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.
There are core strategies that can preempt the negative effects of a disruption:
1. Find new supplies (before original supply chain sources have experienced challenges)
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.
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.
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.
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.
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.
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.
The business bankers at Rockland Trust work with clients to troubleshoot common supply chain issues so that their businesses can thrive, despite potential setbacks.
Itamar Chalif is Vice President, Business Banking Officer at Rockland Trust,