Preserving Business Reputation With Supply Shortages – Forbes

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When a company’s reputation depends on reliable delivery, and delayed deliveries and product shortages prevent reliable delivery, then the business needs to slow down sales. A business hardly ever tries to slowdown sales, but reputation is a long game, based on performance rather than marketing.

A remodeling contractor my family has used is advising prospective customers to wait a year if at all possible. We chose him for a project ten years ago because his past clients reported that he finished on schedule and on budget. Having heard so many horror stories about remodels gone bad, we hired him. And he delivered that project, then another small project, and then our final project early in 2021.

But construction projects are being delayed left and right, with evidence from the remodeling association leaders and industry newsletters. Some of the delays derive from materials shortages, including plumbing products, appliances and other goods. The national labor shortage also means that contractors cannot get workers on the job sites. Commodity products are generally available, but at a very high price. Lumber and plywood are the best examples of sky-high pricing. At some point, contractors may have to ask for more money than clients had budgeted for their projects.

Manufacturers, wholesalers and retailers all face similar supply chain problems. Most frustrating is when delayed delivery of a small component, such as an on-off switch, prevents shipping a high-margin product. The widespread nature of the delivery delays cause more headaches. That product which cannot be shipped for lack of an on-off switch may be part of a larger set-up for another company’s automation plans, or part of a complex consumer product such as a car, or a complementary product (“customers who bought this also bought that”). Thus a wide array of products can be delayed by one simple component’s unavailability.

Consider the choreography of a construction project. In a remodel, demolition of old structures comes before construction of new walls. If plumbing is delayed then bathroom tilework may be delayed, slowing down every succeeding step of the project. That’s not a huge problem in a recession, when the different subcontractors are eager for work on short notice. But in a boom, delays require difficult rescheduling across many busy subcontractors, most of whom are having trouble hiring. Delays propagate like a virus.

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How does a company with a reputation for reliability handle such a crazy market? The best course is brutal honesty. Our contractor first asks prospective clients if they can wait a year. That’s feasible in some cases, but not in others. For clients who must go forward now, they are advised that delays and cost overruns are likely.

With plenty of warnings, one would think that the contractor will look like a hero on any project short of major disaster. Unfortunately, many people hear warnings and cautions without internalizing the bad forecast. Months later their frustrations grow with every delay and cost adjustment.

The alternative to repeated delays is the absurd schedule. What might normally be a three-month project for $50,000 could be bid as a nine-month project for $100,000. That approach might sound like price-gouging, but given the uniqueness of every remodel, nobody knows for sure what the “usual price” would be for their project.

Businesses with repeat customers should think about who their best customers are. Biggest is not always best. High volume is good, but some customers use their volume to get rock-bottom prices. The most profitable customers may be those in the middle, with fair-sized volume but few discounts. However a company ranks its customers, providing better service to some customers, and declining business from others, may be better than offering poor service to all.

A company might also prioritize high-margin products. If not all customer demand can be satisfied, can the business at least provide good delivery times on a subset of its product line? If so, then focusing on delivery of its most profitable offerings will boost net earnings.

Across all of these approaches to supply-constrained business, honesty with customers is vital. It’s better to decline business from a prospective client than to make promises that cannot be kept.

The worst strategy is anything that results in client dissatisfaction. Businesses typically have trouble getting sales in their early years. Then good work brings referrals, which multiply as the number of satisfied clients grows. But bad work—including delays—destroy the company’s reputation. Turning down business that won’t bring a positive referral is necessary for any business playing the long game.