463: Four Ways To Deal With Material Shortages And Price Increases

My Business On Purpose

Four Ways To Deal With Material Shortages And Price Increases

In the third month of building out our Ram Promaster van as an off-the-grid getaway camper, I walked into our local home improvement store and gasped out loud.

A ¾” sheet of Oak plywood was $65 (USD). An 8’ section of poplar wood was $40 per board.

Ouch.

For an amateur just learning how to do basic woodworking and sure to miss-cut, these would mean some expensive experiments. No longer was it measure-twice-cut-once... but instead, measure for an hour and cut (hopefully) just once, and sometimes twice.

We spend much of our day with business owners and key leaders in the contracting, services, and supply industries and it did not take long to start reviewing their bids to customers and realize that $250 per square foot pricing was rapidly increasing to $300 and $400 per square foot in our area.

A perfect storm of production cuts in anticipation of COVID increased demand of services during COVID, and the intracontinental migration of people from more-restrictive to less-restrictive geographies has led to a class increase of demand and a decrease of supply.

Restaurants are running slower with longer wait times due to a shortage of staff. Architects are running slower with longer start times due to a glut of new projects. Builders are running slower with longer supply delays due to material shortages. Landscape construction providers are running slower with challenges finding both labor and material.

In a study in classic macroeconomics, supply and demand are dancing reluctantly like two kids at an awkward seventh-grade winter dance.

When demand is the lead with supply weakened, business owners have the uncertainty of getting the time and materials to complete the work.

When supply is the lead with demand weakened, business owners have the uncertainty of finding work.

In this time of massive demand with struggling supply, how do we deal with unpredictable material shortages and price increases?

Here are four tools in the toolbelt of a purpose-centered owner...

First, communicate with your team and your customer.

How many times have you sat in an uncomfortable airplane seat while the aircraft rests still on the tarmac with no rationale as to why it is not moving? Although we are grateful to have the benefit of air travel, it is made less frustrating with information.

Pilots have access to an amazing amount of information and yet consistently (not always... but often) withhold the information from the tens or hundreds of people sitting blindly in the back of the aircraft.

Sometimes a simple, “We’re still gathering information and I will be back with you in 10 minutes for an update whether we know anything new or not.”

Communication is a powerful tool even when the communication is “I don’t know.”

Be thoughtful in your communication, don’t be hasty. Your team members and your customers are your partners, without them, you do not have a business. Without you, they do not have the valuable service you offer.

Second, grow your cash.

Recently, Rick Steves was interviewed by Guy Raz on the powerful How I Built This podcast. Raz acknowledged to Steves that his multi-million dollar travel business had to have been decimated by COVID. Steves agreed, and was then asked by Raz how he maintained his staff?

Steves responded by saying that he kept his entire staff of 100 people with virtually zero revenue for the entire year of 2020.

Raz pressed and asked how, Steves said simply, “We had a good 30 year run as a privately held company and I saved up cash.”

Steves’ cash reserves have provided options.

Business owners are susceptible to obsessive tax advice that encourages minimizing how much taxes are paid by purchasing unnecessary assets.

If legitimately needed, then these can be beneficial purchases. Just remember, when you spend that cash you a) likely pay a premium for whatever it is you purchased, b) you must now pay to maintain that purchase, c) and you no longer have access to the cash used to make the purchase and used to maintain the purchase.

Access to your own cash, even though you have to pay taxes on it, can be a powerful hedge against the uncertainty of material shortages and price increases. Review your cash position with a qualified CPA who is not obsessed with buying a bunch of year-end distractions.

Third, ensure your contract language clearly spells out what happens in the wake of material shortages and price increases.

For many industries, there is a gap between the time a contract is signed and when work is performed. Markets and materials fluctuate daily. Some vendors have price locks and some don’t. It obviously helps to communicate the consequences of such changes up front.

We know of one builder who had recently removed the price fluctuation clause from their contract months prior to COVID because they felt it was a barrier to clients feeling comfortable.

And then the prices started to increase and a $1mm home was now $1.4mm. You can imagine the shock to the clients. They immediately called all of their active clients under contract and explained the situation, the removal of the clause, the reality of materials and labor. Fortunately for them, each of their clients agreed to move forward.

They caught a huge break... but I would not press my luck. Review your contract language with a qualified attorney.

Finally, be a student of your industry (aka - don’t be so head down in your business that you miss the macro-view that will affect your business).

Building a business on purpose means building a business that you work on and not a business you work in. Working on the business means that you study trends, talk to industry peers, know the flow of supply and support.

Where in your weekly schedule do you have time blocked to study the industry? To attend events? To network with other owners and key influencers?

Supply and demand are constantly slow dancing in a burning room (thank you John Mayer). Let’s not be surprised when one of them trips and falls. Instead, let's prepare now.