Interruption of supply chain is painful for companies and consumers
BY NANCY DAHLBERG
If your small business is experiencing supply chain interruptions, you are not alone. Not a week goes by that I don’t hear about another small business experiencing supply chain issues.
Throughout the Treasure Coast, manufacturers are struggling to keep up with their clients’ demands. One in particular has been put on a wait list for more than15 months as it waits for a key component [truck chassis] for the equipment it manufactures.
These wait times are creating many problems including cash flow, productivity, long lead times, lower margins and loss of business.
According to a recent Federal Reserve survey of 1,104 CFOs across 14 sectors, small businesses have lots of company. Among large and small businesses, nearly 90% said they face extraordinary cost increases because of supply constraints with more than 60% expecting the trend to persist at least into the fourth quarter of next year.
Companies are dealing with higher prices by reducing profit margins, cutting costs, substituting or eliminating products, adding contingency clauses to contracts and turning down work, according to the survey by the Fed district banks of Richmond and Atlanta and the Fuqua School of Business at Duke University.
They are also diversifying supply chains, attempting to increase inventories, switching to suppliers closer to the U.S. and moving products by air instead of by ship. Still, according to economists, those adjustments “will likely increase the cost of production over a longer period of time.”
Supply chain issues are weighing on sales, with 55% of the CFOs reporting lost or delayed sales equivalent to an average of about 5% of 2021 sales revenue, according to the survey. Smaller companies reported an average 7% reduction in sales revenue.
Seven out of 10 companies are struggling with supply constraints that are increasing costs, delaying production and shipping, and impairing efforts to meet demand, the survey found.
“After squeezing profit margins, the only place these pressures can go is into higher selling prices,” economists wrote.
So, what are small businesses doing about it?
Some are trying to wait it out. They are also looking beyond their usual channels to find relief. When companies are able to get supplies, they are likely paying more and they either absorb the added cost or pass on the cost to consumers. Some businesses have started adding supply chain surcharges to the bill.
“What has worked for the last 20 years, will not work for the next 10,” said Duane Reiff, president of Global Source International Inc. and a manufacturing specialist with the Florida SBDC at IRSC.
“Companies need to be innovative and look at other options through this global supply chain breakdown. Companies can look for other manufacturers in their geographical area to help in the production or supply of key components and they could possibly source another option for the manufacturing needs they require to fulfill customer orders.”
The good news: Price increases due to the supply chain are likely temporary. But how long is temporary?
“Many companies have not passed on all of their direct and indirect increased costs and are settling for a lower margin,” Reiff said. “Companies need to keep a close eye on their costs and pass on as much as possible to their clients to preserve their own margins. This will help in their cash flow situation.
“This supply chain breakdown will eventually be corrected, but the strong and innovative companies will flourish and come out on the other side with increased market share and profitability.”
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