Business Supply Chains: What You Need to Know
COVID-19 has ground much of the global economy to a screeching halt, and the effects continue to play out in real-time. Large coronavirus outbreaks have caused supply shocks, hitting key manufacturing centers in China and other Asian countries, disrupting a key link in the business supply chains of many small businesses. On the other side of the equation, shelves across America are empty because of demand shock (a temporary and drastic increase in consumer demand) with some comparing the situation to Walmart on Black Friday.
This global supply chain disruption coupled with targeted customer demand shocks presents a significant challenge to supply chain managers: How can you keep your supply chain intact and your business operations healthy through a public health crisis?
While the COVID-19 crisis is certainly unprecedented, there are examples from the past and key business concepts that can help “right the ship”. We’ve put together a guide to help small business owners manage their supply chains during a demand crisis.
Business Supply Chains: What Past Crises Can Tell Us About Emergency Supply Chain Management
The Financial Crisis: An Unlikely Parallel
Case studies of supply chain performance during the global financial crisis that plunged the world into recession in 2007/8 offer insight into the COVID-19 pandemic. While most global supply chain disruptions mainly affect supply, the financial crisis presented a disruption that affected both market demand and supply, similar to the realities of COVID-19. According to a report by the United States Census, manufacturers saw an average decline in new orders of 18% in 2009 (in sum sub-industries that number soared to 50%!). A report by the World Trade Organization (WTO) saw a reduction in exports by 12%. According to Yossi Sheffi, a professor at MIT who wrote a book on supply chain disruption as a result of the financial crisis, large numbers of order cancellations and a shift of consumer demand towards lower-cost products caused suppliers to delay production and shortages in lower-cost goods. Supplier bankruptcies also severed foundational relationships.
Sound familiar? Similar problems with supply chain operations are present now: small business owners are backlogged with cancellations, working relationships with suppliers are being disrupted (this time mainly through travel advisories affecting lead times and shipments), and plant shutdowns and potential bankruptcies are threatening long-term stability.
So what did we learn from this crisis? What supply chain strategies need to be employed in order to maintain viability through a supply chain shock? While some strategies for the financial crisis were unique, especially concerning the access credit in a collapsing financial sector, foundational concepts in supply chain management were the key to survival.
Companies had to identify and analyze reliable information about changing market conditions, develop plans in collaboration with internal and external based on those market conditions and the status of their suppliers, and work in the long-term to develop flexible and resilient sourcing across the entire value chain.
What Small Businesses Should Be Doing Now to Stay on Top of Their Supply Chains
There’s a lot of discussions out there about what small business managers should be doing to adapt to the COVID-19 pandemic, and the overwhelming amount of information can leave even the most experienced operators paralyzed. We’ve put together a few short- and long-term recommendations for small business owners to leverage in their supply chain planning.
1. Contact Suppliers and Determine the Extent Of COVID-19’s Disruption to Their Operations
First and foremost, you need to be in close communication with your key suppliers of goods and/or raw materials. Managing this crisis will be contingent on having access to accurate information about the status of your suppliers and how they will be able to serve you in the near future. Think about the following when surveying your supply chain:
- Supplier Status: Are your suppliers still operational? Are they operating at a reduced capacity?
- Extent of Disruption: If there is disruption, how long will it last? Which parts of their operation have been affected?
- Effects on Your Business: How will lead times change? Should you expect pricing to adjust? Will they be able to fulfill outstanding orders?
Getting this information will be crucial to your short-term supply chain planning.
2. Take Stock of Current Contracts and Inventory and Develop A Plan for Immediate Stabilization
Gather information about outstanding contracts and your current inventory. Based on what you have in stock and what you expect to be receiving, determine how you can sustain your operations and optimize inventory.
Sustaining Operations: There are a number of steps you can take to stay in business despite disruptions.
- Ration Materials: If you know that there will be a disruption in the procurement of key production materials, think about how you can ration your remaining stock to extend your operations as long as possible.
- Identify Alternative Suppliers: If current suppliers are unable to fulfill orders, look into alternative options for procurement and/or shift orders to unaffected sources.
Optimizing Inventory Levels: Supply management also needs to adapt inventory to changing levels of supply and demand. Demand crises require that supply chain managers avoid taking on surplus inventory, change inventory practices, and rationalize operations.
- Revisit Orders: With significantly reduced demand, it’s very important that firms don’t take on large surpluses of materials and products. Cancel non-essential orders and reduce others. Even if there are no cancellation options in your supplier contracts, attempt to negotiate with suppliers to find options to halt orders in the short-term.
