If you own or operate a small business — especially one that specializes in producing and selling goods — then you're well aware of how integral the supply chain is to keeping everything running smoothly. Despite its pivotal role, supply chain issues can sometimes arise unexpectedly. And there's little a business can do in reaction to disruptions after the fact, with no plan in place. However, taking a holistic approach in managing finances can help hedge the risks that businesses face when it comes to their supply chain.
Itamar Chalif, Vice President, Business Banking Officer at Rockland Trust, advises his business customers on how to weather the unpredictability of supply chains with three core strategies that can preempt the negative effects of a disruption:
We’ll explore these time-tested tips in greater detail below, but before Chalif shares his strategies for navigating potentially volatile supply chains, he first encourages his clients to consider their business decisions in a broader context.
A good financial strategy is more than just about the money, he says. For instance, business owners should do their best to anticipate potential supply chain snags down the line. By listening for insights into inflation, changes in supply chain regulations, and any other economic, political or international factors that could negatively impact the supply chain, business owners can develop a sixth sense on when to pivot their strategy. Keeping a finger on the pulse of what's happening in your respective market can help provide the foresight to brace and prepare for potential, pending disruptions. One good resource is our Commercial Economic Insights, which provides a clear perspective on the current happenings of the U.S. economy.
State of the Supply Chain
Virtually every industry can feel the effects of a disrupted supply chain. In fact, regardless of size all businesses are affected, particularly those in the manufacturing and production industries. It also depends on where your business operates in the supply chain phases.
The five main supply chain phases are:
Issues could arise, for instance, at the warehouse level, during transit at the transportation level, or could occur farther upstream where businesses procure raw materials. Each phase holds its own specific issues, and small business owners should familiarize themselves with each level intimately.
Overcoming Supply Chain Challenges
Chalif and other business bankers at Rockland Trust work with clients to troubleshoot common supply chain issues so that their businesses can thrive, despite potential setbacks. Let's review the three strategies we've mentioned above in greater detail.
Strategy 1: Find New Supplies
If your normal source for materials (raw, manufactured or otherwise) dries up, you'll need to look elsewhere for those items. It’s a good practice to have a diverse group of suppliers so you aren’t putting all of your eggs in one basket. With this larger network, you’ll have other resources to tap into if times happen to get tough.
Strategy 2: Order Inventory Earlier and In Larger Quantities
Sometimes the best policy is simply to be prepared. Should you read in the news or through some other reliable source that there could be an interruption in your supply chain, you'll be able to better weather this snag by dipping into your reserves. This approach does not come without its own risks, however. You'll want to work with banking advisors to mitigate any cash flow issues (e.g. investing too heavily in a good you may or may not need right away), storage constraints (will you have to increase your warehouse space, for instance, should you decide to carry more of a certain material), securing these goods from theft and protecting them from getting damaged.
Understanding Cash Flow Cycles
Before we explore Strategy 3, it's important to understand your business's typical cash flow cycle. Under normal circumstances, these cycles are predictable. When there's a disruption in the supply chain, however, the cash flow cycle can break or become unpredictable.
A typical cash flow cycle looks like this:
It’s always important to free up cash to hedge against setbacks. For example, when a contractor is building a development, they have multiple different supplier working on the project with them all at once. In the scenario that the plumber is experiencing a shortage in piping and is unable to complete their work, the contractor consequently cannot sell the development as expected. The contractor still needs to pay the other suppliers for their work, as well as other carrying costs.
Strategy 3: Take Out a Business Loan to Free Up Cash
You can increase your working capital through lines of credit or permanent working capital loans. While the former provides the business greater repayment flexibility, the latter allows the business to fix the rate and avoid potential higher financing costs. It could be wise to take advantage of both types of financing if possible for your business.
