SUPPLY CHAIN OPERATIONS AND SUSTAINABILITY

BY DANA C. RIESS, CMA, CFM, CSCP, CPIM

Published June 1, 2022 in Strategic Finance

Small companies can use their natural agility to tackle supply chain issues and sustainability simultaneously. 

Supply chains around the world have been disrupted due to a variety of reasons, including COVID-19, and many small businesses are struggling to just survive to the next day. Conditions aren’t improving, and for small businesses this means not only higher costs, but critical leadership attention focused on reacting to supply chain problems instead of on customers, sustainability, and other proactive business improvements. What are some of the current supply chain problems? And what strategies can small businesses implement to manage this supply chain turmoil while also attempting to address improvements such as sustainability? 

TRANSPORTATION 

Labor shortages, increased demands, port congestion, and other issues have driven freight and transportation costs sky-high. Further impacting the supply chain for small businesses are large fulfillment companies like Amazon that require only small batches of inventory be held at their warehouses. This forces small businesses to have more frequent and incomplete carrier loads, increasing their costs. 

To overcome some of these transportation challenges, a small business could utilize third-party parcel negotiators to help reduce parcel costs or shift to third-party logistics (3PL) services, which have volume purchase agreements with lower transportation rates. 3PL can also make costs (those that can be fixed like hiring internal people or securing equipment to do package assembly) variable for a small business operation. Trusting a 3PL specializing in these activities allows for more management focus on longer-term sustainability in transportation. 

SUPPLY 

Suppliers are experiencing large demand spikes, long lead times for raw materials, and uncontrollable delivery schedules as a result of the combination of post-COVID consumer spending, labor shortages, and transportation disruptions. This dramatic fluctuation in demand creates a “bullwhip” effect on suppliers and customers, whereby customers that can’t get timely deliveries in the quantities needed increase their order volumes beyond forecasted demand to overcome perceived near-term product shortages. This then adds pressure on the supplier to produce additional quantities, and so on. The situation is especially problematic for small business manufacturers not able to easily finance the buildup of product to meet demand surges. These businesses are then stuck with potentially obsolete inventory when demand for a particular item collapses. Even simple metrics, such as economic order quantities, can be distorted and inaccurate in these conditions. 

Mitigation of the supply problems begins with the realization that companies may need to hold more inventory to protect against the myriad of disruption scenarios. Higher inventory levels are counter to most sustainability recommendations and also represent a sea change in philosophy; for more than 30 years, inventory strategies have been based on low absolute levels of on-hand materials and driving reduced working capital requirements, Just-in-Time, or kaizen methods. While maintaining working capital as low as possible is still a winning tactic, it will now be tempered by the need to hold more inventory. Holding more inventory means more storage costs, depriving a company of a lever to lower its carbon footprint. 

Achieving sustainability goals will be more difficult when forecasting is less accurate. With supply chaos, the data accuracy necessary to effectively model customer demand may become unreliable, resulting in manufacturing or purchasing compensating by overproducing or overbuying. Lost sales or delayed purchases may create false signals in the demand data, resulting in inaccurate sales, cost, or cash flow forecasts. To improve forecasting, large companies have begun to use AI to create digital twins of their supply chains. This software is now becoming affordable for small and midsize businesses. 

OTHER TACTICS 

Sustainability for a small business is easiest to implement when there is a clear cost reduction or measurable service improvement. Traditional key performance indicators should be implemented and, given current supply chain problems, reviewed frequently for suitability and adjusted as needed. In enterprise resource planning systems, lead time and other settings require constant attention and adjustment. 

A reduction of item numbers, both unique product offerings and materials, can drive down the need and cost of overflow warehouse space. Particular attention should be taken to proactively minimize scrap or quality-restricted products to lessen unnecessary holding costs. Operations and finance should emphasize marketing requirements to be clear about the return on investment for every product. For example, unnecessary colors and options that don’t add value should be discarded. Existing lower-margin items should also be analyzed. 

Rationalization could also include previously overlooked areas, such as packaging. Adjusting product design to facilitate common packaging or minimizing extra dimensional charges in shipping, for example, could result in improved volume discounts on packaging and materials purchases, lower delivery and return costs from the consumer, and improved employee productivity through more standard or automated processes—all good tactics. Equally, working to change packaging by using greener or recycled material, or simply reducing the overall packaging, can reduce the cost of goods. 

After rationalization, consider secondhand market sale of obsolete inventories or equipment at what could be a premium price, given overall shortages and supply-demand mismatches in the marketplace. Not only does this represent an opportunity for cash inflow, but it reduces carrying costs and keeps items out of landfills. 

In the medium and long term, small businesses should work to use suppliers closer to home. Locally sourced materials increase resiliency to transportation disruptions. It can also strengthen local communities, which in turn creates an environment for happier employees (which leads to higher retention). 

Concurrent with bringing on nearby suppliers, it’s time to do a detailed assessment of what innovative technologies can be implemented to bring outsourced production in-house. 3D printing (additive manufacturing) technology has accelerated rapidly in the last few years, and 3D printers now are lower in cost, faster, and capable of using many different raw materials. Using such technologies can reduce not only supply chain risk, but also transportation costs and environmental impacts. 

SUPPLY CHAIN SOLUTIONS 

Both vendors and business customers are interested in solving supply chain problems. These collaborations help all participants, and larger entities often have resources and financing to help small businesses. For example, Walmart is working with CDP, a nonprofit that runs the global disclosure system that helps with management of environmental impacts, and HSBC Bank on changes that provide smaller suppliers access to special financing for their sustainability efforts. 

Because of the unruliness in supply chain management, simple survival is the order of the day for small businesses. Improvements in resiliency, sustainability, and cost reduction are difficult to find while a small company’s total focus is just to manage the day-to-day fires. But it’s worth remembering that small companies can have a special nimbleness in their response to change or innovation.