6 Supply Chain Risks Worth Taking
From technology investments that stretch budgets to supply chain partnerships that share proprietary information, these moves may give small businesses pause. Here's why they should dive right in.
At Chocolate Pizza Company, a gourmet chocolate gift company, quality Swiss-style chocolate is the "linchpin in our supply chain," says Ryan Novak, owner of the Marcellus, New York-based company. "Any disruption in this commodity could seriously jeopardize our small business."
When Novak purchased the business in 2010, he bought chocolate as needed because finances were tight and sales modest. That meant he typically paid premium prices for both chocolate and delivery.
Sales quintupled in three years. A sweet shift, but the practice of buying chocolate just in time limited response times for large orders and cut into margins.
Still, the economy remained sluggish and continued growth wasn't guaranteed. Novak had to decide whether he and his team could grow sales fast enough to cover the investment needed to procure larger quantities of chocolate. Similarly, could he negotiate cost reductions significant enough to allow Chocolate Pizza Company to become more competitive and pitch to higher-volume customers?
Novak decided they could. "We went from buying about 20,000 pounds of chocolate annually to more than 100,000 pounds," he says. The next step: upgrading equipment so they could efficiently use the larger inventory. And after that, "we had to go sell," Novak says.
Sell, they did. "In a short window, we went from small-town chocolate shop to emerging brand with national sales," he says. As costs dropped, Chocolate Pizza was able to capture business from major companies, including CVS, BJ's Wholesale Club, and HMS Host. The decision to procure a larger volume of chocolate set in motion additional investments that accelerated production capacity and fueled greater growth. "But the key was gambling on stabilizing our chocolate supply chain," Novak says.
When thoughtfully evaluated and executed, supply chain moves that contain some risk can propel small shippers to greater growth and success. Here are a few risks to consider taking.
1. Go global
Of the nearly 295,000 companies that exported from the United States in 2015, 97.6% were small to mid-sized businesses (SMBs), according to the Small Business Administration. These SMBs accounted for nearly one-third of the $1.3 trillion in exports that year.
Exporting not only opens a small business to additional markets, but it can boost their sustainability by diversifying revenue.
The thought of exporting may appear daunting, especially to an SMB that lacks the resources to dedicate multiple employees to international operations. Several steps can help.
One is setting aside time to assess the market: Where will your product fit? Who are potential competitors?
Another step is estimating the impact on the supply chain and operations. For instance, does it make sense to find suppliers within the market to which you're exporting? What duties and taxes will apply?
Knowledgeable partners can provide shippers with assistance and advice on exporting. This might be a third-party logistics (3PL) provider, a university professor, and/or an agency such as the U.S. Commercial Service, which is the trade promotion arm of the U.S. Department of Commerce's International Trade Administration.
2. Invest in agility
Investments that boost an SMB's agility and allow it to quickly respond to customers can pay off. "Agility is where SMBs can differentiate," says Peter Bolstorff, executive vice president of the Association for Supply Chain Management, a trade group.
Consider Artaic, a Boston company that designs and fabricates custom tilework, creating mosaics from glass, porcelain, and stone. The best tile materials come from various locations worldwide; little is produced in the United States. Artaic's supply chain extends to about one dozen suppliers on three continents.
At the same time, shorter lead times help Artaic win business. However, every project is custom, eliminating inherent predictability in the company's tile consumption. "Since our supply chain is global, inbound shipments can easily take three months including production times and sea freight transport," says Ted Acworth, Ph.D., founder and CEO of Artaic. Given the tiles' weight, air freight tends to be cost prohibitive.
To achieve four- to eight-week lead times, Artaic worked with the University of Massachusetts, Amherst, for four years to develop a predictive inventory-ordering scheme. To help cover the cost, Artaic applied for and received a National Science Foundation Research grant, which helped support a Ph.D. student and faculty advisor.
With its new system, Artaic can order tile regularly, and before it sells its mosaics. Once a mosaic sells, Artaic likely will have all or most of the needed tile feedstock in house. "We've vastly increased our tile availability percentage, utilizing low cost and environmentally more favorable ocean shipping instead of air shipping," Acworth says.
