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Supply chain disruptions are increasing

With inflation hitting entrepreneurs hard, the Russian invasion of Ukraine and COVID-19 outbreaks are increasing pressure on supply chains

9-minute read

Strains on global supply chains have been impacting the global economy since the beginning of the COVID-19 pandemic.

These disruptions can be explained by both supply and demand factors.

  • Supply: Health restrictions and plant closures, particularly in China, where health measures are stricter, have exacerbated labour shortages and significantly reduced production rates.
  • Demand: Significant fiscal stimulus by governments have helped many households retain or even increase their purchasing power, and they are making considerably more online purchases. As a result, global demand for consumer goods stayed quite strong—especially in periods when health measures were limiting spending on services like travel and dining out.

The combined effects of limited supply and strong demand have led to shortages of consumer goods and inputs, such as semiconductors.

The transportation and warehousing sector has also been under severe stress, with congestion at ports and staff shortages contributing to longer delivery times.

The result of all this are strong inflationary pressures.

We are currently witnessing an annual price increase in Canada that exceeds 5%, something not seen since the early 90s.

The Russian invasion complicates things

The Russian invasion of Ukraine on February 24, 2022 has, first and foremost, severe humanitarian impacts. However, the resulting trade sanctions and disruptions to Russo--Ukrainian economic activities are also putting more pressure on supply chains.

This is particularly true for the supply of agricultural commodities such as wheat, sunflower and corn, of which Ukraine is a major producer. It is also the case for energy products such as oil and gas, as well as fertilizers, originating from Russia.

If the conflict persists and new COVID-19 outbreaks continue to emerge, the negative impacts on supply chains will continue and inflationary pressures can be expected.

More and more Canadian businesses are experiencing supply chain disruptions

This is the context in which we surveyed Canadian business owners about supply chains.

An initial survey conducted in November 2021 showed that 75% of SMEs were already experiencing supply chain issues. The situation has since deteriorated, with 85% of businesses now reporting supply chain issues.1

In another sign that supply chain problems are deeply entrenched in Canada, the entrepreneurs we surveyed reported a slight lengthening of delivery times compared to the last quarter of 2021 (63% of respondents compared to 60% in the previous survey).

Distributors, manufacturers and construction companies are particularly vulnerable to supply chain disruptions. To a lesser extent, service companies are also affected.

Medium- and large-sized SMEs are also more affected, as they are more likely to have foreign suppliers and customers.

Graph 1: Percentage of companies experiencing supply chain issues

Source: BDC, Supply Chain Survey, November 2021 (599 respondents) and March 2022 (650 respondents).

Entrepreneurs report increased costs

A growing number of businesses are also having to pay more for their inputs and for transportation.

Soaring oil prices and rising prices for certain metals and agricultural commodities, exacerbated by the invasion of Ukraine, account for much of this cost increase.

For example, the price of oil surpassed US$100 per barrel in late February, affecting transportation costs as well as production costs for a wide range of products and services.

The Omicron variant has also disrupted supply chains by exacerbating labour shortages due to absenteeism.

Businesses pivot but remain concerned

Supply chain issues have ripple effects on business performance.

  • Two out of three business leaders (66%) have had to increase the prices of their products to meet the rising cost of their inputs.
  • Thirty-nine percent of entrepreneurs have reduced their profit margins.
  • Nearly 60% also had to lengthen their own delivery times.

These changes have resulted in:

  • customer losses
  • lower sales
  • the inability to operate at full capacity or efficiency
  • a negative impact on customer satisfaction

Lastly, many entrepreneurs (37%) have moved from just-in-time to "just-in-case” inventory management by increasing their inventory.

We also note a decline in optimism among Canadian entrepreneurs.

Indeed, 29% now believe that supply problems will worsen over the next 12 months, compared to only 13% last November. However, a larger percentage, although slightly down (40% vs. 42% in November), is still hopeful that the situation will improve.

How is the war in Ukraine affecting supply chains?

The invasion of Ukraine and the sanctions of numerous countries against Russia are undoubtedly the leading contributors to the deteriorating supply outlook for SMEs.

In fact, one-third (36%) of entrepreneurs report being adversely affected by these hostilities. Sixty-one percent did not feel the effects of the conflict, while 3% were able to benefit from it.

Cost increases—which were already present before the war but were exacerbated by it—such as energy prices, have impacted even more businesses across the country.

  • More than half (54%) say they have had to adjust the prices of their products or services upward.
  • Nearly half (49%) are dealing with an increase in their input costs.

Unsurprisingly, 84% of businesses sourcing in Ukraine and 64% of those sourcing in Russia are experiencing the impacts of this devastating conflict.2 We also note that companies with 50 or more employees, those with a greater international presence and those operating in the manufacturing sector are particularly affected by this war.

While the majority of entrepreneurs say they are not affected by the war in Ukraine, companies are apprehensive about the future. If the conflict persists, business leaders say:

  • the cost of their products or services will continue to rise (69%)
  • their input costs will continue to increase (66%)

The greater a company’s international activity the greater their concerns.

4 strategies to mitigate supply chain disruptions

While it is difficult to completely avoid supply chain issues and the resulting inflation, entrepreneurs have a few options to lessen the impact.

1. Increase inventory quantities

First, many companies have made the decision to increase inventory of the most sought-after and profitable items in order to protect themselves from a shortage and to be able to meet the needs of their customers.

To this end, companies need to invest more in inventory and warehouse space. These spaces need to be optimally managed through the use of robotization and digital tools, especially to reduce the need for workers and ensure that inventory is well tracked.

2. Diversify your suppliers

Greater resilience also requires diversification. We suggest permanently keeping an eye out for potential suppliers, in Canada or abroad.

If you opt for reshoring, you need to be ultra-efficient by investing in the automation of production and work processes in order to offset generally higher labour costs. In cases where imports cannot be avoided, care should be taken to maximize the space used in the containers to reduce transportation costs.

3. Invest in digital

You shouldn't hesitate to invest in digital tools to help you maintain control over your supply chain and plan effectively.

Some supply chain management software is available to SMEs to help them track inventory, manage shipments and keep track of the fastest moving items.

4. Communicate with your suppliers and customers

Be transparent with your customers about delivery times. Explain that orders may be delayed because of circumstances beyond your control.

If you are experiencing issues with certain products, inform customers before they place their orders. Many clients are aware of current supply problems. The key is to avoid surprising them and to manage their expectations.

Also keep in close contact with suppliers to know their delivery times and to be able to inform your customers as soon as a delay becomes apparent.

1 The samples in our two surveys are very similar. It should be noted that internationally active companies were more likely to respond to our surveys. You can contact us for more details.

2 Note that, among businesses that are active abroad, 5% had suppliers or customers in Russia and 4% in Ukraine.

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