The end of just-in-time supply chains?

Use these cash flow strategies to mitigate the effect of supply chain challenges

8 minutes read

Just-in-time has been the go-to strategy for inventory management for years. With just-in-time, the goal is to order and receive material as close to the time it is needed, therefore freeing up cash to reinvest elsewhere.

The sudden economic shock of the COVID-19 pandemic and its effect on global supply chains may have put an end to the viability of this strategy.

A March 2022 BDC survey found that 85% of entrepreneurs were feeling a supply chain crunch. We see these challenges with the vast majority of the entrepreneurs we work with every day.

The concept of just-in-time inventory has been thrown out the window. The main measure of success in the current climate is ensuring your production is not interrupted.

The effect of supply chain challenges on Canadian businesses

Increased inventory levels

Unreliable supply chains have forced companies to carry a lot more inventory than they used to. Construction companies, for example, are pre-ordering expensive parts for their heavy equipment because they can’t afford a breakdown mid-season and to wait the now-typical eight to 12 months for parts to arrive.

Longer production times

We’ve seen manufacturing companies being forced to warehouse unfinished products while they wait for a final, critical component—often after putting important down payments on supplies.

Stretched-out order delivery times

The purchase cycle, which used to take three to four months from order, to production, to shipping and reception, can now take six, nine or even over a year. This can lock up cash for long period of time and increases uncertainty for businesses.

Badly timed invoices

“Surprise” shipments have been known to show up unexpectedly after products are backordered multiple times—leaving companies with a large bill they weren’t anticipating.

Employee shortages

Supply chain disruptions are hitting businesses at a time of historically low unemployment rate. Fewer hands on deck are disrupting the flow of goods and services and slowing down production.

Inability to close out a project/sale

Companies unable to finish a project because they’re waiting for a minor—but essential—element are sitting on final invoices for months.

Soaring costs

The cost of items across all industries has risen astronomically. A widget that was once $10 could now be $15, and can make the difference between a profitable and an unprofitable period.

From supply chain disruptions to cash flow challenges

Obstacles like these create cash flow problems, as money is tied up in inventory or work in progress. They also increase stress and can affect your ability to bid on, win and undertake new projects—no matter what industry you operate in.

Here are some successful practices that could protect you from supply chain turmoil.

1. Proactively protect your production

The concept of just-in-time inventory has been thrown out the window. The main measure of success in the current climate is ensuring your production is not interrupted.

This means being proactive in ensuring you’re continuously making products or delivering services.

Proactive strategies include:

  • Maintaining higher inventories than you once did to ensure you’re ready for an influx of orders, a shipping delay or equipment breakdowns.
  • Hiring procurement specialists. One of our clients has created a supply chain management team that includes an overseas freight coordinator, a domestic logistics coordinator and a procurement coordinator, all led by a supply chain manager. Each employee focuses on one critical step of the supply chain process, liaising with multiple suppliers and staying on top of freight and other challenges specific to their area of expertise. This has created a more robust system that is able to respond to challenges in each step of the supply chain.
  • Insisting on fixed-price contracts for construction projects. The rising costs of building materials has led many builders to add 10% to previously-issued quotes. Eliminate that kind of guess-work or any other surprises by locking in prices for parts and projects with your suppliers from the outset.

2. Improve your business processes

Is your business running as effectively as it could be? We’ve seen that most businesses could stand to tweak internal processes to help cut costs and gain efficiency. These changes could help you weather current supply chain challenges while making you more competitive over the long term.

Digitize your company

Are you using technology to optimize billing, quoting, sales, procurement and inventory management? All of these processes are faster and more efficient when they’re automated with specialized software. The Canada Digital Adoption Program offers up to $15,000 in grants and 0% loans to help eligible businesses invest in technology.

Assess the profitability of each product or service

Your business’s bestsellers of yesterday may be dragging you down today due to supply chain delays or rising costs. We advise our clients to examine the profitability of each product or service in order to understand your return on investment. You can often improve cash flow by permanently or temporarily changing what you sell.

Find operational efficiencies

We often talk to our clients about small redundancies or inefficiencies that can add up to big savings when they’re addressed.

For example, if employees walk 30 metres across a shop floor 10 times a day to access a tool, that consumes valuable time. Moving that tool could save each employee 15 minutes a day. Multiply that by 20 employees in your shop times 5 days a week times 25 days a month, and that small change suddenly makes a big impact on your profit margins.

Reach out to your lenders

As your business evolves, so should the financial products you use. It can be helpful to sit down with your current financial institution to discuss supply chain challenges and what they can do to alleviate them. Not all banks have inventory financing, but it’s important to explore your options—inside and outside your current service providers.

3. Assess your need for additional financing

Now more than ever, it’s essential to keep a close eye on your working capital to ensure you can pay your bills as they come through. In normal times, there is a continuous flow of cash coming in from receivables and payments going out to suppliers.

Supply chain troubles can tie up your cash in additional inventory or slow down the flow of cash coming in.

In response, BDC created a supply chain support loan that includes 12-month interest-only terms over the 60-month repayment cycle and no penalty for paying the loan earlier.

Its purpose is to help businesses manage day-to-day costs while they await a shipment or payment. Some even use it to pay for supplies they proactively pre-order to avoid delays or shutdowns.

We advise you to calculate how much working capital you need over the coming months. Filling out this free cash flow calculator can be a good place to start. Most accounting software can help you produce a solid forecast, as well.

We’re here to help. Contact us anytime if you want help analyzing your finances or would like to learn more about our financing options.