Snarled Supply Chain Trips Up Small Businesses

Date: Thursday, April 22nd, 2021
Source: The Wall Street Journal

An Oklahoma restaurant is paying nearly $200 for a case of gloves that normally costs $40. A medical-device maker in Colorado is tweaking the way it manufactures its products to offset higher plastic costs. A clothing wholesaler in Michigan has hundreds of hoodies it has yet to sell because winter was over by the time they arrived from Bangladesh.

The supply-chain disruptions rippling across the business world are taking a heavy toll on small U.S. companies, which have fewer resources to absorb or push back on price increases and less leverage to pass along the higher costs to customers.

Forty-four percent of small businesses reported temporary shortages or other supply-chain problems in March, according to a survey of roughly 800 companies by Vistage Worldwide Inc., a business advisory firm. A U.S. Census Bureau survey of small businesses, completed in early April, found supply-chain disruptions in wholesale trade, manufacturing and construction, among others.

Multiple forces are driving supply-chain woes, from coronavirus infections among employees and temporary business closures to increased demand as vaccines take hold and restrictions ease. A backlog at California ports, the temporary closure of the Suez Canal and weather-related problems have created additional challenges. Smaller companies typically have less sophisticated purchasing departments than larger corporations.

Nitrile gloves have been particularly hard to come by for Evan Kelamis, owner of Savoy, a Tulsa, Okla., restaurant with 35 employees. Some restaurant suppliers no longer stock the gloves; a case of 1,000 that sold for $40 before the pandemic now fetches as much as $185—if you can even buy them.

Mr. Kelamis says buying from local vendors and stockpiling has helped Savoy navigate shortages of pork, chicken and beef. He worries demand for bacon and other ingredients will jump as more restaurants reopen. “Seventy percent of bacon consumption is in a restaurant setting,” he said. “It’s one of the concerns we are preparing for.”

The current mismatch between supply and demand is a sharp turnabout for some companies. Resin distributor PolySource LLC had plenty to sell a year ago, said Grant John, chief executive of the Independence, Mo.-based company. “This year, you have the opposite,” he said.

PolySource, which sources half its products from North America and the rest from Asia, has created a color-coded guide to wait times for materials and substitute materials to help its 23-person workforce meet customers’ needs.

Prices have jumped for many in-demand materials. “If a steel supplier has even a little supply, they are raising prices knowing it will be difficult for them to replenish their stock,” said Matt Erfman, chief executive of Dakotaland Manufacturing, a Sioux Falls, S.D., contract metal manufacturer with about 150 employees. “It’s almost a straight-upward trajectory.”

Suppliers recently quoted Dakotaland a price of $1.10 a pound for 4-by-3-inch steel tubing that sold for 45 cents a pound last summer, said Mr. Erfman.

Dakotaland’s contracts allow it to pass along increased costs quarterly to major customers, but delays in raising prices have squeezed profit margins. “Hopefully, it washes out when things turn the other way,” Mr. Erfman said. “At this point, we don’t know when that might be.”

Sealstrip Corp., a Gilbertsville, Pa., maker of packaging products, has struggled to find steel storage drums and resins for manufacturing plastic films used in flexible packaging. Larger suppliers have boosted prices; some have invoked force majeure clauses that let them exit contracts due to unforeseen circumstances. Even wooden pallets for shipping are hard to find.

The cost of lumber to build crates and pallets has climbed by 50% to 100%, said Heather Chandler, president of the 40-person company, which sells resealable tape, machinery and other packaging supplies to big consumer-products companies.

“One of the biggest challenges of being a small company is we buy from billion-dollar companies and sell to billion-dollar companies,” making it difficult to fend off price increases or pass them on to customers, she said.

Transportation backlogs add to the headaches. It recently took five days for a pallet of adhesive tape to travel from Sealstrip’s Gilbertsville factory to a customer’s facility, about a two-hour drive away. “Things are sitting in freight depots because they are short on staff,” Ms. Chandler said.

Delays can be particularly troublesome for small businesses selling seasonal goods. B&S Activewear LLC, a Warren, Mich., clothing wholesaler, was still receiving shipments of zip-up hoodies and other winter apparel from Bangladesh in April, roughly two months later than expected.

B&S has tried to speed up delivery by shipping goods via UPS Air Freight, at a cost of $8,000 for 72 boxes of T-shirts, more than 10 times the cost of sending the same items by boat. The year-old company sold most of the apparel at break-even after a prospective customer rejected the goods due to the delay, said Steven Gasparovic, the company’s director of U.S. operations.

Though smaller companies may have less sophisticated purchasing departments, they can sometimes be more agile.

MedSafety Solutions, a Centennial, Colo., maker of medical devices, began re-engineering its processes to reduce costs after supply shortages fueled cost increases of 10% or more for plastics used in the manufacture of needle products. “We are using investment dollars to improve efficiencies,” said Steve van Engen, chief executive of the 14-person company.

Other small companies are boosting inventory. After the 2020 hurricane season, assembly company Automation Systems LLC ordered an extra 20,000 pounds of plastic pellets, normally enough to last the Melrose Park, Ill., company nine months. One month later, prices surged due to the Texas freeze.

“They were jacking prices through the roof,” owner Carl Schanstra said. “I did it as a stability measure.” Mr. Schanstra has also placed blanket orders for steel, foam and other materials as much as 12 months ahead, instead of a more typical lead time of six months. Ordering early allows the 45-person company to lock in supply, but leaves little room to fine-tune orders or address concerns.


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