Small business supply chain challenges are nothing new. Unfortunately, more varied and lengthy disruptions are actively causing supply chain issues for small businesses. The continued fallout from COVID-19, the conflict in Ukraine, hackers attacking larger companies, shortage of computer chips—the list goes on and on for small business supply chain management.
These external factors can all be incredibly overwhelming and disheartening for a small business owner. But, you can do something about it and it all comes down to effective small business supply chain management.
To understand the vulnerabilities at stake, we will look at some of the major supply chain issues, their root causes, and how they impact small businesses. Finally, we’ll conclude with tips on how small businesses can plan for and overcome supply chain threats.
What are the major supply chain issues?
Due to their complexity, modern supply chains, while extremely efficient, are susceptible to disruption. To start, let’s take a look at the major issues facing supply chains.
The number one reason behind supply chain issues is complexity. Complexity results from a system that relies on so many different points to ensure that goods can effectively move from one place to another. After all, you can buy goods made in Vietnam using electronic payment methods at a store in Mexico City. And as complexity increases, the supply chain has to adapt.
For example, imagine you grow tomatoes and sell them from a roadside stand in front of your house. In this case, the supply chain might be very basic. However, if you wanted to sell your tomatoes to a grocery store in New York City, you suddenly have to account for the cost of truck drivers, expanding supplier relationships, etc. The number of variables would increase exponentially as additional steps in the chain are added.
Think of a supply chain almost like a food chain – at the bottom are raw materials, and at the top are complex goods and services. When one piece in the chain increases in price, all other following pieces become more expensive to account for profit margin changes.
For example, when fuel prices go up, the cost of shipping goods also goes up. When the cost of shipping goods increases, the goods themselves get more expensive. Increasing costs can be caused by a host of other factors, too, such as labor force disruptions, raw material shortages, and logistical complexities.
Consumer demands are fairly straightforward, but these can be influenced by trends, convenience, and general market competition. For example, when a new clothing item becomes trendy, supply chains for the item can become strained, and ultimately stores carrying the product run out of inventory.
Consumers play a huge role in how supply chains function. Today, the variety of choices and alternative products available to consumers has led to speed, quality, and service influencing supply chains. Amazon is an excellent example of how free, fast shipping has become an industry standard. As a result, the United States Postal Service has been stretched to its limits to meet consumer demands.
Earlier, we touched on complexity, but let’s also take a look at risk, which is related to complexity. The risk multiplies as complexity increases. Every additional step in a supply chain becomes another point of failure in the entire chain.
Risk can be anything from the chance a contract goes unfulfilled, resulting in a lawsuit, or that products arrive damaged. In the end, each step increases the chances something can go wrong.
When things go wrong in one area, it can set off chain reactions elsewhere. This is volatility. Because supply chains are integrated across the globe, what happens in one country can have a huge impact elsewhere. Volatility is often a result of the supply chain being unable to respond to unexpected events, and it is often tied to the complexity of the entire chain.
Think of the supply chain as a pond. When everything is working as planned, the pond is completely smooth. Disruptions send out ripples in all directions. When multiple ripples collide, it creates further disruptions.
For example, several years ago, a hurricane struck Puerto Rico. Aside from the casualties and tremendous impact on life on the island, it also disrupted the global supply chain of saline bags. This disruption allowed other companies to begin producing bags to fill the missing gap. Volatility has a tremendous capacity to disrupt supply chains.
Some other, more specific, issues to consider can be just-in-time manufacturing, which requires certainty about what materials are in demand and what products need to be delivered. Inventory management systems that eliminate waste by reducing held products are closely related to this.
In this scenario, inventory is based on the presumption that a continual supply of products will be made available, so none needs to be stored. When a supply chain becomes disrupted, these systems are prone to failure.
What is causing the current supply chain issues?
Supply chain issues are all about cause and effect. Most problems start with a simple cascade of events. Do you recall when the Suez Canal was blocked by a cargo ship?
The result was an estimated $6-10 billion lost each week due to the disruption. However, not all supply chain issues are caused by blocked cargo ships, though.
COVID-19 has been the most obvious and most significant factor in regard to current supply chain volatility and the subsequent impact on costs and consumer demand. The pandemic created a shortage of workers that has reduced production capacities globally, and major shifts in consumer behavior have also resulted in changes to normal demand.
For example, consumer demand for basic living necessities such as food and personal hygiene items skyrocketed following the pandemic, forcing retailers to struggle with keeping up with demand while also dealing with increased costs and the labor shortage.
Shortages in basic materials can stem from international conflict that eliminates or hinders a once consistent source. The Russian invasion of Ukraine is the most obvious of these issues, potentially disrupting the global supply of corn and wheat. Additionally, sanctions against Russian exports, such as oil, have already escalated average gas prices to a record high in the U.S.
Other current disruptions stem from China’s “zero Covid” policy and boycotts of cotton over forced labor. However, the direct impact on specific materials is only part of the issue. The uncertainty surrounding these, and other geopolitical issues increase the risk and volatility of supply chains. It’s a ripple effect that goes beyond lacking resources.
