The Supply Chain Challenge
Businesses are bolstering inventories and locating backup suppliers to deal with product shortages and delivery delays in the wake of continuously rising prices.
By Phillip M. Perry
Businesses of all sizes are grappling with persistent supply chain issues first disrupted by the COVID-19 pandemic and exacerbated by inflation and Russia’s invasion of Ukraine. To deal with product shortages and shipping delays, many companies are trying to beef up inventories and wooing backup suppliers before prices rise even higher and to help close the gaps when shortages arise.
Product shortages and shipping delays—and associated price hikes due to increases in the costs of materials and labor, as well as growing demand—have been no strangers to companies in recent years, thanks to international tariffs. What had been an exercise in efficient materials distribution, though, morphed into a full-scale crisis with the arrival of COVD-19 and its effect on labor shortages, bottlenecked ports and shuttered production facilities.
In the international flower industry, when much of the world went into lockdown because of the pandemic in 2020, many flower farmers were forced to discard their crops, and, in 2021, because of an uncertain future, they scaled back planting new crops. The effects of those actions are still rippling through the industry today. Second, poor weather conditions in South America and droughts in California have further decreased crop yields. And now, in 2022, with weddings and events again being scheduled in large numbers, the demand for many types and colors of cut flowers often outpaces the supply. Compounding all this are shipping delays, which often result in highly perishable products languishing past their prime in coolers at airports or in warehouses. The hard-goods segment of the flower industry, from manufacturing to wholesale distribution, is dealing with the same supply chain challenges as virtually every other industry, causing shortages and shipping delays of necessary products for retail florists and their suppliers.
The return of a vigorous economy—including, in the flower industry, a return to spending on lavish weddings and events—has only increased pressure on an already thinly stretched delivery structure as businesses and consumers have accelerated their purchasing. The U.S. inflation rate, which has more than sextupled from 1.4 percent in January 2021 to 8.5 percent in July 2022 (down from a high of 9.1 percent in June), has prompted many businesses to increase their buying of goods even more, before additional price hikes kick in. Finally, Russia’s invasion of Ukraine on Feb. 24 of this year caused additional shipping disruptions that have fractured vital sections of the global supply chain.
Worldwide, these forces have coalesced to create a challenging environment for businesses looking to balance the dependable delivery of products with the need to keep inventory at manageable levels. “Everyone in manufacturing and wholesale distribution is dealing with supply chain disruptions,” says Bill Conerly, Ph.D., principal of Conerly Consulting in Lake Oswego, Ore. “Many companies tell me the problem is getting worse as pent-up demand creates additional pressures.”
The supply chain imbroglio has engaged a broad spectrum of industries. “For a number of years, our member companies have been dealing with disruptions caused by factors such as tariffs and higher energy costs,” says Tom Palisin, executive director of The Manufacturers Association, a York, Pa.-based regional employers’ group with more than 370 member companies. “Companies in just about all sectors have experienced pauses and shutdowns. Some have even gone out of business.”
Labor shortages are one of the most persistent causes of distribution slowdowns. “One banker told me that his four manufacturing customers would each hire 50 additional workers if enough applicants showed up,” Conerly shares. “When a company I work with in Portland was awaiting a shipment of brass from Los Angeles, there was no driver for the truck.”
The reasons for labor shortages are varied. “Part of the problem is that many people are not yet willing to come back to work,” Conerly notes. “A larger issue is demographics: Older people are retiring, and younger people don’t want to go into dirty, noisy factories. And then you have government cash payments for people who get laid off. And, finally, there are childcare issues.”
While not applicable to many segments of the flower industry, automation has increased as a result of the labor shortage, in order to produce goods with fewer people. “In recent months, there’s been a surge of orders for capital equipment,” says Conerly. “I think a lot of this spending is intended to replace empty positions with machines. The idea is ‘If I can’t hire a person to assemble this product, maybe I can buy a robot to do it.’ And I think that’s a good strategy.”
A decline in the cost of automation has helped fuel this trend. “The cost of labor has gone up while the cost of electronic equipment has gone down,” Conerly adds. “Something that did not pencil out a few years ago may well do so today.”
