This article was contributed by our friends at Inc.
Bigger isn’t always better when it comes to logistics.
As a startup owner, you are forgiven if you feel powerless in addressing supply chain issues, lacking the financial clout and deep supplier networks enjoyed by the Walmarts and Procter & Gambles of the world.
In reality, though, bigger isn’t always better when it comes to managing your supply chain. Smaller enterprises have one very big advantage: Their ability to be nimble and flexible with suppliers. Large multinationals, by contrast, are often locked into certain geographies and partnerships that can be hard to unwind.
Smaller players can leverage this advantage to build supply chain resilience into their DNA, while borrowing some of the smartest practices of larger firms to improve their supply chain management and efficiency. The following are five ways to achieve that.
1. Identify and hedge risks.
Small enterprises should be delving deep into their supply chains to understand where the vulnerabilities lie and how they can take action to hedge those risks. Many firms make the mistake of stopping at their primary suppliers, thereby missing the risks and opportunities present in the much bigger pool of suppliers of those suppliers — and the suppliers of those suppliers (also known as tier one, two, and three suppliers).
This reality has been highlighted by the impact of the Ukraine conflict on global supply. While there are fewer than 15,000 tier-one relationships with Russian entities, for example, there are 7.6 million tier-two links, affecting at least 374,000 businesses globally.
Once you’ve assessed your downstream exposure, you can start to identify new partners and geographies to build supply chain diversity and resilience. Ensure you build flexibility into partnerships with a minimum of contractual obligations so you can switch suppliers on a dime if needed.
2. Simplify product lines.
While diversity of supply is a strength, it can turn into a weakness if it’s being used to support an excessively broad range of products. The more product types you have, the greater the risk of being disrupted by a shortage of components due to supplier or logistical problems.
Culling products can make for tough decisions, but it’s an invaluable strategy for improving operational execution and building supply chain resilience. That’s why a number of large companies have been moving to streamline their product range in the face of global logistics problems. Coca-Cola, for example, cut its Odwalla juice brand in 2020 as part of a drive to focus on core products.
3. Focus on working capital.
One of the big lessons of the supply crunch has been to move away from the just-in-time inventory model. But that has created its own risk, reducing the amount of working capital as more funds are tied up in securing inventory and raising the chance of a cash crunch.
This requires an extra focus on managing cash flow, ensuring you are being paid as fast as possible while not making payments unnecessarily quickly. Smaller companies have a tendency to be inconsistent in this area, often paying suppliers long before the contractual obligation and allowing customers to get away with long delays in settling invoices.
4. Optimize your workforce.
Another key advantage that small firms enjoy over large ones is the ability to know in detail what each and every employee does and how they add value to supply chain operations. Small business owners should know the value of every employee to ensure they are not falling into the trap of Parkinson’s law (which often affects large companies): Work expands to fill its allotted time. They can then act accordingly — by redeploying people, automating processes, and digitizing systems — to ensure that each person is contributing their maximum value.
5. Control logistics costs.
The spiraling cost of logistics — from shipping containers to fuel prices — has put a huge premium on the ability of companies to manage the cost of moving their products. Companies should be doing everything they can to make their logistics operations lean and efficient. Sending out a few full truckloads to nearby customers is far more cost-efficient than using partial truckloads to reach customers on the other side of the country.
Small businesses often fall into the trap of taking any new business they can get, even if the price doesn’t justify the overhead costs of delivering the product. They need to understand everything that’s a cost-driver in the business and reflect that in their pricing, with adequate escalation clauses to guard against further cost spikes.
Don’t lose confidence.
The biggest, best-resourced companies in the world have struggled, and often failed, to cope with the impact of global supply chain disruptions over the past two years. But don’t assume that because you’re the little guy you’re going to struggle too. The best way forward for startups is to double down on their strengths — innovative, flexible leadership and operations — to excel in a frustrating business environment.