Rapid growth in the US economy and the lingering impact of the pandemic on global supply chains have created problems for almost every industry.
The construction industry has been impacted by shortages of certain glues used to make composite building products leading to escalating construction costs and lengthy project delays.
The automotive industry has been impacted by the well-publicized shortage of computer chips, which is caused by the shortage of chip manufacturing capacity. Underlying causes include shortages of certain critical raw materials and a very small number of chip manufacturing equipment manufacturers.
Even restaurants have been hit with shortages of food containers for to-go orders because of shortages of natural gas feedstock for container manufacturers.
Nearly every business has been beset by delays in the delivery of everyday supplies that can be traced to a shortage of workers in the transportation and distribution industries.
There aren’t enough workers to load trucks at the warehouses or drive them down the highways. If essential supplies are available, they are likely to be higher-priced and available only with extended delivery dates.
How can businesses respond to these challenges?
First, recognize that our supply chain problems took a long time to develop, and they’ll take a long time to resolve.
You can’t just wait it out and hope for the best. If your business hasn’t already done so, you need to thoroughly re-examine your business model in light of your new reality and adjust accordingly. The “new normal” will be with us for many quarters and will only end once global supplies catch up with current elevated demand or demand falls off due to a recession.
You may not have examined your business model in awhile since we’ve had relatively stable economic conditions for quite some time. Stable growth, moderate labor cost increases, the ready availability of supplies, and ever-improving transportation costs have been the norm for at least ten years in most industries. Most businesses have responded to those economic conditions with just-in-time inventory policies and the ongoing drive for ever-more efficient operations. However, all of those assumptions are now open to question. You’ve become more efficient but maybe also less resilient.
So, start at the beginning:
? What does your business do, who do you do it for, and what value do you add?
? What makes your offerings compelling in the mind of your customers?
? How do you help solve their “pain points”?
? What alternatives do they have?
Question your assumptions:
? Is what we’ve always assumed true anymore?
? Is how we’ve always done things still necessary?
For example, restauranteurs offer a mix of food, beverages, and service to their customers to provide daily nutrition and a sense of community, belonging, varying experiences, and social opportunities.
Most restaurant customers could probably prepare food at home more cheaply or dine elsewhere. Why do they choose your particular restaurant?
Second, once you have a firm answer to those questions, you can think about your slate of products and services and how you deliver them.
? What do they tell you that they like when you talk to your customers?
? What are your hot sellers?
? Which ones do you think are making you money?
Start to address your supply chain issues by supporting your core products and services, which you are known for. If your menu of offerings has grown over the years, take a hard look at which items you might let go of in support of your core offerings. If your supply chain problems are only impacting a few of your offerings, ask yourself if you need to continue to offer those products and services or if you could shift to something similar. In our restaurant example, if avocados are expensive and hard to get, do you need to continue to offer a guacamole burger? Could you swap it out for a buffalo ranch burger instead?
Third, after re-examining what you do and how you do it, think about who you buy from.
? Are there plausible online alternatives?
? Are there reliable alternative suppliers who aren’t located nearby?
? Can you spread around your purchases to keep more suppliers interested in keeping you happy?
You may not have had to devote much of your energy to selecting vendors lately because things have been going smoothly for a long time. Now is the time to put in effort on the supply side again. You may have to think creatively and take what supplies you can get, adjusting your offerings accordingly.
Looking to pay the lowest price isn’t necessarily the best strategy in times like this. Instead, focus on who can deliver consistently and reliably. Ask your vendors where they get their materials and how reliable those sources are. You might have to probe a couple of levels deep to find out where the real constraints are. If asked, your suppliers might have some great ideas to mitigate shortages of hard-to-find items.
In our restaurant example, if you can’t get foam clamshell to-go boxes, can you get boxes made from other materials at a reasonable cost? Can you even make a virtue out of switching to alternative products that might be positioned as more sustainable? Ask your supplier reps how their other customers have solved the problem. They’re often a wealth of knowledge and will likely want to position themselves as an advisor, so let them talk! They may tell you more than they realize.
Fourth, re-examine how you price your offerings.
Your materials costs are not the only thing that’s increased lately. In most industries, the war for talent has led to businesses paying more for good people.
Rents have also increased and will likely head even higher as landlords try to recover their increasing financing costs from higher interest rates.
Cost increases will likely continue for several quarters, pressuring your margins. Fortunately, media attention on inflation has raised everyone’s expectations for price increases.
The Fed’s expansive policies have created record-buying power, so both businesses and consumers are more focused on availability than price. This allows you to raise prices selectively. How much and in which products and services are different for every business. Your CFO can help with this by doing an updated cost study of all your major offerings. You need to know which products and services are still genuinely profitable and which ones are not.
Target price increases to maintain your overall firm profitability, recognizing that some offerings may be naturally more or less profitable than others. Recognizing that your costs will likely be rising over the next several quarters, you should have a strategy to pass those cost increases to your customers in ways that they will find acceptable.
Many businesses will find that alternating price increases among different groups of products will make them more palatable because most buyers don’t buy all your offerings and thus won’t be impacted by all your increases.
It would help if you also tried to research what your competitors are doing, recognizing that they’re likely facing the same cost pressures you are and maybe waiting for you to act before they quickly follow with their price hikes.
Fifth, last but not least, look for ways that you can strategically re-invent your business model.
There is opportunity in every crisis.
1) Do you need all that office space if your people still want to work from home?
2) Does it still make sense to have your fleet of delivery trucks when less expensive next-day delivery service by FedEx or UPS may be available in your area?
3) Can you shave some of your T&E budget if your sales team can connect with your customers via videoconferencing, at least part of the time?
The world has changed in the past couple of years. Think creatively about how you can adjust how you operate. You can bet that your competitors will be doing the same.
About the Author
Bill Palmer has experience with the finances of businesses and nonprofits from multiple perspectives. He was a senior commercial banker in the Seattle market for over 20 years. For the past 16 years, he has been a consulting CFO for over two dozen companies and organizations in the Pacific Northwest. For more than ten years, he has acted as the part-time Director of Finance & Operations at a private school where he has a broad range of responsibilities.
Bill has served his community through financial leadership and through governance roles for a broad range of private and non-profit organizations over the years, including eight years as Board Treasurer for a local charity focused on children’s health issues and as a co-founder of a private school. He currently serves on the board of the Northwest’s leader provider of services to non-profit organizations in transition.