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 how the economy during this crisis could affect supply and how to best prepare.

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 habits or circumstances change.

Consider the food supply chain. Pre-pandemic, a big portion of the country’s milk was sold to school programs. When schools closed due to the pandemic, milk suppliers had a surplus. But many grocery stores didn’t have enough milk in stock to accommodate parents who were buying more milk in stores.

The supply chain, including how milk goes from producers to distributors to end consumers, needed to adapt to changing habits and demands. And given how frequently our habits have changed during the recovery from COVID-19, these supply chain shifts are ongoing.

While we’re producing enough milk for everyone, the imbalance can cause price fluctuations. Consider the restauranteur who serves milk or the food manufacturer who uses milk in their products. They may be wondering how to profitably price their own products when they’re unsure what raw material costs will be week to week. 

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 may have switched from a supplier in China to one in Mexico at the beginning of the pandemic. By summer, the same distributor 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 over the course of the crisis.

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 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 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, UPS