Supply Chain Risk and Increasing Costs: How Are UK Businesses Building Resilience?
Supply chain issues are not new, but following the lifting of coronavirus restrictions in the UK and the hope that UK businesses will bounce back from a prolonged period of suppressed (or no) trading, they are having an acute impact on recovery.
Disruption, delay and increased costs were compounded by the pandemic. But these issues have arguably been brought into even sharper focus now that business has re-opened and the true impact of the UK leaving the EU is being felt. Indeed, supply chain challenges are at the very top of many C-suite agendas right now, having recently caused some very high profile operational disruptions and lost sales for a good number of household name brands: such as McDonald’s, IKEA, Nandos and JD Wetherspoons to name but a few.
What are we seeing and how are and have businesses been addressing these issues?
As restrictions started to lift in the UK, demand for goods and services rose steeply, significantly outstripping supply and production. Raw material scarcity, labour shortages, rising energy costs, a lack of CO2, and transport and logistics issues have since compounded the problems. As seen recently with fuel, a shortage of HGV drivers caused significant logistics problems, with the lack of drivers creating delivery and therefore a supply crunch in getting certain products to market.
Rising container costs and delays at ports have also had an acute and on-going impact on global business. Those businesses reliant on imported materials, components and goods have been unable to get them, or are receiving deliveries much later than forecast. This in turn is creating production problems and inefficiency, impacting planning and distribution, as well as affecting the ability to meet contractual obligations and commitments.
Drewry’s shipping index, which measures the cost of containers, recently confirmed the index is up 291% compared with a year ago. Busy routes, such as from China to Europe’s biggest port Rotterdam, have seen freight/container shipping costs rise sixfold in the past year alone. Global demand for containers is also significantly up too: 20% in 2 years, coupled with a global over-reliance on shipping. Delays, congestion and closures at ports have exacerbated already rising costs. These are not just issues for the UK, with delays at foreign ports and increased freight costs affecting businesses in many other jurisdictions too.
Whilst, for the UK at least, one might put this down to leaving the EU and increased post-Brexit border-checks and paperwork, not all issues are Brexit related; elsewhere many delays and hold ups have been caused by slow bureaucratic processes, a pile up of containers and a general lack of labour, including HGV drivers, to shift them.
Supply chain issues are not sector specific and are affecting all businesses, although industries such as automotive and construction are two areas that have been particularly hard hit of late.
Construction has suffered from shortages of raw materials (timber, paint, cement, etc.) and automotive with a shortage of key components, such as semi-conductor chips, which have stopped production lines. Car manufactures that fared better than others in the face of such shortages were those able to stockpile components and build-up inventory (just in case rather than just in time), allowing them to work through supply problems; but in order to do that, such companies needed increased warehousing capability and working capital at exactly the time others had to stop production.
Businesses are trying to build supply chain resilience and security of supply, including by removing weak links. In some cases, strong businesses can ride out the stress – the stockpiling example given before is an illustration of this. However, we are seeing an increasing shift towards risk mitigation steps such as dual, local, regional and near sourcing in some instances; as well as greater mapping/monitoring (eg red flags), simplification and optimisation of supply chains in many instances. This helps to reduce the impact of supply chain volatility, delay and disruption, especially when materials and goods are sourced from further afield using longer and ever leaner lines of supply.
Sourcing products locally is also helping businesses with their ESG (environmental, social and governance) objectives – reducing carbon footprints, sustainable sourcing and greater tracing and transparency (including through use of blockchain technologies) will certainly be an important facet of supply chains in the future.
In addition, a shift towards automation, robotics and digitalisation of supply chains are helping address costs and labour shortages, which is a problem not just in the UK (where a large number of workers have not returned from the EU post Brexit and from “ping-demic” induced labour restrictions, etc.) but in other countries too.
As a consequence of a rising cost base, fixed price supply contracts are causing business stress for some suppliers. Being tied into uncompetitive contracts and the impact of delays is manifesting itself in penalties, liquidated damages claims and pricing/other contract disputes. Suppliers and end customers are increasingly dusting off their agreements to see if they have any contractual levers/protections from increasing costs, such as the ability to increase or resist price rises. Others are trying to renegotiate terms or considering termination options.
Looking further forward, we are also seeing supply chain partners seeking to work together more collaboratively (an extension of the “all in it together mantra”), through increased sharing of information that can assist with demand planning and data analytics to monitor risk. But such steps can lead to legal issues, including data privacy and potential competition complications, when sharing such detailed supply data. Nevertheless, despite the legal and other risks, increased use of AI and digital twin technology (essentially to aid planning and model disruptive events), will likely continue to gain traction as a solution to address future supply chain problems. For further discussion on this topic click on this link: AI fixes for supply chain logjams carry legal risks
As well as looking to build resilience by localising and simplifying supply chains or reducing costs through automation, even in the best-planned cases a business can still suffer unexpected stress or supply chain shock through no fault of its own. This could be down to a major supplier or customer falling over or (but hopefully not) a near instant cessation of trade from a future pandemic. However, a business is impacted, directors must ensure that they continue to comply with their directors’ duties, and take advice as and when required. Early advice can often lead to preserving value in a business that is being eroded by external threats such as supply chain delays, disruptions and costs. To access our quick guide to director duties click here.
 30 September 2021
 For a variety of reasons such as on-going Covid restrictions (eg licence renewal/testing), disputes over pay and conditions, a lack of EU nationals in the UK, and an aging driver population, etc.