Arriving back in the office after the Christmas break, Rachel Watkyn opened an email from one of her company’s suppliers to find that prices were being increased by 40% – with immediate effect.
It’s hardly an unusual situation - according to a recent survey by The British Chambers of Commerce [1], 80% of UK SMEs faced increased supply chain costs in 2021.
Over the last year, Watkyn’s business, Tiny Box Company, has seen a massive fluctuation in supply chain costs. The cost of a single shipment of boxes from Asia has increased from £2,500 to £18,000, while the cost of sourcing raw materials in the UK has increased by 26%, in part due to rising logistics costs.
“Supply costs used to account for 10% of our product costings, but that’s now increased to 40%,” says Watkyn. “It’s a huge challenge, but we don’t have the option to pass all of those costs on to customers because we’d end up losing sales.”
Reasons for Fluctuation in Supply Chain Costs
“Global supply chains are designed with a certain amount of tolerance, but a lot of things have gone wrong at the same time,” says Simon Geale, executive vice-president at supply chain consultancy Proxima. “That means every company with a supply chain is grappling with supply chain cost management.”
Over the past two years, global supply chains have been affected by a number of factors including poor weather, the pandemic, Brexit negotiations, shortages in labour and logistics capacity, and a huge mismatch between supply and demand for all sorts of commodities, from semiconductors to building materials.
In some cases, businesses are being hit by one price increase on top of another, adds Geale. “Most SMEs will have seen price increases of 20-30% for things like raw materials, but also increases in pricing for logistics, labour and energy. We are living in an inflationary market, and as a business owner, you can’t put your head in the sand. You need to do something different.”
How to Manage Supply Chain Fluctuations
Understand the market
The most important thing that business owners can do in the current market is to know their market, says Geale. “Keep a very close eye on your suppliers. Know who has supply, when the prices are moving, and when is the right time to do a deal, or when to consider an alternate,” he says.
“You also need to understand your business model. If the price of logistics jumps by 8%, what does that mean for your cost model? How much can you absorb, and how?”
Renegotiate Supply Chain Costs with Suppliers
Just because a supplier wants to increase prices doesn’t mean you can’t negotiate. Working with suppliers more closely can put your business in a stronger position to reduce the impact of price changes.
Silent Pool Distillery buys thousands of tin strips used to seal its gin bottles each month. When the price of tin increased by 400%, the company’s supplier increased the price of these seals.
Rather than taking an antagonistic approach to conversations, Silent Pool opted to work with its supplier in a spirit of partnership, says Ian McCulloch, The distillery’s founder and managing director. McCulloch asked his supplier to break down the cost of its tin seals to understand how much of the product’s price was per unit. “Basically, 50% of the product cost was tin, while 50% was things like printing, labour, overhead, and profit,” says McCulloch. “We offered to pay the higher price on 50% of the cost if the remaining 50% stayed the same.”
Working together meant that the supplier could maintain its product margin, and Silent Pool could minimise the price increase. “We have an agreement that we will bear the cost of the raw material increase, so the supplier is on a fixed profit per unit. If they were making 5p per capsule, they’re still making 5p per capsule,” says McCulloch.
The key to successfully renegotiating with suppliers is understanding what your supplier values as much as money, says Geale. For example, a supplier might value a long-term contract or the option to use your business as a reference site.
It can also be worth looking at whether you can simplify an order. “Many suppliers today want large, non-complex orders, so an SME that offers to buy more volume of fewer products could strike a deal on price,” says Geale. Rather than buying 1,000 of 10 products, could you buy 5,000 of two products? “The supplier in this scenario can ramp up production and get product out of the door efficiently.”
At Tiny Box Co, Watkyn always tries to negotiate with suppliers. “We find companies in Asia are keen to make deals because it’s their livelihood just as much as ours,” she says. “We had one supplier there that even suggested we open a joint-venture facility in Europe to address the high cost of shipping.”
Reflect Rising Costs in Your Pricing Strategy
Increasing your prices is often the most obvious way to absorb a price increase in the supply chain. But you need to tread carefully around how willing your customers are to absorb this change in your pricing strategy.
The key is to understand price elasticity. How much can you increase a product’s price before your customers are put off buying from you? At Tiny Box Company, the business was reluctant to increase pricing too far. “We made some small increases and noted that our turnover stayed the same,” says Watkyn. “That tells me that we are at the top limit of what price increase our market will accept.”
Instead of increasing prices across the board, Silent Pool reduced the number of annual price promotions. “Rather than running four or five campaigns each year with discounts, we will only run two promotions. It’s [a way of] increasing prices without necessarily being seen to do so,” says McCulloch.
Alongside modest price increases, Tiny Box Company has focused on driving internal efficiencies and finding cheaper supply options to mitigate supply chain costs. This strategy has included moving to online sales for certain products, reducing the number of product lines, and switching up some of its manufacturing.
Rather than importing cardboard from overseas, the company has moved 20% of its production to a factory in Cornwall. By doubling the production output of its UK facility, it has managed to offset the increased price of sourcing materials overseas.
Use Cash Flow Reserves to Absorb Costs
It’s important to remember that price increases may need to be short-term and focused to avoid damaging your business health, says Geale. “Many of the supply chain changes we’re seeing are very fast-moving, and you need to respond quickly. But it’s important to focus on two things for long-term survival – how do we reduce our own costs by being more efficient, and where can we optimise processes and drive growth and revenues?”
Businesses that need to move quickly to source in-demand supplies while they are available can make use of the American Express® Business Gold Card. You get up to 54 days to clear the Card balance, so you can keep your money in the account for longer and get more flexibility in your cash flow¹.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.
2. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
Sources
[1] CC, Four in five firms report rising prices as supply chain crunch continues
