Managing Supply Chain Problems

The past couple of years have been marked by severe supply chain problems. Small businesses have collectively waited for these problems to end. However, these problems persist and will likely remain for a few years.

Supply chains are complex, interconnected systems. A disruption in a link of the chain can create a cascade of downstream and upstream problems. There is no simple or fast way to fix this, especially during a pandemic.

As business owners, we have to adapt to this situation. We must find ways to operate in this environment, overcome its challenges and grow our companies. Here are six tactics to help you deal with the current situation.

1. Forecast possible supply shortages

Companies in the construction industry usually forecast their sales using a simple but effective method. Review past sales volumes and current market conditions to come up with an estimate. In the past, business owners never spent a lot of time planning for potential supply issues. After all, suppliers always had products when you needed them. Unfortunately, this is not always the case anymore.

A more effective forecasting approach accounts for possible supply chain issues. This task is difficult for small businesses with limited resources. However, a simple method can provide a reasonable estimate. Talk to your suppliers to understand their perspectives on the market. Get their opinions of the near-term supply situation based on their order flow. See if they are willing to discuss their expected sales to other companies in your industry. This conversation provides valuable insight about the anticipated direction of the market. Incorporating supplier information into your business forecasts enables you to make better inventory, sales and personnel decisions.

2. Diversify suppliers

Most small business owners prefer to work with as few suppliers as possible. This strategy has advantages. It allows you to build a track record and get volume discounts and good payment terms. This approach works very well during normal times. Additionally, you also develop a good relationship with the supplier, which can be helpful during challenging times.

However, this strategy has a significant limitation. It leaves you exposed if a critical supplier runs into supply chain problems. This situation can lead to delayed projects, dissatisfied clients and lost revenues.

Consider working with multiple suppliers for each essential product that your company uses. Spread your purchases around, so you build a track record with each supplier. Evaluate prospective suppliers carefully and work only with well-established companies. Consider buying a commercial credit report on them to determine the health of your suppliers' businesses. These reports are inexpensive and are available from Dun & Bradstreet, Cortera and Ansonia.

3. Consider holding more inventory

Inventory is a double-edged sword. It takes money, time and space to purchase inventory. Inventory is an expense until you sell it, at which point it becomes revenue. For this reason, companies try to minimize the inventory they keep on hand. The problem with this strategy is that it has no safety margin. It leaves you exposed to inventory problems during supply crunches.

Any increase in your inventory should be done gradually to minimize sudden expenses. The obvious benefit of this strategy is that you are better prepared to meet customer demand. Unfortunately, the downside is the increase in cost. Businesses need to carefully weigh the cost of holding more inventory against the cost of upsetting prospective clients.

Monitor expenses carefully if you decide to increase inventory. This scrutiny helps you avoid buying more inventory than you can afford. Otherwise, you might end up with excess inventory but no cash.

4. Manage labor shortages

Some of the problems in the supply chain system have been caused by labor shortages. Every company has been affected by this development. The best ways to handle this challenge:

• Cross-train employees. Cross-train employees so they know how to do someone else's job. This flexibility allows you to reassign employees if key team members need to miss work. Ideally, every employee who is key to the business should have a backup employee who can do their tasks.
• Use a staffing agency. Develop a relationship with a temporary staffing agency that focuses on the construction industry. An agency can help you if you are short-staffed. Keep in mind that staffing agencies have become very popular for this very reason. Consequently, finding a temporary employee may be difficult.

5. Conserve cash

It appears that the economic uncertainty that we have faced for the past two years will remain for the foreseeable future. I would not be surprised if financing costs increase and lending standards tighten.

Monitor your cash flow carefully. Keep your accounts receivable up to date and ensure clients pay on time. Scrutinize expenses to avoid unnecessary purchases. Lastly, work on building a cash reserve for the company. A cash reserve is essential for every company. Having enough funds to cover operations for a couple of months gives you time and space to maneuver through major problems.

6. Keep an eye on inflation

The combination of a pandemic, supply chain issues, and monetary policy has led to high inflation. The last time businesses had to deal with significant inflation was in the late seventies through the early eighties. Most small business owners have never dealt with this degree of inflation and are unprepared for it. Here are three strategies to help with this challenge.

• Update your accounting system. Business owners must keep accurate and up-to-date accounting. Data must be entered regularly. At a minimum, update the information every week. Keeping an accounting system is tedious but necessary. An up-to-date accounting system’s information allows you to implement the following two strategies.
• Check profit margins regularly. Supplier and labor costs change frequently. These cost changes affect the profitability of your business. Check your profit margins at least once per month to ensure that your business meets your profit expectations Take corrective action if the profit margins do not meet your expectations.
• Ensure your pricing retains profit margins. Update your pricing list regularly to keep pace with rising inflation. Ensure the sales team is up to date with new pricing, and review all proposals against expected profit margins.