Utah small businesses suffer as global supply chain breaks down

Things almost feel like a new normal. Some workers are returning to the office. Families and friends are going out to restaurants again. But the COVID-19 pandemic is likely far from over, especially for small business owners.

Despite many people feeling hopeful as the vaccines against the virus and its variants prove safe and effective, small businesses are dealing with something beyond the 14-day quarantine.

For business owners, it seems things have just gotten worse.

You may have heard rumblings of global supply chain problems, but business owners are acutely aware of them.

• Raw materials in high demand are causing prices to surge

• Materials can take weeks or even months to ship because of the high demand

• International ports are clogged and shipping companies are dealing with a worker shortage

• Low unemployment in Utah is leading to increased wages for in-demand workers

Just about every link in the supply chain is weak, and local businesses are feeling the pressure.

In a meeting with Gov. Spencer Cox late last month, several Utah small businesses -- all of whom are part of Goldman Sachs 10,000 Small Businesses support network -- told the Governor that costs associated with the supply chain problems and with inflation are threatening to put them out of business.

In South Salt Lake, Shades Brewing owner Alexandra Ortiz said her 10-year-old small brewery is struggling in the “unsustainable” environment of the continued pandemic as material prices go up and customer habits change.

In Salt Lake City, Kaddas Enterprises CEO Natalie Kaddas said her family-run manufacturing business has the same problems with sourcing materials and with maintaining a full workforce.

In Murray, Air and Sea International is an outlier, president Jason Fowler said, because the logistics company is doing well under the pandemic as other businesses need its help moving and sourcing their products. Still, Fowler said he is seeing the many struggles facing others.

Rising Prices

The foremost challenge for small businesses is increasing material prices.

Most components for Shades’ beers have gone up in price, Oritz said, but it’s the price of containers that is hurting the business most.

“The cans really have been the most egregious,” Ortiz said. “Our can prices really have tripled.”

Cans are in higher demand with fewer people drinking in bars and restaurants. Instead of putting beer in kegs for resale, breweries started using more cans to sell directly to customers or through grocery stores, putting more strain on can manufacturers.

Shades used to pay 13 cents per can. That price has now gone up to more than 30 cents, or more than 125%, Ortiz said.

Shades can’t just start charging customers more either, Ortiz said. When the company tried to do so, a retailer that had agreed to a test run of selling Shades cancelled because the beer would not be competitively priced.

“It’s killing us,” Ortiz said. “It’s basically crushing our margins.”

Shades isn’t alone in this. Few companies manage production from raw materials to shipping, instead relying on a chain of vendors to source materials.

Kaddas Enterprises, a second-generation family-owned business founded more than 50 years ago, makes protective casings to protect power lines from animals as well as other molded plastics.

The company purchases the plastic it uses from a nearby supplier, Kaddas said, but that supplier has had problems sourcing the chemicals needed to make the plastic. The chemicals for the supplier are primarily made in Louisiana, she said, which has dealt with the pandemic, an unusual winter freeze and a hurricane in the past year, lowering its output.

With demand for Kaddas Enterprises’ products rising, the company needed to overstock on plastic material to ensure that it could fill orders. That’s a lot of money up front, Kaddas said, which puts a strain on the cash on hand to pay workers.

“Maybe their revenues are up, and that’s great,” Kaddas said. “But if all your other costs go up as well, you actually could be taking home a lot less money.”

To prevent future problems of this nature, University of Utah business school professor Nitin Bakshi said businesses need to be more transparent with suppliers and purchasers. If a purchasing company knows where its suppliers get their supplies, they may be able to shift course if there are known problems. For example, if a natural disaster affects raw material sourcing from a certain country, the final purchaser may look for suppliers who source raw materials from another country.

“All sorts of disruptions happen,” Bakshi said. “You have to be prepared.”

Switching suppliers as needed isn’t really an option for the company, Kaddas said.

“One of our challenges, because our product is so niche and we supply the power utility space, the materials have to go through rigorous testing,” Kaddas said. “It could take a year to complete, and it’s six plus figures for each test.”

While trying not to price their products so high that they can’t compete with large corporations, small businesses are struggling to keep up with rising wages for employees. The low unemployment rate means workers can choose to hold out for better-paying positions, but some business owners say they can’t afford to pay what the employees demand.

“It’s not really sustainable to grow wages at the rate that they have been,” Kaddas said, “especially in Utah.”

Many workers are also moving away from jobs with manual labor, such as manufacturing, to take office jobs, Bakshi said.

Ortiz said Shades has a leg up with hiring since craft brewing is a job people like to be in if they’re beer enthusiasts, but even with that, the demand for workers is high. Her suggestion to fill these jobs: allow more immigrants.

“I think nothing would help more than to open the borders,” Ortiz said, adding that there are people looking to come to America to find a job.

Piling up

Just moving materials and goods is a struggle right now -- ports are backed up, there aren’t enough workers to unload shipping containers and there aren’t enough truckers to haul goods across the country.

Fowler attributes some of the holdup in shipping to a change in consumer habits. People are buying more physical goods rather than spending on travel or eating out because of public health concerns, and Americans who retained their jobs during the pandemic now have more cash to spend because of stimulus checks from the federal government.

The supply chain wasn’t prepared for that spike in demand.

“With the need for durable goods that we are ordering,” Fowler said, “it’s like bringing in six lanes of traffic into four lanes.”

Businesses, to try to keep up with demand, changed operations from what Fowler called “just in time” to “just in case.” Instead of purchasing items with the intent to ship them out right away, businesses are stockpiling items in case there are shipping delays or a sudden spike in demand.

Companies are all “making different guesses” about when demand and the supply chain will stabilize, said Bakshi.

Leading into the holiday season, the supply chain has commentators and customers concerned that gifts won’t arrive in time. Because people are thinking about holiday giving so early, Bakshi said purchasing early should be enough to curtail any problems for presents.

Larger retailers and other businesses, with their stockpiling, have also prepared far enough in advance to meet holiday demand, Fowler predicts.

“I don’t think it’s going to be as bad as everyone, you know the harbingers of doom out there, think,” Fowler said. “Maybe prices will be higher on some scarcer products, but I think we’re going to be okay.”