Small Businesses Stay Calm and Carry On

Small Businesses Stay Calm and Carry On

Keeping calm and carrying on – that’s the current steady stance of small business owners despite the backdrop of rocketing Omicron cases, disruptive protests and ongoing uncertainty.

In The Alternative Board’s Summer Pulse Check, nearly two-thirds of business owners report their confidence is holding steady in the face of ongoing challenges.

For many, this confidence is lessened by government policy and economic conditions, although in contrast, a smaller number report that government policy and economic conditions improve their confidence.

Three-quarters of business owners report they are having to manage labour issues, including skills shortages, juggling staff absences or retention. The vaccination rollout has not had a huge impact on their workforces or businesses – a small number report staff losses but for the majority, it has been business as usual.

After last year’s lockdown stresses, when our Spring Pulse Check showed owners were at their lowest ebb since the start of the pandemic, the summer has seen business owners rally, finding ways to manage uncertainty and pandemic pressures. Chief among the stressors are rising input prices with lack of sales and supply chain issues not far behind.

To get through 2022, business owners are looking for more government or financial support however recent changes to lending conditions has not had an impact. Working capital and customer relationships are also holding steady and while the future isn’t bright, the current pulse is stronger than at the end of 2021.

You can download the full results here and access all the Pulse Checks here.

The Alternative Board supports small to medium sized businesses and their owners through advisory boards consisting of other local business owners, expert one-on-one coaching, a suite of business planning tools and business mentoring.

The Pulse Check is run as a regular monitor of the sector. The Summer edition went to 3520 of our members and associates between 18 – 24 February. Results have a confidence level of 90% and a 5% margin of error.

Competing in a strained labour market

Competing in a strained labour market

One of the main issues contributing to a lack of business confidence right now is difficulty in recruiting appropriately-skilled employees.  The Alternative Board NZ’s Spring Pulse Check showed that 37% of the businesses surveyed were suffering due to the inability to recruit the people and skills they required.

COVID-19 restrictions have put additional strain on the labour market and exposed the problem, but it would be too simplistic to suggest that the pandemic is the sole cause.  Other factors may include

  • Long-term underinvestment in training for New Zealanders to acquire key skills.
  • Competition for labour from Australia, where wages tend to be higher and living costs are often more favourable.
  • Significant expansion in the public sector, which leaves fewer people available for employment in businesses.

Irrespective of the causes, businesses need to think about how they will compete to recruit and retain the employees they need in the current labour market conditions.

The best way to do that is to ensure the business provides a happy workplace with a positive workplace culture so your good staff will not want to leave and others will be attracted to apply.

Business owners and CEOs should strive to create and maintain a happy workplace for their employees – and remember they spend much of their own time there. An unhappy environment only adds to their personal stress and workload.

Happy workplaces have lower staff turnover, so recruiting, onboarding and training new employees becomes more manageable.

A workplace culture where employees feel safe, comfortable and valued could make the difference between success and failure in recruiting and retaining the talent that your business needs to survive. Creating and maintaining such a workplace should be foremost among your staffing strategies.

Of course, there are other ways that you can try to compete in a tight labour market. You could try offering more money – if you are offering way above the market pay rates you are almost certain to attract a few applications from mercenaries.  However:

  • Can you afford to increase your payroll expenditure?  Remember, this is likely to be a long-term increase in your business expenses.
  • There is no guarantee that the mercenaries that you attract will have the attitude that you are looking for.  They may only be interested in the money, and not be so interested in the long-term success of your business and may leave if they get a better offer.
  • You may rely on some of your best people to train the new recruits in at least some aspects of the job – so make sure there is no apparent pay gap between your loyal long-servers and the fresh faces they are training.

You could try offering perks (such as free health insurance, paid time off, kiwi saver co-payments, discounts to your business’s products or services etc).  Some of these have only a small marginal cost to your business and, used wisely, can help in building employee loyalty.  However, some perks can add substantially to your business costs and you need to make sure that any perks are accessible to all staff rather than a recruitment bargaining tool, adding stress and ultimately being counterproductive. A happy workplace is probably the most cost-effective strategy for recruiting and retaining good staff.  In a happy workplace your employees will help in attracting the talent that you need to your business and attract more customers.

