How small and midsize businesses can improve their supply chain resilience

When it comes to supply chains, the lesson of recent history is that challenges originate in all sorts of ways. Who knew that within five years, a pandemic, a stuck cargo ship in the Suez Canal, and global tariffs would throw wrenches into goods and production for small and midsize businesses?

While the list of potential challenges may be ever-changing, there are time-tested options for small and midsize businesses to strengthen their supply chain resilience. Here’s what to consider.

How widespread are supply chain frustrations? Nine out of 10 respondents to the McKinsey Global Supply Chain Leader Survey reported having supply chain challenges. Oftentimes that challenge is relying on a single supplier for a critical need. If prices increase or transportation disruptions for that component happen, the business may not be able to complete production and leave orders unfulfilled.

Single sourcing strains for small and midsize operations may also happen as a result of larger businesses increasing their demands. “It’s often an early indicator of supply chain stresses when smaller operations find a sourcing supply is restricted or dries up,” says Chaun Powell, president of Elevate by Principal. “Smaller businesses don’t have the ability to purchase at huge volumes. Suppliers very often need to make sure the bigger companies get their orders filled first.”

What can business decision makers do? Two options are worth exploring for small and midsize businesses, says Powell: sourcing diversification (spreading orders across two or three potential solutions) or going all in with a single source.

Sometimes supply chain stressors for small and midsize businesses may equal higher prices, even in the short term. But that variability may not be something that some business leaders can absorb, either because they’re unsure of exact margins or not quite certain budgets can withstand the change.

“Today, pressures are hitting small and midsize businesses not just from one place but from a lot of places—insurance, wage increases, inflation, to name a few,” Powell says. “It’s all compounding.”

To adapt, business leaders can spend time ensuring that they have funding sources and access to capital. And margins should be a key focus: Can your overall profit absorb expense increases, even temporarily, if you have to shift to a different supplier at a higher cost? Knowing your flexibility can help with decision making and planning in the near and far term.

Not all suppliers are created equal, and even longstanding relationships should be continuously assessed for quality, cost, and delivery times. The criteria you use to analyze how well a supplier is doing may be different than another businesses. Evaluative tools, including software and questionnaires, can help if you’re not sure where to start. Your financial professional may be able to suggest some options; if you simply want to learn more, search for “supplier relationship management software.”

Larger companies have the space and budget flexibility to ramp up inventory in all market conditions. Small and midsize businesses often don’t. However, closely analyzing inventory needs with sales and production cycles can help leaders learn how and when to optimize inventory, particularly for critical, harder-to-source components. For example, say history demonstrates a need for finished goods in October. Can you ramp up (and safely store) supplies of a critical part much earlier in order to protect yourself from unforeseen disruptions?

When they can, more and more companies are shifting to nearshoring. Two-thirds of the companies in the McKinsey survey were focused on regionalizing supplies more than they had the year before. “The majority of goods flow through global distribution channels, and those often are focused on bigger customers first,” says Powell. But, there’s value in focusing less on local and more on regional, which “can be a way of improving resources and flexibility—maybe even with the logistics of transportation, should global sourcing supply chains get disrupted.”

That regionality may include options like a group purchasing organization, or GPO. “GPOs can offer a competitive advantage by helping to protect a business’s price and margin and eliminating or smoothing out supply chain disruptions,” Powell says.

Much of AI is still in its infancy, but its potential to modernize supply chains and offer ideas to manage inventory and logistics may turn up unexpected opportunities, says Powell. “AI is a tool to help you understand the implications of certain factors, to come up with a few ideas that might be smart.”

Ultimately, supply chain resilience is about business resilience, says Powell. Assembling a team that includes a financial professional and tax advisor can help.