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Small Business Supply Chain Strategies for Uncertain Times
Navigating the effects of COVID-19
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As the COVID-19 pandemic hits the two-year mark, business owners and consumers continue to wrestle with how much longer it takes for products to hit shelves, and how much those products cost when they get there. Alvarez & Marsal Consumer and Retail Group leaders Sanjay Srikanth and Lakshman Lakshmanan joined our small business webinar series to help our community understand the causes of the current supply chain challenges and develop strategies to help. Here’s how entrepreneurs can face production and distribution disruptions head on.
What’s causing supply chain issues?
When worldwide lockdowns first happened in 2020, demand for everything from toilet paper to theater tickets changed drastically, causing a ripple effect. Fewer travel, recreation and entertainment opportunities meant more shopping for many. “The sudden drop in demand and supply has led to imbalance in the entire supply chain across different countries,” said Lakshmanan.
As the U.S. recession ended in April 2020 and businesses reopened in fits and starts, demand quickly started to move in the opposite direction. “We are seeing a lot of constraints on the service sector, so there is pent-up demand that [has] moved towards products,” Srikanth explained. “Hence, a lot of consumption has happened very, very quickly.” That imbalance is still impacting businesses and consumers at the start of 2022.
Currently, the major supply chain hiccups are in the production and transportation parts of the chain. Factory shutdowns due to the coronavirus in production hubs across Asia and Europe have slowed down the amount of goods reaching the United States. Imbalance of ocean liners and container positioning is also straining the next leg of international supply chains. Ports, especially the Port of Los Angeles, are experiencing longer than average unloading times as there are fewer people available to unload shipping containers. Lastly, driver shortages are delaying the trucks that take goods from the ports to other parts of the country. All of this had a major impact on shipping container prices; the same container that cost $2,000 before the pandemic hit a high of $20,000 before coming down to $10,000 as of December 2021.
When will things get better?
Analysts estimate that shipping container prices won’t drop to pre-pandemic prices for 12 to 18 months.
What should I do now?
“The simple answer is that there are no easy answers,” said Srikanth. Still, founders can start by taking a step back. “I think the first thing that everybody should do is understand all of the different points in your supply chain that could get disrupted.”
Lakshmanan also recommended reviewing your agreements with wholesalers and retailers. They may be willing to offer you an advance so that you have cash on hand as you wait for inventory or experience longer production times. You may also look into getting a line of credit or applying for grants.
Is there anything I can do about shipping?
“For the most part, you don’t have a choice other than to use ocean liners as your primary shipping mechanism, simply because air is too expensive,” said Srikanth. But you could consider moving your manufacturing to nearshore facilities, in places like Central or South America. Changing the port you use is an option as well; some are less congested than others right now.
Small businesses also have the option of relying on the big guys. Major retailers who carry products from smaller companies are sometimes willing to pick up those companies’ products from the factories. “If you’re working with retailers, explore that, but do an all-in cost model,” Lakshmanan advised.
Another potential strategy is to consider getting larger shipments at one time and store them locally, in pop-up warehouses. That way, you can cut down on shipping costs in the long run.
I’m thinking about working with a 3PL (third-party logistics company) or changing the one I work with now. What should I know?
Lakshmanan and Srikanth agree that 3PLs are a great option for smaller companies. “They provide you services that help you move the products faster in a more seamless way, in a cost-efficient manner,” said Lakshmanan. These companies handle things like packing and shipping. Some larger national 3PLs have value added services like trucking and warehousing; many small regional 3PLs don’t have those capabilities, so you may need to find additional vendors.
Start by asking a potential 3PL partner who their existing customers are so you can get a sense of whether they understand your industry and needs. Look for a company that sends regular updates about the status of your products. Additionally, Lakshmanan warned founders to beware of logistics companies that try to push their customers into a fixed-cost costing model over a variable cost one. Variable-cost models are typically more expensive on per unit basis but offer a high degree of contract and volume flexibility, making them a better option for companies that are still scaling.
What about changing my products or my prices?
Raising prices isn’t always ideal for small businesses, who are already competing with low prices at major stores, but it’s something to consider. Test a price increase and see how your customers react.
Short-term shortage can also be a reason to raise prices. “At least your margins are getting significantly better,” said Srikanth. “And that increased margin will potentially help you, even in the short to medium term, to see if there are other sources of supply. Or if you have to pay a little bit of a premium to get your product to the chains, it’ll help you offset some of those costs.”
Srikanth also advised businesses to review their assortment. “Eighty percent of your volume is going to come from less than 20 percent of your total assortment. So, here’s an opportunity to really double down on that small and narrow offering that is really generating the bulk of your revenue and profits.” Of course, communicating with your customers is still key. Let them know that you’re focusing on core products. Companies experiencing supply chain hiccups can also protect revenue by offering pre-orders. Incentivize customers (and thank them for their patience) by offering perks for their orders.
Though companies of all sizes are currently facing similar challenges, they can face them by staying up on news, being good partners to their vendors and simplifying their offerings, Lakshmanan and Srikanth advised. “Use all possible levers to make sure you’re delivering on your customer promise.”
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