Our Summer Pulse Check is now live. The Alternative Board seasonal Business Pulse Check is gaining significant traction within the market and our voice is starting to resonate with key politicians including the Minister for Small Business, Stuart Nash. You can have your say on the constrained labour market and other issues by clicking here.

Is your business Omicron ready?

Is your business Omicron ready?

The COVID-19 Omicron variant is now out in our community and the spread in cases saw a shift to Phase Two. With further surges being predicted over the next few weeks smart operators will use the current time to prepare their businesses for the likely challenges.

The good news is that most people who have contracted the Omicron variant have experienced relatively mild health symptoms.  The bad news is that it is very contagious, and at Phase Two the government will be requiring persons who test positive and their contacts to isolate for a period of 10 days (for cases) or 7 days (for contacts).

Keeping Employees in Separate Bubbles

Given the isolation requirements, it will be a good idea to split up your workforce into separate “bubbles” (ie. teams, shifts, or whatever your workplace parlance requires) that do not have any direct contact with each other.  By doing this, you will be able to avoid having your whole staff in isolation should one employee have a positive COVID test. 

If you can split your staff into two separate bubbles then a positive test in only one of the bubbles will still leave you with approximately half of your staff available for work.  If you can split your staff into more than two bubbles, that will be even better.  The more bubbles you can practically split your staff into, the less affected your business will be if your staff start testing COVID-positive.

During phases Two and Three of the Omicron response, businesses may have vaccinated, asymptomatic “close contacts” onsite if the worker is not customer-facing and can maintain a “bubble of one” while at work (including travelling to and from work).  The detailed “Bubble of One” requirements and other requirements for returning to work during omicron are available by clicking here.

At the risk of stating the obvious, implementation of these measures needs to be clearly communicated and well-managed.

Anticipating more supply chain disruptions

If there is widespread absenteeism in the transport and distribution sector due to an increase in the rate of COVID infection (and the associated isolation requirements), then it is to be expected that supply-chain disruptions will also increase.

So it will be smart to increase your inventories of critical supplies and bring forward orders for your critical items.

It would also be smart to identify alternative sources of supply (for both non-critical items and critical items if possible), and transport alternatives that you could use if your usual transport arrangements fail.

Keeping in touch with customers

In addition to communicating with your employees, you need to make sure that you keep in touch with your customers.  If you don’t maintain the contact, you are providing an opportunity to your competitors to step in to exploit the communication gap.

Could be that some of your customers will voluntarily self-isolate during an Omicron surge out of an abundance of caution. So you need to remind them that you still value their business, and explain how they can order without visiting your premises.  Easy if you already have an e-commerce website, but otherwise you need to have some other system whether that be by email (send them an up-to-date order form) or by telephone ordering.

And if you don’t have any system at all for your customers to do business without visiting your premises, it is certainly time for you to set one up!

Is your business Omicron-ready?  What additional measures have you had to take? If you would like to discuss these or any other issues give Russell or me a call.

Worried how you’ll weather the storm?

Worried how you’ll weather the storm?

The past two years have been very challenging for everyone, particularly for businesses. But also for our customers, our suppliers, and our employees. And for their families, and our families. Some have lost people dear to them. Fortunately, in New Zealand, the illness and death caused by COVID have not been on the scale that has been suffered in many other parts of the world (for which we should be grateful).

Nevertheless, it has been a tough time. Many people have lost their businesses and many employees have lost their jobs. As always, the effects have not been evenly distributed – some businesses, some sectors, some occupations have suffered more than others.Be not troubled – for all these things must come to pass, but the end is not yet.

The perpetual optimists among us may have been hoping that 2022 would get off to a much better start, but the current outlook is for more stormy weather.

  • Stats NZ has released the inflation indices for the December quarter. Although the quarterly CPI increase is down slightly from the September quarter, the annual increase for the year to 31 December 2021 is 5.9%, which is the highest annual increase for 31 years.

