Supply Chain Challenges: Strategies for Manufacturers & Distributors

There isn’t a business or consumer that has not experienced the effects of today’s global supply chain disruption. From lumber to microchips, breakdowns in the supply chain have wreaked havoc on all market sectors and on businesses’ ability to meet customers’ needs and expectations.

In a 2022 Grassi survey of mid-sized manufacturers in the food and beverage sector, nearly 70% of food processors and manufacturers cited delivery and supply chain issues as a challenge in 2021. Supply chain disruption was identified as a continuing challenge in 2022 by the majority of respondents, with 60% saying they were working to identify new suppliers.

Since 2020, the supply chain crisis has been fueled not only by the pandemic but also by labor shortages in the manufacturing and distribution industries and political unrest overseas.

This challenge, combined with inflation and other economic issues, has seen larger companies leveraging their buying power, supply chain diversification and capital flows to successfully weather the storm. But most middle-market companies needed to come up with more creative solutions to these extreme circumstances.

As advisors to many of these innovative companies, Grassi’s Manufacturing & Distribution group has identified several key strategies for responding to ongoing supply chain disruption.

Rethink product sourcing. The process of sourcing high-quality, low-cost goods has been turned upside down as suppliers are dealing with their own supply chain challenges, and vendors who were once depended on are no longer reliable. Strategies such as buying more product at one time or dual sourcing may need to be considered to ensure you have enough product to satisfy customer needs in the best possible timeframe.

Another solution may lie within the business itself. Can the company’s research and development team identify alternatives that perform equally well as hard-to-find parts or goods? Even if this option costs more, being able to fulfill orders on demand and the resulting customer satisfaction may be worth it in the long run.

Embrace digital solutions. Among the highest performing companies that participated in the Grassi food manufacturers survey, nearly 60% reported utilizing automation tools through supply chain management software to assist with tracking and managing inventory. More than half of them reported increasing their use of analytics to optimize production, distribution or customer service in this economy.

Implementing automation and artificial intelligence will not only help you keep up with the competition, but it will also give you unprecedented insights into the supply chain and how it is affecting your business performance. Technology can also help a company forecast when they may need to re-route shipments or increase purchasing volume to avoid stockouts.

Diversify and multiply. The COVID-19 pandemic was a stark example of the importance of diversification in the supply chain. Companies that had a variety of suppliers in multiple geographic locations were at a clear advantage to those that did not. In response to ongoing supply chain issues and in preparation for future disruptive events, diversifying and increasing your suppliers, both domestically and internationally, is critical. Not surprisingly, more than half of the respondents in Grassi’s survey are planning to increase their number of suppliers this year.

Evaluate cash flow. With inventory and sales levels shifting erratically, your cash flow probably looks nothing like it did in the past. It is more crucial than ever to develop cash flow projections and conduct financial scenario planning to identify when the company might encounter cash flow shortages and plan for alternative funding sources and credit options.

Better control of your cash flow will also allow you to make confident decisions about when and how you will finance other strategies in this list, including increased product sourcing, research and development, adding domestic suppliers, and investing in technology.

Communicate effectively. As in any crisis, communication is key. In the Grassi survey, 67% of the highest performing companies reported that increased communication with customers was one of their most important strategies for combatting challenges in 2021. Do not overpromise anything to your clients and be transparent about the situation and what they can expect. Pay particularly close attention to your top customers and keep them informed and serviced first and foremost.

Explore new delivery options. Just as you will give priority to your top customers, so will your transportation providers. Unfortunately, that may mean preference goes to larger companies that bring the highest levels of volume and certainty. Larger companies also have the advantage of being able to pay higher freights costs or charter their own ships – luxuries that middle-market companies cannot usually afford.

Transportation disruptions were among the top 3 challenges reported by midsized manufacturers in the Grassi survey. Their tactics will require more creativity, such as splitting up orders across multiple ships or bundling their shipping needs with other companies through a purchasing association and collectively gaining greater negotiating and purchasing power.

Gain control over inventory. Inventory management is a critical component of your business in any economy, but especially one riddled with major supply chain issues. Inventory cycle count is one of the most effective ways to maintain accurate oversight of inventory levels and prevent stockouts and backlogs of sales orders. Using gap analysis, process improvement, monitoring and training strategies, an effective inventory cycle count program mitigates many of the risks caused by today’s supply chain challenges.

Don’t Face the Challenge Alone. Turn to your advisors for recommendations and advice on operating within a broken supply chain and saving costs to lessen its financial impact. Consult with your CPA to make sure you are taking advantage of all relevant tax credits, including research and development. Even if your business was an essential business during the pandemic, it may still be eligible for the employee retention credit if non-essential portions of the business were shut down.

As supply chain disruption continues to fuel inflation, it may be a good time to revisit your accounting method as well. The Last In, First Out (LIFO) method is particularly effective in this economic climate. This inventory valuation method assumes that the most recent products (produced or purchased at inflated price points) are sold first (before products produced or purchased at lower price points). The price paid for the more recent products is used in the cost of goods sold (COGS) calculation, producing substantial tax savings.

Among all the uncertainty of today’s economy, one thing that is seemingly guaranteed is the unrelenting effects of supply chain challenges throughout the coming months. Executing proactive strategies like these will not only help your business weather the current storm but also make it stronger and more resilient before the next one.

For more information on improving your supply chain efficiencies and cost-savings strategies, please contact your Grassi M&D advisor or Pat Fahey, Partner.

Patrick Fahey Patrick J. Fahey, CPA is a partner at Grassi.  With over 25 years of accounting experience, Patrick specializes in serving publicly and privately held companies within the manufacturing & distribution, software and digital media industries.  He consults with clients on financial reporting, auditing, financial statement preparation, due diligence, reviews, compilations and management policies.    Prior to joining Grassi, Patrick was a partner at a top... Read full bio

Categories: Advisory