Why Small Business Owners Need To Understand Supply Chain & Risk Mitigation: COVID-19 Edition
As a small business owner, there are always a million things on your mind and plans to be made. How do you draw in new customers? Where can you get extra funding? Is it time for expansion?
But one of the things that’s likely not top-of-mind is the supply chain. How does that work? What happens when there’s a disruption in that chain?
Think about it. As consumers, sometimes our favorite product is sold out, but we know that (eventually) it will be back in stock. As small business owners, the same typically applies. While your vendors and suppliers may run out of an item or two on occasion, the impact of the shortage is minimal … that is until COVID-19.
The coronavirus pandemic and the shortages that have accompanied it have shown us how a supply chain disruption can affect consumers and businesses of all sizes. For consumers, store shelves containing necessities like hand sanitizer, toilet paper, bread, and meat are empty. For small businesses, shortages can be even more serious, causing many unprepared business owners to shut their doors for good.
Whether you’ve had firsthand experience or you’re worried about what the future holds, this post is for you. In this article, we’re going to look at the supply chain and how it’s important to more than just big businesses. By understanding your supply chain, how it works, and how to mitigate risk, you’ll be better prepared for the future, whatever it may bring.
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If you were unaware of the effects of disruption in the supply chain prior to the coronavirus, the pandemic has certainly highlighted problems on a global scale. Let’s look at a big example: hand sanitizer.
As the demand for hand sanitizer has increased, supply has become limited, and consumers are unable to acquire the products they need. Some key materials, such as alcohol, are becoming harder to come by, leaving manufacturers unable to produce hand sanitizers. Even if the manufacturer produces enough to fit the demand, distribution may be a problem, leaving the shelves of many retailers empty. The end result? Consumers are left scouring stores for their much-needed supplies and businesses are missing out on revenue.
Just one disruption in the supply chain can cause problems, but we’re seeing multiple issues that are affecting businesses of all sizes. In the case of hand sanitizer, thousands of businesses (such as distilleries) have registered with the FDA to help fill the void, but there are questions regarding safety issues and unproven claims of these new products.
Your business may be affected on a smaller scale. Let’s take a look at a small local coffee shop, for example. While the business model seems simple — brew coffee and create drinks for customers — there’s actually much more that goes into it. The coffee beans you use are planted, harvested, dried, milled, and roasted. These beans are then typically exported before being packaged and distributed.
At any point, a disruption in the supply chain can cause a problem for your business. Halted or delayed exporting, distribution centers that are short-staffed, and other problems mean that you aren’t getting the coffee you need to serve your customers and earn revenue. This isn’t even counting other critical products that may also be in short-supply — creamer, coffee syrups, sugar, and even toilet paper for your restrooms. In addition to being unable to keep crucial items in stock, items that are available may come at a premium. In other words, prices are going to go up.
With many business owners facing these shortages, it’s become more critical than ever to understand risk mitigation.
What Does Risk Mitigation Look Like For Small Business?
The term “risk mitigation” sounds a bit complicated (and intimidating!), but it’s actually quite simple. Risk mitigation is identifying potential risks that could affect your business, then developing a plan to overcome these risks.
While a global pandemic is an immediate risk, there are other risks to be aware of both now and in the future, such as theft, data breaches, or damage. According to a survey conducted by the Business Continuity Institute and Zurich Insurance Group, 75% of respondents reported at least one disruption in the supply chain in a 12-month period. Of those affected, nearly one out of every five companies went out of business within 18 months.
Looking specifically at the coronavirus, an Institute For Supply Management survey showed that nearly 75% of respondents had faced disruptions as a result of coronavirus-related transportation restrictions, while nearly 80% of respondents believe their companies will be affected in some way by a supply chain disruption as a result of the coronavirus.
With risk mitigation, you can lessen the impact of supply chain disruptions on your business. What should you consider as part of your risk mitigation plan? Let’s explore a couple of ideas.
