Many unusual economic problems have come up during the COVID-19 pandemic, and recently it’s supply chain issues that have caused problems for small businesses. Entrepreneurs are facing shortages of some products and extreme price gouging from suppliers on others. While this won’t last forever, your business will need to adapt to the current environment to keep moving forward.
Here are just a few tips to overcome supply chain issues for your small business.
Flip your operating cycle
Your business’s operating cycle likely follows a general pattern. You estimate how much product you’ll need in the future, you pay money to order it, you receive your inventory, sell it, and you get paid by customers.
Even in normal times, there are risks attached to this method. Until your customers buy the product, your business is “out” of the cash spent on it. At the end of the day, most businesses will slightly over-order products or end up with not enough product to meet demand.
In a supply chain crisis, this risk is doubled. The out-of-pocket amount that you need to pay for inventory goes up, and your ability to react to shortages is slowed.
If you flip your operating cycle, you’ll receive payments from your customers first, then make your product and ship it to them.
There are many benefits to this strategy, and it works very well in a supply chain crisis. First, it allows your business to place orders for the exact amount of supplies needed to fulfill the orders you’ve received. If your customers have already ordered the products, then your business knows exactly how many to make. Second, it reduces the amount of financial risk that your business takes on. Since the profit is “front-loaded,” your business can deal with changing prices from your suppliers more effectively.
Here are a couple of strategies to help your business re-order your operating cycle:
Pre-orders: Starting a pre-order system makes sense for a lot of businesses. When using pre-orders, customers place their order in a fixed window of time with the understanding that the order will be fulfilled later. You can even work pre-orders into your marketing plan, using the structure to build up hype about product launches and new releases.
Subscription kits: This method frontloads the profits on products by taking customer payments at the beginning of each billing cycle, and then distributing the product through the month or year. The effect is the same as with pre-orders: you can accurately determine the demand and create orders with precision. Even better, subscription kits allow your business to have a stable source of recurring revenue from customers until they cancel their subscription.
Take a deeper look at your inventory
Not all parts or inventory are made the same. Some inventory comes from suppliers that are far away and you need to build extended delivery times into your timeline. Some inventory is perishable and has an expiration date.
Take some time to map out all the inventory or parts that your business uses. Divide it into categories of:
- production and delivery time
- perishability or outdating risk
- potential for local assembly and/or production
With items in each of these categories, you can make production decisions to maximize your “in-stock” rate and reduce logistics bottlenecks through local assembly and/or production. You can also use this categorization to “triage” which items can have expedited delivery services in emergencies.
Take advantage of demand inelasticity
Supply chain issues are driving up costs. The good news is that for many types of products, demand has become less elastic.
During normal times, customers may turn away if you suddenly change the prices of your products. Over the past few years personal disposable income has increased (thanks in part to increases in minimum wages, and COVID-related relief programs in 2020 and 2021). Higher disposable income and the scarcity of goods have created the current state of inflation. But it also means that customers are less likely to turn away from a reasonable price increase.
If you’re planning to shift suppliers from overseas production to a domestic supplier to solve supply shortfalls, it can also be an opportunity to raise your prices. Customers are more likely to understand price increases due to supply chain changes as everyone is well-aware of the current situation. This strategy works well for discretionary products (like cars, luxury goods, and clothing) but doesn’t apply to necessities.
Put a pause on supplier pooling
Sometimes businesses work together with other businesses to identify products and vendors they have in common and make group purchases. This is called supplier pooling and it can help reduce the price by increasing the order quantity and mitigating shipping costs.
If your business uses this practice, you may want to consider putting it on pause during this period of supply chain disruptions. If the group order for 10+ businesses is put onto a single ship and that ship gets delayed, everyone is now out of stock.
As an alternative, here’s a different strategy for collective action. Each business buys separately, which helps to diversify the order shipments and the odds that most of the product gets delivered. Once each business is stocked up, you can work together with your industry peers to share the inventory you have on hand if one business or another is out of stock.
Finally, consider your working capital
The supply chain crisis has placed unique financial burdens on businesses. To make sure that you’re ready to weather any supply chain issues ahead, take time to review just how much working capital you have in your business’s reserves. You may need it to pay for lost orders due to supply chain delays and sudden supply cost increases.
If your working capital reserves are coming up short, talk to Pursuit! We can help you navigate your options and find the perfect financing solution for you.