Economic and business challenges
Alongside more direct conflict, the overall international environment has become increasingly more challenging to navigate. Events such as Brexit have influenced everything from contract negotiations to legal stipulations associated with distribution. All of this only adds to the ongoing challenge of accounting for fluctuating exchange rates and the nuances of foreign relations.
In short, an already complex supply chain has escalated in complexity in a very short amount of time. There’s far more red tape and wide-ranging ramifications to contend with. And outdated supply chain infrastructure only further exasperates the ability to adapt quickly to these nuanced issues.
How do supply chain issues affect small businesses?
Small businesses are one of the primary victims of supply chain issues, not just big box stores like Walmart. According to the Q4 2021 U.S. Chamber and MetLife Small Business Index—61% of small businesses have had their supply chain disrupted and 47% say it makes it difficult to keep up with demand.
Let’s look at this example. Say that you operate a business that requires local delivery and leverage a handful of company vehicles to do so. Currently, the global chip shortage severely impacts the supply of both new and used cars. Today, the cost of a new car is only increasing.
By offering delivery, your vehicles are potentially one of your biggest assets. Suddenly, one of your cars fails and you need a new one to replace it. However, with the increased cost of cars, you may not be able to immediately purchase one. This potentially leads to lost sales and even downsizing for the drivers you employ.
A supply chain issue can be the difference between having enough inventory to fill orders and having your payment system functioning so you can take orders. On the other hand, when the supply chain becomes too strained, you may be unable to fulfill orders because the postal service cannot deliver packages online.
Supply chain disruptions can play out in surprising ways too. Think back to the beginning of the pandemic. In its early stages, grocery stores became swamped, and many ran out of toilet paper.
Years later, the pandemic, which initially shut down the global economy, also became the source of new demands for face masks, medical supplies, vaccines, and labor. This means that supply chain issues can also be a source of innovation.
How small businesses can overcome supply chain issues
The difference between effectively managing a supply chain crisis and being overwhelmed by it comes down to proactive planning. It can help you diminish risks, make quick decisions, and identify opportunities. Let’s walk through some of the best ways to plan out a reaction to issues in the supply chain.
1. Closely track inventory
Inventory is inextricably tied to the supply chain. Goods are brought to you via logistical networks that span the globe. By tracking and monitoring your inventory levels, you can ensure that you understand what your needs are.
Today, many businesses utilize JIT (Just-in-time) and Lean methodologies as part of their business plan. Lean/JIT often relies on cutting down held inventory to reduce storage space and use it for better, value-adding activities. By monitoring your inventory, you can decide whether you need to stock up on certain items if you fear a supply chain disruption is coming.
2. Explore alternatives
In the face of supply chain problems, embracing alternative solutions can be a great step in making sure your business continues to operate. The founder of Arizona Iced Tea recently announced the price of the famous tea would not change from $.99. Vultaggio noted that rather than increasing costs, he found alternative ways to cut down costs to ensure that consumers could still get their tea at an affordable price.
Even if you can’t control the supply chain, you can work to ensure all other aspects of your business are healthy. Consider evaluating the financial health of your business and using services like free checking accounts.
3. Take advantage of pricing deals
When the cost of purchasing goods is low, you can take advantage of pricing deals to stock up. Then, when costs are high, you’ll be able to use your held inventory and capture a larger percentage of revenue than other competitors who are stuck paying higher prices. Pricing deals help ensure you protect your bottom line and profit margin.
4. Track and forecast sales
Understanding sales is another key to navigating tumultuous supply chain issues. Consider using a profit and loss statement template to better understand how your sales are performing. Sales, expenses, and cash flow are not only essential to predicting what inventory you should purchase to ensure the stable flow of products, but they are also vital to understanding the health of your business as a whole.
5. Communicate with customers
The number one complaint customers have regarding businesses is a lack of communication. If you’re facing supply issues, you should confront these problems head-on. For many consumers, a delay is acceptable if they know about it in advance.
Or you can work with customers to suggest alternatives that may meet their needs. If worse comes to worst, you can always refund them. Whatever the case, you should work to communicate with your customers actively.
6. Pivot your products and services
Changing your approach can also be a valuable method for making sure you can survive a supply chain shake-up. Supply chain problems can also be an opportunity!
The Covid-19 pandemic opened up many opportunities for businesses with technical expertise in one area that easily translated to another. For example, Ford used its manufacturing expertise to quickly help produce respirators and masks in the early stages of the pandemic. Pivoting can help you capture sales, move inventory, and stay operating when others have closed their doors.
7. Revisit relationships with suppliers
The final thing you can do is revisit your relationship with suppliers. Even when disruptions occur, having a solid relationship can help you make the most out of a situation. Suppliers can prioritize you over other contracts. Or, maybe your relationships aren’t working out, and it’s time to find a new supplier.
Either way, revisiting these relationships, regardless of whether you have supply chain issues, can help eliminate weak points in your own supply chain.
Be prepared for supply chain issues
In the end, understanding supply chain issues, building a plan, and implementing that plan are the best ways to prepare for any possible supply chain disruptions. Supply chain issues will not disappear, and the supply chain will likely only become increasingly complex. Analyze your business, build a plan, and you’ll be sure to succeed.