  • Rising inflation is not unique to New Zealand – many other countries are also experiencing higher inflation due to many factors including supply chain disruptions, increasing oil prices (the price of crude oil is now more than US$85 a barrel or 60% higher than the price at the start of 2021 while petrol prices in New Zealand are up 30% year-on-year), labour shortages, soaring transport costs, and steep increases in the cost of many commodities and materials used in the construction industry.
  • The cost of construction of new dwellings in New Zealand has risen 16% since December 2021.
  • The Omicron variant of COVID is now in the New Zealand community, the whole country has been put on the “Red” traffic light, and “locations of interest” (and “super-spreader events”) are popping up everywhere. The government modelling has extended up to a possibility of 50,000 cases per day, although they have also modelled significantly lower case numbers. Nobody knows for sure how quickly it will spread but internationally it has quickly raced through populations.
  • The good news is that, for most people, the Omicron variant causes much milder illness than the earlier variants. Nevertheless, if case numbers run as high as anticipated then there will still be a lot of deaths.
  • If the Omicron variant really takes off and the people diagnosed with COVID (and all their contacts) have to isolate for 14 days (or even for 10 days), that will be a lot of people not turning up to work. This will quite likely exacerbate the existing labour shortage and create even more supply-chain issues.
  • On top of all that, the geopolitical situation in the Black Sea area seems to be deteriorating. Hopefully, the issues can be resolved diplomatically because a shooting war would probably put additional pressure on both inflation and world supply chains.

Despite a rough start to 2022, these things will pass. In the meantime, we need to focus on developing plans to survive whatever circumstances the year may throw at us and be prepared to react very swiftly. Shared wisdom will help.

After the rain comes the fine weather

Have you considered how each of the clouds on the horizon may affect your particular business? Have you planned how you will deal with the most critical risks?

At The Alternative Board we believe in the value of shared wisdom, and we’re starting to see the positive actions our members are taking to combat the storms ahead. If you’re interested in finding out how being on an advisory board can help you walk through the storm, get in touch. It’d be great to have a chat.

Rethinking Inventory Planning and Supply Chain Logistics

Rethinking Inventory Planning and Supply Chain Logistics

One of the major drivers of the wave of inflation currently sweeping the global economy (and the New Zealand economy) are the issues arising from stretched or broken supply chains. 

You would have to be comatose not to have noticed shortages in the past couple of years as they have affected almost all products – dunny rolls, medical supplies, personal protective equipment, new cars, computer chips, cleaning supplies – even food. And because these shortages started manifesting themselves about the same time that the COVID-19 pandemic started spreading around the globe, it is easy to assume that the pandemic has “caused” the supply issues.

They are not unrelated. The pandemic certainly caused some demand surges that were not able to be immediately met by inventories on hand, and staff shortages due to illness combined with lockdowns to cause production and logistic slowdowns.

Significant choke-points have arisen in the world’s transport and logistics industries – shipping container shortages, congestion at major ports and rail shipping hubs, lack of capacity in road transport (to name only a few).

In short, the pandemic has resulted in widespread disruptions, dislocations and delays. And transport costs have risen significantly, up to about 10x for container shipping.

However, to attribute the supply chain issues solely to the pandemic (or, in fact, to any single cause) is an oversimplification that will not serve us well in adjusting to the new operating environment. The pandemic may well have been the snowflake that started the avalanche (or the proverbial last straw that broke the camel’s back), but the real causes are systemic weaknesses that we have spent the past decades building into our supply chain management and inventory policies.

It is important to acknowledge that the pandemic exposed the supply chain and inventory management problems rather than causing them because if the pandemic was the cause we could think that the problems might be fixed with a vaccine. But the problems are far more complex and are unlikely to be resolved quickly, even if the pandemic quickly came to an end.

For many decades we have been focused on cost-cutting in the areas of transportation, warehousing, and inventory carrying costs by implementing “Just-in-Time” manufacturing and logistics, zero-inventory (or at least very minimal inventory) policies, and lean supply chains. This has been very effective at reducing costs in all three areas of transportation, warehousing and inventory carrying costs as long as there were no supply-chain disruptions or supply/demand shocks.

But the reality is that there will always be disruptions and shocks from time to time. When that happens, the worst-affected economies and businesses will be those with the longest supply chains (i.e. those furthest from the sources) and those for which transport costs (rather than warehousing or inventory carrying costs) represent a larger proportion of the costs of goods. This does not bode well for New Zealand businesses and consumers, because we are relatively remote from most sources of supply (excluding primary industry goods) and transport costs are a significant part of our cost structure.

