The Weekly: Edition #97 - May 14th, 2021
Supply Chain Shocks
2021 is the year that completely exposed our just-in-time supply chains. The pandemic impacted supply chains all over the world in odd ways from lumber prices to strawberry demand. The Suez Canal debacle illustrated just how much trade flows through one small bottleneck. Just this week, the cyberattack on the Colonial Pipeline showed how thin gas supply chains were from the pipelines to the gas stations.
If there has been one takeaway for small and medium sized businesses this year, it is to examine your supply chain from vendors to customers. The just-in-time flow of goods and services from vendors to producers to customers has been exposed as the pandemic, cyberattacks, and man-made accidents have clogged up key points in supply chains. Running a small business can be hard enough without supply chain interruptions, but nonetheless we wanted to offer a few thoughts to consider on how to build resilience against supply chain shocks.
Stay vigilant. SME owners are busy folks, make no mistake. But staying plugged into current events can help mitigate major stumbles and help you get ahead of potential supply chain interruptions. Many people began ringing alarm bells about an approaching viral outbreak in the US in late December and early January, a full 2 months before mass lockdowns began. What one did with that information may have made a large difference in business operations in the ensuing months.
Evaluate diversification vs. concentration in vendors and customers. There is a balance between diversifying your vendor base to avoid any interruption risk and concentrating with a couple vendors to achieve scale and negotiating leverage. The problem when supply chain interruptions occur, however, is that negotiating leverage simply doesn't work. If your supplier is out of product, there isn't any amount of negotiating or money that will change the situation. Balance your vendor list accordingly.
Evaluate your position in the supply chain. Each supply chain has multiple positions of strength (a price setter with leverage) and positions of weakness (price takers with no leverage). It is imperative for SME owners to evaluate their position in their industry's supply chain to mitigate risks associated with weak positions. If you are in a weak position relative to your suppliers, building redundancies into your weak areas may mitigate against price or supply shocks. If you are in a stronger position, diversification may give you greater leverage over certain suppliers.
Build redundancy if possible. This isn't always an option for SME's that are strapped for cash, but over time, if you can deploy some of your excess capital into non-perishable redundancies (e.g. inventory, gas, an extra vehicle, etc.), you'll have it when you need it. For example, many companies that require a lot of gas to run their operations (e.g. service contractors with van fleets) simply use gas cards for their fleet. Another option to build redundancy would be to have a gas tank at your office site. This serves the same purpose, but would prevent any interruptions to operations because of a lack of gasoline.
We'd love to hear from our readers: what are some ways that you have built resilience in your organization against supply chain interruptions and shocks?
Inside Jessica Alba’s long and turbulent road to taking the Honest Company public (Forbes)
+ "The business has yet to meaningfully surpass its 2016 peak. According to Honest’s IPO filing, revenues were $238 million in 2018 and $2 million less the next year—down from $300 million in 2016, a drop the company in part attributes to having a diluted product catalog that did not optimize its margins, according to the filing. Meanwhile, Honest’s headcount—reportedly more than 500 in 2016—now stands at 191. A key component of Honest’s pitch to potential stockholders is its “strong financial performance”—namely that it grew revenue nearly 28%, to $300.5 million, last year. Yet that figure means the business is roughly the same size it was about five years ago."
Ransomware attack forces shutdown of major U.S. fuel pipeline (Axios)
+ "Colonial Pipeline, which carries 45% of the East Coast’s fuel supplies, shut down 5,500 miles of its pipeline in response to the attack, according to the New York Times. The pipeline transports around 2.5 million barrels of refined gasoline, diesel fuel or jet fuel every day, supplying harbors and airports on the East Coast."
Five Guys has opened its first ghost kitchen, which only cooks food for delivery, as digital demand continues (Business Insider)
+ "Ghost kitchens, also called dark kitchens, have existed for years but only really gained traction in 2020 during the coronavirus pandemic. They have since sprung up all over the world as demand for food delivery has soared. They allow chains to cut costs and build their delivery capacity, or explore a new area, without opening a new restaurant, which would usually involve large outlays for real estate and staffing. Other chains including Burger King, Wendy's, and even the grocery giant Kroger all have ghost kitchens."
