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Author: ICAEW Insights
Published: 26 Sep 2022
A recent poll of 400 mid-market business leaders found that more than half had changed their UK-based suppliers as a result of mounting supply chain issues, while 40% had switched providers outside the UK.
In addition, the survey by consultancy RSM UK found that a third had exited select product lines and a fifth had walked away from entire lines of business.
The figures provide a stark illustration of how supply chain problems have caused upheaval for UK businesses.
For RSM UK’s Lead International Partner Simon Hart, the current shape of the UK’s supply chain crisis has emerged from Brexit-related sourcing concerns morphing first into those around the pandemic, then the war in Ukraine and now the inflationary pressures that have gripped the globe.
“It’s evolved from a challenge in specific areas, such as microchips and semiconductors, into something more fundamental,” Hart says. “In parallel, we have China going in and out of lockdown, with impacts on goods coming out of Shanghai. The knock-on effect of each lockdown decision is a lag of a few months, with demand and cost implications.”
In Hart’s assessment, the challenge for businesses is knowing how susceptible to disruption their part of the supply chain is – both upstream and downstream – and how much of the pressure they can pass on.
Plus, Hart points out: “For decades, we’ve been used to the lean, ‘Just in Time’ model that Amazon exemplifies. But now, if a company is forced to say, ‘It’s going to be three months before the raw materials turn up’ and that affects its ability to make certain products, that’s a reputational risk. So, working around the challenges to Just in Time is critical.”
He notes that the debate over longshoring and nearshoring has shifted to one around ‘friendly-shoring.’ At this time, business owners will want to source goods and materials from countries friendly to the UK’s geopolitical stance, he explains, but that may mean looking further afield.
Meanwhile, in a recent quarterly poll, consultancy and training network the South West Manufacturing Advisory Service (SWMAS) found that SME manufacturers have had to add the equivalent of almost two full-timers to their staff rosters, specifically to manage the effects of supply and resourcing changes and to ensure business continuity.
In addition, says SWMAS Managing Director Nick Golding: “Businesses are having to invest in greater levels of inventory, which uses funds that could potentially be used for greater returns in other areas to protect the delivery performance to customers.”
Associated costs include not only those around the inventory itself, but also the extra space required to store it. As Golding explains, the requirement to hold escalating inventory levels, in combination with rising costs, is shifting risk to the companies concerned: if the pricing drops, it could affect their ability to recoup their costs, or saddle them with obsolete stock.
Golding notes that companies are taking four approaches to this:
He says: “Taking a strategic approach to understanding your planned customer demand, while improving supplier relationship management to explain your issues to the supply chain, helps to lower risk through improved information sharing. It also helps you pave the way for further improvements in the use of digital technology and prepare for reporting requirements around your sustainability activities.”
Simon Geale is Executive Vice President, Procurement, at Proxima, a supply chain logistics consultancy that works with FTSE 100 and Fortune 500 companies. In his view, the time and resources that businesses are having to dedicate to supply chain firefighting “is preventing us from making progress on some of the big strategic challenges and opportunities – such as net zero, delivering greater social value, and embracing Industry 4.0 to create faster, more agile and intelligent businesses.”
Despite that, Geale notes, as larger companies have faced supply chain issues for several years now, they have become used to dealing with them – mainly through two key approaches: first, factoring risk into buying strategies and decisions creates resilience; second, driving greater levels of internal and external transparency creates more agile and responsive value chains. “However, that comes at a cost – so lots of organisations are looking hard into their expenditure and taking bolder steps, in hope of eradicating waste and driving efficiencies to open up as much cost headroom as possible,” he says.
For example, he explains: “We’ve seen different buying techniques, such as changing specifications to reduce cost or increase availability, reducing complexity of range to make it more attractive and cost effective for suppliers, investing in stock, hedging and spot buying and broadening supply routes. Market dynamics, customer behaviour and internal needs dictate how a buyer should face a storm.”
So, which sorts of supply chain challenges are lurking on the horizon? Hart says: “I break it down into concerns that China will continue to flip-flop over lockdown and that the war in Ukraine will go on – although clearly, we would all welcome a peaceful end to that conflict as soon as possible. But another potential concern would be if hostilities were to flare in the South China Sea over Taiwan. Given the number of microchips that are manufactured there, that would knock the other challenges into a cocked hat.”
ICAEW Head of Business Simon Gray FCA says that a further strike at Felixstowe port, an escalation of lockdown measures in China or increased tensions between China and Taiwan are very real threats that could cause further disruption to an already rocky supply chain. “One critical issue is around communication. While customers are more prepared to wait than ever – with some manufacturers reporting 50-week lead times – it’s inevitable that there will be negative impacts that ripple through supply chains and, ultimately, to customers.”
The ability to finance stock and risks associated with late payments are taking a further toll, he says. Some businesses will see this as an opportunity to restructure and refine supply chains. But the ability to do this at limited cost, or with minimal disruption, is not really an option.
“Exchange rate concerns are also pressing, Gray says. “Downward pressure on rates raises input costs – and increased volatility in currency markets makes it very difficult to plan. Although there has been better news on shipping costs, and some indication that other pressures may be easing, it won’t take much to upset the apple cart again.”
For further ICAEW analysis on supply chains and related topics, visit our archive of relevant articles, our Economy section and our business intelligence tracker Economic Insight.
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