Of course, all businesses are different and business owners need to think about the implications of the supply chain “new normal” as it affects their own business. There are seldom any solutions that are universally appropriate for everyone.

The leaning of supply chains and inventories have been very effective in cutting business costs and improving competitiveness, so it would be counter-productive to throw out the baby with the bathwater. What is needed is a more nuanced approach that identifies which supplies are critical to business continuity and planning for more buffer stock of those critical items to keep the business going through supply chain shocks.

There may be no need to increase inventories of non-critical items.

The analysis needs to be informed by a detailed analysis of total costs to ensure that savings in warehousing costs and inventory carrying costs are not eaten by increased transport costs. It also needs to be informed by supply chain risk and resilience considerations, and by sound continuity of operations planning.

Inflation will be a significant business challenge in 2022

Inflation will be a significant business challenge in 2022

There can be no doubt now that we are in for an inflationary period.  Quarterly inflation for the period ended 30 September 2021 is the highest for 10 years (see chart below) and the RBNZ Monetary Policy Committee (MPC)’s report of 24 November 2021 states that headline CPI inflation is expected to measure above 5% in the near term.

NZ Quarterly Inflation Graphic
NZ Quarterly Inflation Graphic

The MPC’s report attributes rising inflation to tightening capacity pressures in the economy and specifically cites employment as being above its maximum sustainable level.  The report also refers to higher oil prices, rising transport costs, and the impact of supply shortfalls as a consequence of global supply-chain disruptions.

Some economists might also argue that monetary and fiscal policy might also be contributing to inflationary forces, and there has certainly been a significant and rapid expansion in the RBNZ’s balance sheet (as shown in the chart below).

Graph of the NZ Central Bank  Balance Sheet 2012-21
Graph of the NZ Central Bank Balance Sheet 2012-21

Irrespective of the causes of inflation (and whether it will be “transitory” or longer-lasting), business people will need to focus on how to mitigate the effects of inflation on their businesses.

Typically, the business challenges associated with higher rates of inflation are as follows:

  • As the purchasing power of the currency decreases, customers become discouraged from buying goods and services in the same quantities as they used to. This impact can be particularly severe on businesses selling non-essential services and goods. Consumers will often choose to forego luxuries and minimise on the quantities of essential goods and services as a result of increased prices.
  • Currency held in bank accounts by both businesses and consumers loses its value day-by-day. This exacerbates the falling demand for goods and services as consumers typically feel “poorer”. It also reduces the value of the reserves that businesses hold to fund equipment replacements, new products and services, and to see them through unforeseen setbacks.
  • Business costs increase across a broad range:
    • As transport costs and the price of products and materials increase, so does the cost of replacing inventories.  It is obviously important to be increasing the selling prices of goods and services to at least a level that will fund the purchase of new inventories, but this is often difficult to do in an environment in which demand for goods and services is already falling due to the decreasing purchasing capacity of customers.
    • Rising costs of replacing inventories can be amplified for goods for which there are supply shortages, as competing businesses attempt to fulfil their requirements by bidding up the supply prices.Employee wage demands typically increase during periods of high inflation due to the increasing cost of living.  While this is quite understandable (and it is important to increase wages in order to maintain consumer demand), a lot of businesses will struggle to afford payroll increases because of decreasing revenue.
    • Borrowing costs typically increase along with inflation, as interest rates are increased to try to counter the increasing inflation rate.  At its November 2021, the Monetary Policy Committee increased the Official Cash Rate (OCR) to 0.75%.  The interest rates have already started to increase and it is only a matter of time until the increases flow through to the retail interest rates charged by banks and other lenders.

Of course, different businesses have different characteristics and different circumstances, so there is no single solution that will be best for all businesses (just as there is no financial advice that will be most suitable for everybody).

Members of The Alternative Board are in the fortunate position of being able to access the collective experience and knowledge of their fellow members, and then apply that knowledge and experience to making their own business decisions grounded in the knowledge of their own businesses and circumstances.

The Alternative Board Auckland North