By: Lydia DiLiello, Capital Pricing Consultants
Lydia DiLiello is the founder of Capital Pricing Consultants and has been helping clients grow profitably for more than 25 years. Lydia lends her expertise to Zilliant for a three-part blog series on the current supply chain crisis that is dramatically impacting B2B companies’ costing and pricing decisions. Lydia recently appeared on our B2B Reimagined podcast – listen here.
Supply Chain Series Part I - How Did We Get Here and What Does it Mean?
Tired of hearing about supply chain issues? Wish it would all just go away? Join the globe.
Regrettably, this issue that first surfaced in 2019 is likely here through 2023. How did we get to this point and what continues to fuel this seemingly never-ending challenge?
In this three-part series we will explore the historical events that created the supply chain issue, the global economy and geopolitical events that continue to fuel the mess and finally we will discuss both short- and long-term plays to protect your company’s revenue and profit streams.
In the fourth quarter of 2019 the coronavirus was just being identified. The shipping industry and the rest of the players in the global supply chain were essentially following standard practices. By Q1 of 2020 it all came to an abrupt and unprecedented halt. Lack of labor resulting from port closures and dramatically reduced hours of operation due to illness left container ships stuck in ports whether they were cargo heavy or empty. Ships couldn’t leave port if they were still cargo-laden with long delays to be offloaded, and once empty, they were at the mercy of a ship in their path that still had cargo and was waiting to be emptied. All the while ships were queueing up outside of ports, some waiting more than 65 days to gain entry. A resulting maritime traffic jam of global proportions ensued.
Ships all over the globe were essentially stuck in the wrong places, in ports. Most should have been at sea to either deliver or pickup goods. Not the case. By 2021 the resulting impact of this inefficient movement of goods skyrocketed container prices by an order of magnitude of 10. For example, a Chinese restaurant owner in early 2020 paid $1,500 for a 40-foot container from China. Currently the same container costs $15,000 to $17,000! Clearly, this is not a sustainable situation.
What does this mean for most businesses?
Extended wait times for product
Necessity to order months in advance to protect against extended wait times
Employees spending time focused on identifying substitute products
Utilizing a larger variety of freight carriers
Administrative complexity resulting from all of the above
All in all, nothing good for your business. More fires and more headaches, with more to manage.
So, what do you do?
The first and most critical step is to look to your data. The standard rule applies; 20 percent of your customers are bringing in 80 percent of your revenue and profit. What are these customers buying? How strong or weak are the profits on the products purchased by this group?
Second, is anything being sold at a loss? If so, immediately change the price to a profitable point or substitute another product. It is amazing how many companies continue to sell product either as a loss leader or at a loss due to lack of visibility or attention.
Third, review all of your contracts. There are out clauses in most contracts and now is the time to exercise them. No held pricing, no extended terms, no grace periods. Your business cannot afford them and may not be around next year if these pre-pandemic giveaways are not removed. All of these preferential terms are forms of discounts and cannot be supported in this extreme environment.
Finally, and perhaps most important of all, communicate. Issue a letter to your customers, explaining that these changes are temporary and that as soon as your supply chain returns to a steady and predictable state that these preferential business terms will be returned. We are quite literally and figuratively in the same boat with supply chain challenges and through data, quick and decisive action, and communication we can ensure that our businesses and customers remain viable.