Pricing strategies for supply chain volatility

The supply chain is suffering under unprecedented pressures, and those compounding challenges have wreaked havoc on small businesses.

Los Angeles and Long Beach, California, the busiest ports in the U.S., are facing historic cargo backups offshore, enhanced safety protocols due to the pandemic are furthering inspection and transportation delays, and the price of raw materials, like steel and wood, have soared amid labor and supply chain shortages domestically and in Asia.

“Shipping containers and freight issues, coupled with labor force issues, congestion on rail networks, shortage of trucks, drivers, and warehouse workers makes this possibly the largest cornfield meet in the modern history of global trade," says Arjun Narayan, the chief executive of Seattle-based SalesDuo Inc., which makes software that helps companies boost sales on Amazon. "Worse, it does not appear that the situation is easing in the foreseeable future."

In response, businesses are enacting a variety of strategies to quell volatility and other unexpected disruptions in the supply chain. Here are some of their solutions and tips for weathering the uncertainty.

Scale back to stay on budget

Crate, which is retrofitting a Houston building to provide on-demand warehousing, storage, and office space services, modified its budget as material prices and availability fluctuated, delayed some bigger ticket items, such as pavement improvements, and scaled back interior designs.

“That, of course, was on top of having to get creative in how we went about sourcing the materials," says Justin Lee, who established the company about a year ago. “Some materials and equipment could be found used and at a bit of a discount, while others had to be procured new and several months in advance."

Lumber price hikes, fueled partly by pandemic-led mill and lumberyard production constraints, have cut into sales at Seattle-based MellowPine, which sells handmade furniture online and helps consumers build home projects. To help offset the escalating expense of pine wood, the company raised prices on some products, while increasing the amount of wood purchased per transaction and improving raw material requirement estimates.

“Currently, we plan to buy at least three months' worth of supplies in advance," says MellowPine partner Gian Moore. “Since wood is not perishable, the risk is minimal in our case."

Food & retail have pivoted

Supply chain and inventory shortages have also drastically diminished closeouts, or distressed inventory sales, according to bulk buyer Parker Newman, the head of operations at Closeout Express in Minneapolis.

The food and retail industries, in particular, have been affected by this shift as some manufacturers are no longer carrying distressed inventory on a month-to-month basis. Pre-pandemic, it was industry standard to sell 3% to 5% of food inventory through distressed channels, according to Newman.

Shortages have led retailers to reassess operations and tweak business models.

“Lots of small discount retailers are looking at more creative solutions to try and fill this void by shifting purchasing dollars to smaller manufacturers or buying import products that are too expensive to return overseas because of high shipping costs," Newman says. “We have also seen a lot of retailers looking at selling returns as a way to increase product selection while maintaining margins."

3 tips for surviving supply chain issues

Stanley Chao, who helps small and medium-sized U.S. companies source products and components in China, offers the following recommendations to ease supply chain challenges:

1. Purchase full container loads, rather than partial loads, to improve pricing and scheduling.
2. Provide suppliers with alternative sourcing options, particularly on raw materials and specialty components.
3. Bypass the middlemen (distributors and sellers) in big Chinese cities and forge direct relationships with factories to improve communication channels, production, and partnerships.