Identify Risk & Effects
What risks does your business face? Identify potential risks and prioritize them. Which factors are the biggest risks for your company? Using the coffee shop example from earlier, exporting delays as a result of political or economic unrest could spell trouble for your business. If you source items from a smaller local company that’s facing financial difficulties, a bankruptcy filed by the distributor could affect your supply chain. Think about various scenarios and how they would affect your business.
An analysis of your supply chain can give you great insight into reducing costs, increasing efficiency, and mitigating risks. We’ll explore this idea more in the next section.
Work With Reputable Suppliers
While it makes sense to work with low-cost suppliers and distributors to maximize revenue, cost should never be the only factor you consider when choosing where to purchase your inventory. Do your research, and work with reliable, reputable businesses that offer competitive pricing.
To mitigate risk, you should always have a backup supplier (or two) and/or distributors standing by. If you are unable to get the products you need to run your business from one supplier, having another reputable company on the backburner could help you get what you need to keep your business flowing smoothly.
Talk With Your Insurance Agent
In some cases, insurance can play a critical role in mitigating risks due to supply chain disruptions. Talk with your insurance agent about the risks identified in your business and find out what type of insurance your business needs and when it’s appropriate to use.
Keep Lines Of Communication Open
Don’t be afraid to communicate with suppliers, distributors, data management centers, and other business partners. Learn about their risk mitigation plans to ensure they align with yours. Keeping the lines of communication open can help you better manage problems when they occur.
Analyze Your Supply Chain
Whether you’ve been affected by a disruption in the supply chain or you fear that problems lie ahead, you’re not alone. Eighty of the world’s economies have banned or restricted exports in response to COVID-19. Even prior to the pandemic, China reduced its exporting dependency by almost 50% since 2008, while more Americans are pushing to buy and sell more products from American companies. As you could imagine, this affects supply chains and thus puts companies at risk.
To understand your supply chain and come up with a plan for risk management, it helps to perform an analysis of your supply chain. This takes time and research but is critical to avoiding (or at least lessening) the negative impact of supply chain disruptions to your business.
First, let’s take a look at a basic, generic supply chain. Note that yours may vary depending on the industry you’re in, but at least a few of these critical players will sound familiar.
- Suppliers: Suppliers receive the raw materials used to create specific products. The supplier may also act as the manufacturer to create a finished product, or has a partnership with a separate manufacturer. In the case of a coffee shop, the supplier would receive milled, harvested coffee beans.
- Manufacturers: Manufacturers use the raw materials from suppliers to create a finished product. In some cases, the supplier may also be the manufacturer, but this isn’t always the case. In our coffee shop example, the manufacturer roasts the coffee beans, grinds some of the beans for ground coffee, and packages the products.
- Distributors: A distributor purchases the items wholesale from the manufacturer and is then responsible for selling and transporting the finished product to retailers, restaurants, and other businesses. For your coffee shop, you may work with a wholesale distributor that sells a variety of coffee beans, grounds, and other products.
- Retailer: The retailer — you — sells the finished products directly to consumers.
- Consumers: Consumers purchase products from the business at a marked up cost, so the retailer makes a profit.
Again, this isn’t the exact blueprint for every company, but some of this should apply to your business. Let’s take a look at another supply chain, this time for an eCommerce business.
- Consumers: Consumers visit the eCommerce site to place an order.
- eCommerce Site: An eCommerce site features the products that are available to purchase. Consumers can check out, pay for their items, and input shipping information.
- Payment Processors: When a site accepts online payments, they work with a payment processor. The payment processor takes all of the steps necessary to transfer money from the consumer to the business owner.
- Warehouse: The products on the eCommerce site are stored in a warehouse. This can either be an in-house facility or a third-party warehousing company. The warehouse is responsible for finding the ordered items and making sure they’re ready for delivery.
- Shipping: The warehouse may act as the shipper, or it may work with a third-party shipping company. The shipper is responsible for making sure the orders get to the correct destination in a timely manner.
- Consumers: The shipping company delivers the ordered product to the consumer, finishing up the supply chain.
