How Does Supply Chain Management Affect Working Capital?

Buyers often expect working capital (current assets minus current liabilities) to be included in the sale of middle-market food and beverage companies. So, working capital is critical to the valuation – it’s estimated at the closing and adjusted 30 to 90 days afterward. This makes deciding whether to hold more stock to offset supply shortages a decision that comes at a price.

For insight into supply chain issues in the foodservice industry, I spoke with Dennis Silva of food wholesaler Julius Silvert. What follows is an abridged version of our conversation. Questions and answers have been edited for clarity and conciseness. You can listen to the full interview – How the Food & Beverage Distribution Channel is Changing – on my Food and Beverage Talk podcast.

Guest Bio

Dennis Silva is the Chief Operating Officer of Julius Silvert, a fourth-generation specialty food wholesaler servicing the Atlantic and Northeast regions. Dennis has private equity, board of directors, C-suite, and management consulting experience. He possesses a track record of scaling new business segments while delivering multimillion-dollar profitability improvements.

Key Questions

• What impact will holding more stock have on the market?
• How do customers react when a supplier is out of stock?
• What has been the impact of the Ukraine-Russia war?

The Impact of Supply Chain Management on Working Capital

Jacob: Since the pandemic, there’s been a shift toward holding more stock, which ties up working capital. What impact do you think this will have on the market?

Dennis: Well, think about the opportunity cost of maybe not being in stock on a particular SKU. If your competitor had more stock on an item and you lost the business because you day traded it just in time, then you lost that opportunity – cost of sales in that instance. Whereas if you’re safe and insulated on products, that makes sense. I’m not condoning to load, though, that’s the worst thing you could do for tying up capital. But there’s a new opportunity cost: Will I lose the sale? Will I lose the business if my competitor has this product?

Jacob: And potentially, you could lose the account, too?

Dennis: That’s what I’m getting at, yes. For example, how much did we spend on labor this year? Would we have lost out had we not had the labor to service that customer? How much do we have tied up in operating capital – for the cost of capital, for inventory? And if we run out of the same product again, can we say all our competitors will also have run out? The answer is no. Then, we have to second-guess and analyze what we stock up on, because you can’t stock up on every product. Nor can your competitors. That’s just not financially sound. So it’s a bit of a chess match. Which harvest am I buying in? What’s the code life on this? What’s the lead time into that combination of products? Which VIP accounts are buying this? Really, no out-of-stock is acceptable. That’s the environment we’re living in today.

You can’t stock up on every product… That’s just not financially sound.

Jacob: How do foodservice customers react when a supplier is out of stock?

Dennis: Well, you’re delivering ingredients for an item that’s on the menu. If you were in a grocery store and a particular SKU was out of stock, you’d buy something else. It’s a packaged product.

But, at a restaurant? Say, you were at a steakhouse and they just ran out of the filet you were looking for. It upsets you; it’s frustrating. You go to these restaurants for an experience and to relax. It’s a social, cultural thing that’s enjoyable. And it’s fantastic that it’s survived through the pandemic and come out stronger. But when a supplier shorts a venue, they’re shorting the customers. That venue is going to have to get that product from someone else. If they can’t, their customers aren’t going to deal with continued shortages on those items. You might do it once or twice. But, you know, if it happened more than twice, I wouldn’t go back there.

When a supplier shorts a venue, they’re shorting the customers.

Jacob: That’s a good point. I’d imagine diners get pretty disappointed?

Dennis: Yes, when we pick out a restaurant for dinner, we go to our existing accounts of Julius Silvert. We’ve got some fantastic white-tablecloth restaurants that we service. We go out for a date night and look at the menu. Let’s say we’re going to have the steak or the fish; if that item is out, it can ruin the whole mood.

Restaurants are having to do more with less, so not only are they out, but they’ve got less staff in the back of the house as well. So it’s a much more dynamic scene. But it’s still a beautiful scene. I mean, I don’t see people not going to restaurants.

Jacob: And what sort of impact are you seeing from the Ukraine–Russia war?

Dennis: Fortunately, we haven’t been detrimentally impacted. There was a little bit of a wheat harvest issue, but we procured well ahead of time. And the way the harvest works, at least for many of the wheats we buy, we’re loading up – so supply chain disruption has eased and we can resume normal buying patterns. That was the only product category that affected us.

Takeaways

• More companies are stocking up where it makes sense; they rely less on buying just in time.
• With working capital in mind, there’s a fine line to getting this balance right.
• Restaurants are having to do more with less.