By Raymond Greaves, Head of Research at finnCap Group plc
Inflation and rising energy costs are top of mind for every business leader, but so is the supply chain, which remains a major challenge for businesses, as it is. has been the case for over a year. Everyone is affected due to the Suez Canal blockage, labor shortages, Brexit related administrative hurdles, Covid lockdowns and of course Russia’s invasion of Ukraine.
The question is what are companies doing about it? And one of the main answers is relocation. to mitigate these challenges, and one of the key themes that emerged was relocation.
For years it was fashionable for UK companies to outsource manufacturing due to cheaper labour. This trend is now being reversed, with many companies relocating, choosing to move from a global supply chain to a continental and national supply chain. Price becomes pretty irrelevant if companies can’t physically get their hands on the stock.
So UK manufacturers are bringing production back to the UK to deal with the supply chain chaos. According to a survey by Make UK, the manufacturers’ trade group, three-quarters of companies have increased the number of their UK suppliers in the past two years.
The breakdown of just-in-time supply chain processes means UK businesses are shifting away from lower-cost sources of production, particularly in Asia, to suppliers closer to home.
However, some supply chains cannot be fully relocated because critical resources may only exist in certain places around the world. Thus, companies seek to combine relocation with nearshoring or “friendshoring” as it is sometimes called – using a network of trusted suppliers from friendly countries that offer varied independent supply routes.
The relocation is driven by several other factors, not just proximity to the supply chain and difficulties in long-distance management and delivery. Technological security, with growing concern over the infiltration of sensitive technology and know-how by the Chinese government, is a factor. Another is increased freight costs for shipping containers and general transportation costs (fuel and salary increases for truck drivers). Additionally, increased technical and data requirements combined with customs delays at ports have resulted in additional costs.
It is increasingly clear that products based on a just-in-time business model are no longer reliable over long distances. But relocation does not just address the point of reliability. Domestic sourcing also reduces the need for excess inventory and buffer inventory, improving working capital efficiency.
Nevertheless, while orders may be flowing to UK factories, many manufacturers are facing disruptions to their own supply chain to varying degrees in their sourcing of raw materials and spare parts overseas, which is slowing down their output. Supply chain does not only refer to products and materials for direct sale to customers, but in the case of manufacturing industries, it can mean the machinery parts needed to operate plant and equipment equipment efficiently. factory. Automation is a growing trend, accelerated by Covid lockdowns. However, while having great long-term benefits, in the short term, it is beholden to the delivery and availability of vital components.
The other key answer is agility, being able to run a business flexibly and dynamically, reacting to what is happening and speeding up or slowing down depending on the situation.
Companies must move from one operating situation to another. Supply chain constraints can cause a management team to rethink their business model, but CEOs need to ensure these are the right medium-term changes, not just for today.
The past two years have shown that it is imperative for businesses to adapt to circumstances – first with Covid and now with the supply chain.
According to McKinsey’s US Consumer Sentiment Study, 77% of consumers have changed stores, brands or ways of buying during the Covid-19 pandemic. The big winners from the crisis have been companies able to keep products flowing to their customers in a difficult operating environment. In a post-pandemic world, McKinsey argues, future supply chains must be more dynamic – able to predict and respond to rapidly changing demands.
The quest for agility may force companies to re-evaluate make-or-buy decisions. Agile supply chains will also need skilled and flexible people with a wide range of skills so they can move from task to task as business needs change.
Another simple approach to agility is for companies to diversify and contract with additional vendors. At least 81% of supply chain managers surveyed by McKinsey this year now source raw materials from two suppliers, rather than relying on just one. Some companies are also buying up their domestic and foreign suppliers in the name of vertical integration.
Some leaders tend to want to have all the data in front of them and only act when the data is clear and sufficient. However, true leaders can work with some level of ambiguity and are able to make decisions based on available information. They remain attuned to the external dynamic forces that shape the environment in which they compete and mitigate the associated risks. It is more important to act quickly and decisively than to waste time trying to gather the evidence to support a decision. Living with ambiguity is key.