For your business, map out your supply chain, making sure to identify the key players that fill each role. It may also help to create a flow chart showing your supply chain from start (raw materials) to finish (delivered to your customer through mail or in-person). Make sure to note the interactions between each person or organization to fully understand how the process works.
Next, it’s time to dig in and do some research. Research and record key details, such as the names of the organizations, your point of contact, the activities of each link in the chain, shipping schedules, and other important information. Smaller businesses can opt to do this manually, keeping up with data in a spreadsheet, while larger or more complicated business structures may want to automate the process with supply chain analysis software.
And remember, it’s important to keep an eye on global trends. While it’s certainly encouraged to keep up with what’s going on in your own country, understanding what’s happening globally that could impact your supply chain can help you be better prepared.
The Importance Of Inventory Management
Inventory management is an important part of the supply chain. Inventory management simply refers to a system of tracking inventory that leaves and enters your business. Inventory management is important for a number of reasons:
- Prevents Running Low On Stock: By tracking your inventory, you can quickly and easily identify when you’re low on stock. Then, you can order more inventory as needed in order to fulfill customer orders.
- Prevents Overstock: Just as you don’t want to run out of stock, you also don’t want to have too much in stock. Perishable items can go bad before being used, some items may become outdated before being sold, and ordering too much ties up funds that could be used elsewhere in your business.
- Keeps Orders On Track: Make sure that all orders are complete and correct by keeping up with your stock, correctly tracking and labeling products, and taking other steps is key to preventing mistakes.
With inventory management, you can lessen risks such as shortages by knowing what you have on-hand, what you need to order, and other important data.
Fortunately, inventory management doesn’t have to be difficult. There are a variety of POS systems that offer advanced inventory management features. Your inventory management system may even integrate with other software that you already use, making it quicker and easier than ever to track your inventory.
The Ethics Involved: A 101 Primer
Now, if you are currently facing a shortage or fear one approaching in the future, what do you do? Even with a risk mitigation strategy in place, sometimes, it’s just inevitable that you’ll face a shortage. How do you proceed, especially when it comes to your customers?
It’s important to remember that no matter what, you have to remain ethical. Increasing your pricing because your cost of supplies has risen is okay. Price gouging to unfairly take advantage of customers in the event of a shortage is not.
What’s the difference? Here’s an example:
Your coffee shop sells a cup of coffee for $2. The supplies to make one cup of coffee cost $1. You make a $1 profit for each cup of coffee.
Now, export limitations and prohibitions have affected the cost of your supplies. Now, a single cup of coffee costs $2 to make. If you continue to charge just $2 to your customers, you’re only breaking even. You opt to raise your prices to $3 to cover the cost of supplies plus make a reasonable profit.
Now, let’s say the cost of supplies has risen to $2. Other coffee shops in your area have closed their doors temporarily or permanently. People in your area want coffee. You take advantage of this and start charging $10 per cup of coffee.
Will customers still buy from you? Sure. But it’s important to remain ethical and fair. While you may be making a profit now, even your long-time customers may turn to another business when available. So, while it’s perfectly reasonable to raise your prices as your costs and demand increases, it’s important to sit down, figure out the numbers, and think about the long-term effects of raising your prices.
Prepare For Another Disruption
If someone could see into the future, I bet most of us would want to know when our personal and business lives will return to “normal.” There are still so many unanswered questions about the pandemic: Are we reopening too soon? Will a second wave hit as some have predicted?
Unfortunately, not even the experts are sure of what’s to come. While the future remains unclear, however, there are a few steps small business owners can take to be prepared.
Keep up with what’s going on around the world. Take note of what’s happening not just in your own country, but nations around the world. Are coronavirus infections increasing? Are numbers expected to increase again?
Understand your supply chain, the importance of inventory management, and the risks that your business faces. Create a risk mitigation plan, look into inventory management software, and do your research to ensure that if another disruption occurs, your business is prepared. Good luck!