The COVID-19 pandemic has been marked in the United States by local shutdowns and a significant downturn in economic growth. One of the driving forces behind the economic downturn has been supply chain disruptions that have affected everything from toilet paper and hand sanitizer to meat shortages. As small business owners, it is crucial to understand how these disruptions are affecting you in the short-term – since the coronavirus pandemic started – and in the longer-term, as the global economy begins to recover. We’re going to look at three main questions:
- What caused the shutdown of global supply chains?
- How is the disruption impacting businesses and what can they do now?
- Where do we see businesses and supply chain resilience in the next few years?
These are the big ideas shaping our understanding of how business can be ready for the future and know what to do moving forward. The important part for business owners is seeing how the impact of COVID-19 disrupted global supply chains that have been working well for decades, and how this unprecedented event had a truly devastating economic impact for businesses and consumers alike.
What caused global supply chains to shut down?
The short answer here is the COVID-19 pandemic, but trade tensions were already at high due to a trade war between the United States and China that led to tariffs. These tariffs, which are a tax or duty to be paid on certain imports or exports, were in place up until the fourth quarter of 2019 when both countries reached an initial deal. The trade war had made it difficult for the U.S. to deal with China, already the “world’s factory,” and when the pandemic hit Wuhan global supply chains were devastated.
Then COVID-19 hit. The first global epicenter was in Wuhan, China, a city that Deloitte estimated over 200 of the Fortune Global 500 firms have a presence in because the city has become “an area of modern industrial change” and a base for modern manufacturing along with high technology. Because of the global corporate presence any significant political, public-health, or humanitarian event impacting Asia or China could lead to a financial crisis.
Before a global pandemic, risk management was not expecting a significant global impact. One of the more recent examples of a natural disaster creating a supply chain shock was the 2011 earthquake in Japan, where the cascading effects of the natural disaster led to an “additional 1.6 percent fall in Japan’s GDP.”
How did it come to this? Deloitte noted that a focus on “supply chain optimization” that would “minimize costs [and] reduce inventories” made it difficult to deal with disruptions – like a global pandemic – and a survey from the Institute for Supply Management (ISM) found that suppliers were operating at 50 percent capacity early in the pandemic.
The pandemic was an unforeseen global public health emergency that disrupted businesses and suppliers. As the OECD reported, “companies experience a reduction in the supply of labor, as workers are unwell or need to look after children or other dependents while schools are closed and movements of people are restricted. Measures to contain the disease by lockdowns and quarantines lead to further and more severe drops in capacity utilization.” The pandemic did not just affect retailers, restaurants, and other businesses on Main Street, it hit the suppliers too, which contributed to massive supply chain disruptions around the world.
So, what caused the global supply chains to shut down? COVID-19 is a big reason but also a reliance on supply chain optimization that put raw materials and production lines in areas that were later in lockdown without an alternative for businesses.
How did this impact businesses?
The global supply chain and business market is a fragile ecosystem that relies on three major components: the supplier, the seller, and the consumer. If any of those parts are impacted, then the whole model risks collapse. We saw it happen early in the pandemic when suppliers could not keep up with the demand for medical supplies and other essential items consumers wanted, which created a bottleneck in production. We are seeing it now as suppliers are working to produce and sellers are working to distribute products to the consumer in time for the holidays – but other related delays (the post office in the U.S., for example) are getting in the way and creating a new bottleneck in distribution.
This impact has been a long time in the coming as we continue on in the second year of the pandemic. Over year ago in March of 2020, ISM reported that “nearly 75 percent of companies report supply chain disruptions in some capacity due to coronavirus-related transportation restrictions, and more than 80 percent believe that their organization will experience some impact because of COVID-19 disruptions.” These disruptions were compounded by consumer demand and orders were not being filled. Now, over a year later, these supply chain issues remain a real issue, with consumers across the United States feeling the impact and witnessing the consequences. For example, the drastic rise in the price of used cars can largely be attributed to the massive supply chain pinch we are witnessing.
At the Central Bank of Ireland, Fergal McCann and Samantha Myers outlined three main impacts we’re seeing with firms navigating supply chain shortages, their own revenue shortfalls, and the global pandemic:
- “Missed payments coming due” and trade credit from highly vulnerable (hotels, restaurants, non-essential retail) and moderately vulnerable (construction) businesses are not met due to decreased cash flow from those businesses.
- “Future demand shock” and purchase orders not materializing over the coming months as the supply chain comes back together.
- “Input sourcing instability” where the supply chain is affected in production and faces “reductions in quantity, delays, or higher prices,” that are passed on to the businesses and consumer.
