Five strategies for dealing with rising supply chain costs
In an inflationary market, where constant disruptions are the norm, businesses must get creative to keep their costs in check
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.
Watkyn’s business, Tiny Box Company, supplies a range of cardboard boxes to consumers and businesses. Over the past 18 months, the cost of raw materials has grown by 80%. “Supply costs used to account for 10% of our product costs, 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.”
Tiny Box Company is typical of many UK companies. Over the past two years, global supply chains have been rocked by poor weather, labour shortages, energy crises and a huge mismatch between supply and demand, says Simon Geale, executive vice-president at supply chain consultancy Proxima. “We’re in an inflationary market,” says Geale. “As a business owner you can’t put your head in the sand. You need to do something different.”
In many cases, businesses don’t have the option of passing on higher prices to their customers. Watkyn experimented with increasing prices on her company’s website last year. “We made some small increases and noted that our turnover stayed the same. That tells me that we are at the top limit of what price increase our market will accept,” she says.
Here are five strategies to help mitigate supply chain costs – without increasing prices for customers.
Negotiate on supplier pricing
Many suppliers are currently at capacity, so they’re looking for simple orders they can execute quickly, says Geale. “If you can reduce range, increase volume or up quantities, you are a more attractive customer and might be able to negotiate,” he says.
Businesses should also think about what else they can offer suppliers that would make them a more attractive customer. Geale suggests asking suppliers if you can act as a reference or case study or introduce them to other customers. “It’s about finding the thing that makes you valuable, apart from the value of the order. If nothing else, consider whether you can afford to offer them more favourable payment terms because everyone is feeling the pressure on working capital,” says Geale.
Just because a supplier wants to increase prices doesn’t mean that you can’t negotiate. Silent Pool Distillery buys thousands of tin strips that are used to seal its gin bottles each month. When the price of tin shot up by 400%, the company’s suppliers increased the price of these seals.
The company responded by opening negotiations, says Ian McCulloch, the company’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 tin. “Basically, 50% of the product cost was tin, while 50% was things like printing, labour, overheads and profit,” says McCulloch. “We offered to pay the higher price on 50% of the cost, if the remaining 50% stayed the same.”
What this meant was the supplier was able to maintain their product margin, and Silent Pool was able to 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.
Re-engineer your product line
Last year, Tiny Box Company’s top-selling product was a white, luxury magnetic box. This year, the company’s most popular item is a flat-pack basic brown cardboard box. “Our customers are reducing the quality of packaging they buy to make cost savings, so we need to mirror that,” says Watkyn.
Tiny Box Company has changed the cardboard used to produce its coloured cardboard packaging, switching from dyed board to printed board. “Rather than the board being white all the way through, it’s now printed white on the edges. Making that change means we’ve been able to absorb the 80% increase in cardboard costs,” says Watkyn.
Another change has been to switch the way that one of the company’s most popular boxes is structured. By modifying the way that the box opens and closes, the company was able to slightly reduce the amount and shape of cardboard used. “What that means is we can get 11 boxes out of a sheet of board, rather than 10,” says Watkyn. “This means we’ve had to pay for new tooling up front, but in the long run it’s more cost-effective.”
Finally, Tiny Box Company has changed some of its products altogether. “The most popular jewellery box we sell is a black box for earrings but at the moment it’s impossible to find them for a decent price,” she says. “We know there is a global shortage, so we buy what’s available and work with our customers to find compromises. It’s saying, we don’t have black boxes, but we do have grey or brown.”
Making this sort of change might be more readily accepted by customers than you think, says Geale. “You aren’t operating in a vacuum. People will accept some changes because they know the situation that we are all in,” he says. Companies could consider switching things like colours or materials, or look at alternate packing options, he adds. “If a large part of your costs is packaging-related, could you look at reduced packaging, recycled packaging, or even local pick-up services that don’t require packaging?”
Move your production onshore or nearshore
In recent years, Tiny Box Company has sourced much of its cardboard from China and the US, but the combined impact of rising cardboard prices and expensive shipping containers prompted the company to look for other options.
For several years, Tiny Box Company owned a disused production site in Cornwall. In 2021, the company revived the facility and moved 20% of its production to the UK. By doubling the production output of its UK facility, the company has managed to offset the increased price of sourcing materials overseas.
Since the start of 2022, the rising cost of energy, labour and materials in the UK has eroded some of the savings in material costs and production, says Watkyn. “Those costs have increased by 80% in 18 months, but we are at least able to reduce logistics and shipping costs,” she says.
Invest in efficiency improvements
Perhaps the most important thing any business owner can do in an inflationary market is to take a rigorous view of the company’s costs and revenue. “It’s not just about the top line but about understanding every component of every cost. What is the challenge you’re solving in each area of your business, and how might you do that more efficiently?” says Geale.
Tiny Box Company needed to improve efficiency to absorb rising supply chain costs but didn’t want to increase spending on labour – which is already the company’s biggest expense. Instead, the business has invested in a series of new IT platforms that include a new customer relationship management platform, software for automated picking systems in warehouses and barcode readers.
“It means we can be more efficient in areas like packing, shipping and customer service, and ultimately sell more product with greater economies of scale,” says Watkyn. “We generally work to a ratio of £100,000 turnover for every one employee, but if we can push that ratio to £110,000 by using technology then within a year or two, we’ll see huge benefits as a business.”
Exploring new markets
When you’re sitting in the middle of a fire, it’s easy to forget that not everyone is sitting in the same fire. Silent Pool Distillery has faced one price increase after another for the past 18 months. The conflict in Ukraine has sent the cost of neutral alcohol skyrocketing, while labels that are printed in the region can’t leave ports, says McCulloch.
To keep turnover steady, Silent Pool has had to make changes to its strategy, specifically by identifying global markets where people have the disposable income to spend on premium gin. “In the UK, families are spending thousands to heat their homes, and are paying more tax on top of that. The escape valve is that if you can grow the business faster and push the top line, you can get to the same cash profit. We’re pushing hard to grow, to try to soften the impact of the increases,” says McCulloch.
The company has recently launched in Brazil, where gin is experiencing a boom. “In Brazil, people love gin because it doesn’t make you fat like beer does,” says McCulloch. “They’re so body conscious that sales there have gone berserk and where Brazil goes, the rest of the continent tends to follow.”
Along with Brazil, Silent Pool has launched its gin products in Peru, Mexico and India. Next on the list is a small-scale launch in China and potentially Taiwan. These regions were always part of the company’s strategy but the crisis affecting supply chains accelerated plans. “We’ve had to pull stuff forward to keep us afloat and execute it as well as we can, given the circumstances. We need to remember there are lots of countries that don’t have the same immediate pressures as we do,” McCulloch says.