The dangerous blind spot of the supply crisis

According to the STIQ, 61% of the respondents to the study affirm that their margin has decreased, not to mention that half of them indicate that they refuse or lose orders because of problems obtaining supplies of inputs. (Photo: 123RF)

ECONOMIC ANALYSIS. It is well known that the supply crisis leads to delivery delays as well as additional costs and losses for manufacturing companies. What is less so is that the reduction in their profit margin due to the crisis also undermines their growth, their competitiveness, and even their long-term sustainability.

The STIQ (Industrial Subcontracting Quebec), a multi-sectoral association that helps improve the competitiveness of manufacturing companies, recently published the 13th edition of its Quebec industrial barometer.

Several elements emerge from this random survey of 500 companies of different sizes, active in various sectors and regions of Quebec, one of which deserves special attention given its potential impact.

This is the profit margin of manufacturers, that is to say the oxygen to fuel their growth.

Thus, 61% of respondents to the STIQ study affirm that their margin has decreased, not to mention that half of them indicate that they refuse or lose orders because of problems obtaining supplies of inputs.

This situation is worrying – even if the STIQ does not know the extent of the drop in profits of Quebec manufacturing companies.

The sinews of war: the margin, not the revenues

As a general rule, losing income is never pleasant. However, an organization can manage a decline in sales if it manages at the same time to maintain its profit margin by reducing its costs, for example.

Let’s remember the obvious: it is profits that make it possible to spend and invest, not revenues – because they can increase at the expense of the erosion of the profit margin.

However, in this case, it is the profit margins that have melted, i.e. the ability of companies to invest more in training, in the purchase of equipment, in R&D and in digital technologies, points out to Deals the CEO of STIQ, Richard Blanchet.

“In other words, the supply problems are mortgaging the growth of our businesses, not just their ability to deliver on time,” he says, specifying that he does not want to be alarmist, but rather to make people realize the importance of this problem.

Because the erosion of the profit margin creates a vicious circle.

Less cash means less money to buy equipment and new technologies to be more efficient and competitive.

Less cash means less money to invest in R&D to develop new products.

Less cash means less money to train more employees, who are increasingly unskilled due to labor shortages.

Possible solutions to mitigate the impact

In the current supply crisis, manufacturing companies can deploy certain strategies to limit the negative impact on their profit margin, believes Richard Blanchet.

1.Reduce costs by optimizing all processes, from supply to production and marketing.

2.Integrate operations vertically by acquiring a supplier – if of course the financial capacity allows it – or by taking a stake in its capital in order to further secure supplies and reduce costs.

3.Refusing contracts with customers if a company does not have the assurance of being able to have all the necessary inputs in order to carry them out, which limits unnecessary costs and even losses.

4. Introduce contractual clauses with customers – at least, for those who accept it – which do not mention a precise delivery date for a product, which eliminates the imposition of penalties for delays.

5. Invoice customers – if there is no risk of losing them to competitors’ profits – for any significant increases in supply costs in order to protect the profit margin.

6. Stock the inputs most likely to break in the supply chain, especially those that are critical and strategic.

Admittedly, these solutions are not miracle recipes. Some may even generate additional costs, for example in terms of storage, if this leads to new handling costs.

However, the status quo is not an option either, as the supply crisis is likely to last for some time, logistics specialists say.

It is therefore better to limit the impact on the profit margin as much as possible.

And, de facto, on the growth and future of many manufacturing companies in Quebec.

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