Companies are responding to supply chain challenges by doing more with less, running machinery beyond its prime and collaborating with vendors to predict shipping delays. “The pandemic has really highlighted the need to develop strategies to mitigate potential disruptions in the flow of critical components,” says Palisin. “That means doing a deep dive into the supply chain, mapping the geographical locations first-tier suppliers and learning about the reliance of second tier, as well.”
Pandemic-related shortages have affirmed the need for backup vendors, even for lower-volume items. “Instead of relying on one supplier, a company might need to have three, to manage risks,” says Jim Hannan, CPA, practice leader of the Manufacturing, Distribution & Logistics Group at consulting firm Withum Smith+Brown. “We expect this trend to continue with the advent of Environmental, Social and Governance (ESG) standards at larger companies.”
When deliveries are spotty, companies are tempted to keep more stock on hand. “Companies should no longer rely on just-in-time inventory strategies, which too often have become just-too-late failures, and they should stockpile more supplies,” says John Manzella, a consultant on global business and economic trends, based in East Amherst, N.Y. “This approach reduces efficiencies but favors risk reduction.”
Companies are willing to turn upside down the traditional views of inventory control, given the increased risk of shortages and customer goodwill. “Many companies are investing more cash in inventories, and banks seem content with lending against that,” Hannan says.
While businesses must pay the price for bolstering inventory levels, such costs must be balanced against operational expenses such as the need to pay higher prices for goods when a company scrambles to fill customer orders—or lost revenues when an unhappy customer jumps ship for a competitor. “Risk mitigation has become more important than efficiency gains,” says Manzella.
Furthermore, three historic costs of inventories—interest, obsolescence and shrinkage—no longer universally apply. “The interest rate you earn for having cash in the bank now is approximately diddly-squat,” says Conerly. And obsolescence would only be an issue if something was expected to go out of fashion. “Many products in short supply today are the same products as last year’s models, and they are not going to go obsolete.” Shrinkage, Conerly adds, is not an issue in some industries and, in others, can be controlled with requisite security steps.
Cheap or not, inventory storage must be allocated selectively. “Companies need to think about ‘what might be in short supply when we try to ramp up our production?’” Conerly continues. “They may well buy a year’s supply of a relatively cheap item that is a small part of what a company uses but is vital to producing a finished product.”
Despite the inventory mind shift, many business owners feel that a return to the days of warehouses bulging with inventory is not in the cards. “Everybody has become accustomed to reducing costs by minimizing touch points, moving goods from the ship straight to the distribution facility and on to the customer,” says one operator. Indeed, cooperative efforts with suppliers and customers may well help bring back a greater emphasis on “just in time.” “I believe that the economy will eventually get back to that just-in-time concept as market disruptions lapse and the continued collaborative partnerships with vendors and suppliers remain a priority,” Hannan proffers.
The Road Ahead
Businesses face a conundrum as the world emerges from the pandemic: How quickly will demand increase for products and services, and will the increase be steady or erratic? The wrong answers can result in a pile up of inventory or lost revenues and customers. “The risk is especially great for goods requiring long production lead times [such as cut flowers and plants],” Hannan notes.
The solution, says Hannan, is to develop a playbook to address possible disruptions and evaluate risks up and down the supply chain, then develop a plan to address those risks. And management must grapple with other unknowns such as whether the surge in the prices of manufactured goods can be passed along to consumers.
All this may reduce profits until everything shakes out. “Revenues will probably hold up or even increase because of higher demand, but margins will likely take a hit because of increases in the costs of materials, labor and inventory,” Palisin says. “It’s a highly unusual situation where all these cost increases happen at once—and at a time when tariffs are still in place. Companies just can’t pass along everything to customers.”
As for the road ahead, Conerly anticipates a gradual improvement in the operating environment. Many business owners and managers concur, believing that, with the pandemic coming to an end, now is the time to find all possible ways to deliver quality service and, thereby, gain market share. Says one, “We’re assuming the worst and hoping for the best. Our overriding goal is to protect the health of our people and service our customers. Those things haven’t changed, and we’ll do whatever it takes to get it done.”