The COVID-19 crisis created new challenges for businesses that rely on a supply chain for materials. The pandemic affected supply chains in unanticipated ways, and because the world is recovering at a varied pace, interruptions may continue well into the future.

Manufacturers, distributors, and retailers may all be affected — as well as the businesses that serve them. Whether you’re directly or indirectly impacted, this article can help you better understand why the disruptions are occurring and how to best prepare.

Why the disruption?

For years, most business owners in the U.S. favored 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 habits or circumstances change.

Consider the food supply chain. Pre-pandemic, a restaurant’s food supplies may have arrived via shipyard and/or big rig, depending on where the ingredients originated. After COVID-19 hit, staff shortages sometimes meant that trucks and ships were stuck in a distribution center or in a port for days.

Food supply companies had to adjust — sometimes from week to week — based on which route had the fewest problems. In some cases, they (or the restaurants they supply) wound up investing in additional cold storage (either on site or at another facility) so they could order in bulk (in case of a future delays).

In other cases, manufacturing and production delays (as with computer chips for cars) and high demand for certain items (as with lumber for home building) led to disruptions in the supply chain that affected a variety of businesses (small and large).

Because of the potential for disruption at any and every stage of a product’s journey — from raw material to end consumer — it has become very difficult to predict problems and find alternate options.

Is my business at risk?

Given the global nature of our economy and the uneven global recovery from the pandemic, most industries can expect some level of ongoing disruption. And these interruptions may not be predictable.

For instance, a wholesale business that switched from a supplier in China to one in Mexico at the beginning of the pandemic may have had to switch suppliers again when Mexico experienced a surge in COVID-19 cases. That same business may have shifted suppliers several more times in the months since, and they may need to continue to do so indefinitely.

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 tip: 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 carries risk.
  • Can you update your products? A change in materials or suppliers could present an opportunity. If you’re a jewelry maker affected by higher silver prices, you might consider silver plating on some designs.
  • Can you handle a delay? Some of your customers might be willing to accept a delay in exchange for the same product. Ask suppliers 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.

 

Sources: Bloomberg, CNBC, FDA, Marketplace

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