account differences in price and quality.
- Can you find a new supplier? If you can’t adjust the type of supply you need, look into finding a different qualified supplier. The same questions around price and quality apply.
- How flexible is your pricing? If the cost of your supplies go up, can you pass the increase on to customers or will it eat into your margins? Remember that passing costs on to customers has the potential to backfire, considering many Americans are financially strained during the crisis.
- Can you update your products? A change in materials or suppliers could present an opportunity. A jeweler who can’t afford the increased price of gold might launch a line of sterling silver products.
- Can you handle a delay? Some of your customers might be willing to accept a delay in exchange for the same product. Ask if you can get the same supplies at a later time. (You may be able to ask for a discount, too, in exchange for waiting.)
Not every business will experience a supply chain disruption directly. However, understanding what’s happening with supply chains and the cost of raw materials can help savvy business owners with forecasts and future planning.
If you expect a disruption, think through which solutions make the most sense for your business.