- Rationalize Service Offerings: One way to reduce inventory burdens is to focus production on service offerings with the largest value add. Scaling down from a full-service operation allows you to cut costs, free up inventory capacity, and optimize the service level trade-off.
3. Reach Out to Your Competitors, Customers, and Local Communities
Crisis management also requires that small business owners collaborate, where possible, with partners in the business and greater communities in which they operate.
If you are doing well, think about how your supply chain could help a struggling local business. You may be able to kill two birds with one stone: optimize the use of incoming inventories while helping a business partner.
If you are doing poorly, reach out to the community for support. Your clients may be willing to reduce orders in the short-term, local businesses may have access to resources that you don’t, and community institutions may be able to connect you to people who could help.
Tim Kelly, a veteran business owner and CEO of Felene Vodka, told us about how he’s done his part to help his community deal with supply chain issues:
“As a distillery, we were fortunate enough to not be affected by business closure directives. Our current contracts for ethanol were unaffected by the crisis, and we had a big opportunity to profit off of spiking demand for Vodka by using every last drop of what we had procured. But, we had lots of third parties reach out to ask if they could purchase a share of our inventory, including some competitors. We made the decision to help our local community, while still maintaining our quotas. We know that this kind of goodwill will pay off in the long run, and we feel good knowing that we helped our community.”
Small business owners are pillars of their local communities. Leverage your relationships to keep your local economy thriving through collaboration.
1. Diversify Your Supply Chain by Establishing Relationships with Multiple Suppliers
The best way to insulate yourself from the risks associated with supply chain shocks is to build a diversified portfolio of suppliers. If your business relies on a single source of materials or products, either overall or for a vertical of your business, you are in a very vulnerable place and in need of some serious risk management.
Tim has implemented this strategy into Felene Vodka. Before the COVID-19 crisis, he was getting his bottles from a vendor who sourced their glass from a Chinese factory. During the escalations of the trade war between the US and China Tim was worried about how potential tariffs could balloon his costs. Tim made the decision to expand to other vendors, even if they were more expensive, in order to mitigate the risks of supply disruptions.
“We all want to make as much money as possible, but a myopic view of your costs-of-goods-sold can hurt you a lot in the long-term. While it stung to have to pay more for our bottles, we saw the potential of increased cost as a sort of insurance policy to hedge against any supply shocks that would disrupt our logistics. By doing this we ensured long-term price stability and maintained good relationships with our clients. This strategy has also helped with disruptions caused by the recent pandemic.”
By building a diverse supply chain for your mission-critical products, you will ensure that your business will stay in operation even with shocks to your supply chain.
2. Take Steps to Build Flexibility into Supplier Relationships
In future negotiations with suppliers, try to build flexibility into your contracts. Kai Hoberg, a professor at Kühne Logistics University, and Knut Alicke, a partner at McKinsey, define the concept of a “smart contract” in their analysis of supply chain management during a crisis.
Standard long-term contracts that leverage discounted pricing are vulnerable to deviations from even the most sophisticated demand planning, and reconciliation of these shocks can often hinge on the “goodwill of suppliers.” Supply chain leaders, instead, define contracts that consider fluctuations in demand that can help firms adapt supply networks to changing market conditions. These contracts allow supply chain professionals to be flexible in their response to potential crises.
For example, if you are a restaurant owner, you could negotiate multiple options for regular inventory shipments that can be leveled up or down on a relatively short-term notice. If you rent your equipment, instead of renting all of your equipment starting on the same date each year, consider spreading out the contract start dates to allow for the potential flexible spinoff of capital liabilities throughout the year.
3. Prepare for the Recovery: Plan Early to Get Ahead
It’s essential that small business owners not lose sight of planning for the future. Crises can often represent opportunities for firms that can jump ahead and capture market share during the recovery.
- Maintain Relationships and Excess Capacity: To the extent that it is possible, maintain relationships in your supply chain network and keep excess capacity available. By doing this, you will ensure that you are ready to ride the wave of recovering demand and reduce the backlogs inherent in quick scale-ups.
- Retain Key Employees: Increasingly complex business environments require a skilled and experienced workforce. Maintaining employment relationships with your employees builds a foundation for a successful recovery.
- Establish Procedures For “Stress Tests”: The most successful supply chain executives in the world’s largest companies have taken key lessons from past demand crises to heart and constantly test the ability of the supply chain organization to adapt to changing conditions. Small business owners should do the same: analyze your supply chain and the ability of your business to quickly adapt to potential crises. These types of risk assessments will help your business in any future crises that it may face.