Driscoll’s desperately needs to know America’s appetite for strawberries (Wall Street Journal)
+ "Just over a year ago, Soren Bjorn, who helps run the world’s biggest berry company, made a bad call. Demand for fresh berries was falling as the onset of a pandemic shut restaurants, while grocers focused on keeping staples in stock. Mr. Bjorn, president of the Americas division of Driscoll’s Inc., told farmers in California to plant fewer strawberries. Then, Americans stuck at home went on a berry binge. Strawberry demand surged. This March, Mr. Bjorn made the opposite decision, telling farms to increase their strawberry acres when they plant the crop this fall. Those acres won’t yield berries until next spring. “The world will change three times over between now and then,” Mr. Bjorn said."
The economics of movie product placements (The Hustle)
+ "A frequent misconception is that all brands pay a fortune to appear on the silver screen. In some cases this is certainly true:
Harley-Davidson paid $10m to get its electric motorcycle featured in Marvel’s Avengers: Age Of Ultron (2015).
Heineken shelled out an estimated $45m for 7 seconds of screen time in the James Bond film Skyfall (2012).
BMW plunked down ~$110m to supply cars for GoldenEye (1995), Tomorrow Never Dies (1997), and The World is Not Enough (1999) before Aston Martin outbid them with a ~$140m offer for Die Another Day (2002).
More than 100 brands (including Gillette, Nokia, and Carl’s Junior) offered a combined $160m to be featured in Man of Steel (2013)."
An oncoming mineral shortage may derail our green future (The Hustle)
+ "Popular green energy solutions use a variety of rare earth metals and minerals. Two examples:
An electric vehicle (EV) uses 6x as many mineral resources as a fossil fuel car.
An offshore wind plant requires 9x as many mineral resources as a comparable gas power plant.
According to the IEA’s analysis, manufacturers will need 6x the amount of minerals being produced today by 2040."
One-on-ones are my most valuable meetings; here’s how I run them (Mathilde Collin)
+ "If done effectively, these one-on-ones are an opportunity to show my team that I care about them, their professional success, and their overall happiness. It gives them an opportunity to step back and think about what they need to be successful, and to hold me accountable to setting them up for this success."
The great talent reshuffling of 2021 has begun (Hunter Walk)
+ "Employees are going to vote with their feet and I feel for People Ops teams who are going to be having a tremendous number of emotional conversations. With understaffed HR teams increasingly working with algorithms instead of coworkers, it’s easy to forget that employees are people — people with families, hobbies, and rich inner lives that often go unnoticed and unacknowledged at work. Empathy is not a math problem. And even if most of us aren’t crying behind the webcam, it’s never been more important to know how employees are feeling."
Don't fret about tax-law changes--yet (Morningstar)
+ "A higher capital gains tax, as has been proposed by the Biden administration, would have a meaningful impact on just a small subset of investors during their lifetimes. But proposed limitations to the “step-up” in cost basis on inherited assets have the potential to affect the estates of a broader swath of individuals. Of course, both changes are bound to be contentious and will have to make it through a deeply divided congress before becoming law. The Biden proposal is an opening salvo; there could well be significant alterations along the way. That said, investors with sizable taxable accounts will want to give some thought to whether and how changes to the step-up rules might affect their plans. For example, a reduction in the step-up would make lifetime giving more attractive; the case for leaving appreciated assets behind in taxable accounts would be diminished."
Why Wall Street is salivating over the garbage business (New York Post)
+ "Garbage truck companies may soon be all the rage — thanks to a new report making the rounds on Wall Street that’s advising investors not to overlook the waste management sector when searching for industries that might benefit from the economic rebound being triggered by coronavirus vaccinations."
His ship vanished in the arctic 176 years ago. DNA has offered a clue. (New York Times)
+ "All 129 explorers ultimately perished, succumbing to brutal blizzard conditions and subzero temperatures. The doomed expedition endured in the public imagination — inspiring fiction by Mark Twain and Jules Verne, and, more recently, the 2018 AMC series “The Terror” — driven in part by rumors that the crew resorted to cannibalism. The wreckage lay quiet until 2014, when a remotely controlled underwater vehicle picked up the silhouette of the Erebus near King William Island. Two years later, a tip from a local Inuit hunter led to the discovery of the Terror in the ice-cold water of Terror Bay."
We'd love your help.
If you stumble across something great, send it to weekly@permanentequity.com.
If you know an owner, operator, or someone who works with SMB's, please give us the highest compliment and send them our way. You can find previous The Weekly issues here.