Many businesses are having to deal with payments and trade credits coming due when there is no revenue coming into their business. At that point in the decision-making process, funding may be the option (and Biz2Credit can help). As the economy begins to slowly recover, businesses may also find their purchase orders not arriving, and it may be time to separate from their supply chain and find new suppliers (see below for more on that). But this did not just impact businesses. The impact has severely hampered the capabilities of factories and producers as well.
So, what does this mean for small business owners? Well, we are already seeing the impacts and resilience many consumers and business owners have demonstrated throughout this pandemic. As we hopefully move towards economic recovery there is the big question of how suppliers and small businesses will together in the future.
Where can businesses go now?
The big question for many small businesses is what they can do once the pandemic is over to recover lost consumers. The supply chain disruption created an “existential risk” for these companies, according to the World Trade Organization, “through shortages of parts and intermediate goods or through shocks to the demand for trade in intermediate goods” produced by small businesses. The WTO continues: “Sourcing from new suppliers, or absorbing price increases, is more challenging for a smaller firm with limited supply options and capital,” which has been devastating for small businesses that are absorbing all of the potential risks in order to stay afloat.
Big-box stores and e-commerce giants (like Amazon and Wal-Mart) have a competitive advantage as we begin to move forward from the coronavirus pandemic. McKinsey writes that to compete with big-box stores and one-stop shops, “smaller companies may need to find new ways to differentiate their value proposition: focusing on ‘hyperlocal’ demand trends, competing on service quality instead of price, or building customer loyalty through marketing campaigns that engage the local community.”
That may be the way forward for small businesses: finding alternative suppliers and going local – investing in their community and proving they are business leaders who care about the well-being of the community. With no supply chain funding support from the U.S. government, it is falling on small businesses to be proactive and look at restructuring their model as a way to help other small suppliers get products to the consumers.
As we begin to look beyond the coronavirus outbreak, small businesses need to look beyond the norm for their supply chain – and their consumer. Global supply chains were decimated by COVID-19, and although we are beginning to see reemergence, it is important that small businesses have a new plan that does not put them in competition with big-box retailers that can easily outspend them. Also, McKinsey notes that bigger corporate supply chains are being most affected by material shortages, so a localized approach could allow small businesses to thrive.
The pandemic has shown that a localized approach, versus a globalized one, can greatly aid a community. New York, for example, focused on “monitoring and mitigating supply chain issues” as a way to help businesses and organizations with food products. That same approach could be used by small businesses with raw materials and products.
There are no easy answers or simple solutions. Instead, there is an opportunity for investment and the potential for shaping local economies with local stakeholders. It is also an opportunity for small businesses to set themselves apart from major retailers and establish themselves on Main Street with local consumers and local supplies.
“If firms in vulnerable sectors cease to operate, then firms relying on inputs from those sectors may struggle to maintain output,” the Central Bank of Ireland reports. This is potentially damaging because if suppliers or retailers go down, they can affect the whole economy that relies on them.
Although things may be starting to get back to normal, it could take months for supply chains to be back at regular operating capacity. The optimized supply chain that was heavily utilized before the pandemic has an over-reliance on China, which now opens small businesses up for new options and gives business owners the space to try something new.
As the ISM was analyzing the outbreak in China and its effect on the supply chain, they put together a list of three things to consider for businesses moving forward. These three ideas are a great place to start when looking ahead to 2022.
- “Diversify the supply chain. Shifting production to other countries or finding alternative suppliers outside of China.” This a benefit of looking for many suppliers, plus going local around the country to diversify the supply chain.
- “Develop transportation risk-mitigation plan. Consider impacted lead times due to cargo ships and freight plane delays and consider alternative solutions.” This is another benefit of going local and looking local ensures that products are not traveling a long way to you.
- “Plan. Supply chain disruptions could become the norm, so it is important to have a plan.” We are still seeing suppliers struggle to deliver and their constraints (including labor risks) are not expected to diminish any time soon.
These are all great recommendations and a great place to start when planning your business, and it’s important to start now. By looking for small, local suppliers, you are helping the economy and promoting other small business owners. There are suppliers who need places to sell to and small businesses can then compete with big-box stores (physical and online) by cultivating these relationships.
You can also look online for new suppliers (on Etsy or similar sites) and expand your brand that way. It is possible to be in e-commerce as a small business and thrive. Don’t be afraid to diversify your supply chain by looking for many suppliers; working with only one supplier can be a recipe for disaster – as we’ve seen with China during the pandemic.
You’re probably wondering how we can expect small businesses to reinvent the supply chain and create solutions without getting beaten back by big corporations? It’s simple: they don’t have the local relationships or resources that you do, as a small business owner and community member.
It’s time to recreate the value chain from scratch so that it fits your small business model and can benefit the local community. When you’re ready to start, Biz2Credit is here to help.