3. Build supply chain talent
It's not just systems and technology that are critical to supply chain effectiveness. People are, as well. Yet some smaller shippers hesitate to invest in strong supply chain talent.
"They often look at supply chain as a cost center, not an area where they can build a competitive advantage," says Eric Dunigan, president and co-founder of Arrive Logistics.
Qualified supply chain professionals, however, are key to helping a small organization leverage its supply chain to better compete.
4. CONSIDER VERTICAL INTEGRATION
Annie and Michael Murphy own Eco Relics, a Jacksonville, Florida-based company that reduces landfill waste by reclaiming wood and salvaging usable building materials and then selling them. Eco Relics also offers antiques, hardware, and other items.
The Murphys recently invested several hundred thousand dollars in equipment, including mammoth saws, a drying kiln, and a slab planer. These tools will allow them to more efficiently produce wood slabs that they get from local tree services, trees felled after a weather event, and other sources. "There's an art to using reclaimed wood," Michael Murphy says, noting that the sizes and shapes are unpredictable, unlike the wood sold in big-box stores. And without the kiln, slabs can take the better part of a year to dry and are more vulnerable to bugs.
The investments were substantial ones for the six-year-old business. However, the equipment not only helps Eco Relics further its goal of repurposing wood and other building materials, but the vertical integration provides a supply chain competitive advantage.
"There are millions of antique and building supply stores," Michael Murphy says. The market for recycled and upcycled wood and building and other materials "is a niche market but a fairly big niche," he adds.
Moreover, few companies are vertically integrated and thus can meet demand with the speed Eco Relics now can offer. Say a storm knocks down a tree in a homeowner's yard, and they would like to use the wood to make a bookshelf. "We can take it from log to finished furniture," Annie Murphy says. "This makes us stand out."
"In today's market, it is essential for businesses to reframe customer empowerment as an opportunity to offer additional value and create a more intimate and trusted relationship," notes Darren Cockrel, president of UPS Global Logistics and Distribution.
5. Partner with supply chain experts
For an SMB, going it alone can feel safer than committing time and money to partner with other firms. However, shippers that try to do everything themselves often end up underinvesting in their supply chains, says Eric Dunigan, president and co-founder of Arrive Logistics. The result? Their supply chains often strain and then break as the business scales.
Strong partners, whether 3PLs, consultants, academics, or others, "can give SMBs the reach and resources that they might not otherwise have," Dunigan says. SMBs are better able to leverage their own capabilities and spend more time on their businesses.
6. Develop strong relationships with a few customers
The idea that an SMB should diversify its customer base, whether through exporting or other tactics, certainly holds merit. If one client runs into trouble, the business is less likely to lose a major portion of its revenue base.
At the same time, successful SMBs often concentrate on a handful of customers. This approach allows the business to focus its time and attention on a few key relationships, rather than manage multiple smaller ones.
As important, an SMB often can tap into the operational expertise of its key customers, many of whom are likely to be larger and more established. "Customers can advise on selecting suppliers, managing quality, moving forward with innovation, and improving fulfillment and delivery," says Mikaella Polyviou, assistant professor of supply chain management at Arizona State University.
The SMB also needs to monitor the relationship and the customer's financial performance, so it can stay abreast of any potentially troublesome changes.
Playing It Safe
While making moves that contain some risk can pay off, preparation and research are key. "Take time to ask questions, connect with trusted industry peers, and conduct your own research to reduce potential business risks," says Darren Cockrel, president of UPS Global Logistics and Distribution.
As part of the analysis, weigh total lifecycle costs against the estimated impact to revenue. Identify potential issues that could arise, and how the decision is expected to help the business execute on its strategic business goals. If the investment will require a heightened sales effort or a change to operations, how can the organization achieve that?
SMBs can also mitigate risk by using tools that provide additional control. For example, digital systems enable businesses and their customers to track and manage shipments in real time, so they can respond quickly to deviations from plan.
Finally, it's rarely necessary to tackle an entire project at once, says Peter Bolstorff, executive vice president of the Association for Supply Chain Management. It's often just as effective and more prudent for SMBs to break a project into smaller components, complete one or two, assess, tweak where necessary, and then move to the next phase.
"Think big, start small, and scale fast," he says.