With many multinationals transferring assets closer to home and taking steps to shorten their supply chains, opportunities for manufacturers based in the UK are likely to appear to take advantage of this gap. Although taking on new contracts could put a strain on cashflow, therefore steps should be taken to avoid this.
For the past couple of years, the benefits of switching to domestic sourcing arrangements has been a significant talking point. Disruption of supply chains linked to the challenges of the pandemic and Brexit have meant many manufactures have started to reconsider reshoring.
Why should Manufacturers consider reshoring?
Reshoring has now become a focus for manufactures for several reasons. For some sector businesses, transferring production to the UK creates the chance to increase supply chain resilience and remove risk, while creating diversification in their supply network. Pricing advantages associated with manufacturing in overseas economies have decreased in significance. Therefore, manufacturers are switching to UK suppliers as it makes much more commercial sense.
Review possible supply chain disruption
Alternatively, businesses may decide that the cost benefits of manufacturing key parts ‘in-house’ outweigh the risks of potential supply chain disruption. For example, recent events such as the blockage in the Suez Canal, has highlighted the potential for significant supply chain disruption. Whereas, pressure from higher up the supply chain could force manufacturers to narrow their search area and look closer to home when sourcing materials or parts.
As well as improving supply chain visibility and reducing product lead times, reshoring could enable some manufacturers to increase their profitability by taking advantage of an emerging area of demand. In some cases, this could result in the formation of potentially lucrative long-term contracts. Switching to domestic production could also enable businesses in the sector to make use of spare capacity, for example, unused production facilities or furloughed employees.
How could reshoring impact your cash position
However, it is important to be aware that this change of approach could result in pressure on a manufacturers’ cash position. In order to effectively capitalise on demand for domestic production, businesses may need to go outside their comfort zone by buying materials or crucial parts in bulk or investing in the new machinery required to bring manufacturing ‘in house’.
Maintaining a healthy cash position requires manufacturers to look at the bigger picture to determine if reshoring is appropriate for their business model and overall strategy. For example, even though reshoring could create opportunities for new contracts, it is important to consider if it will work for existing customers. They should also ask the question to whether there is the required capital equipment and skillset in place to successfully switch to domestic production. For examples, onshoring production could require investing in non-core activities, leading to strategic business implications.
Switching to new UK-based suppliers may also involve agreeing to tighter payment terms, with the potential for upfront costs involved in activities such as sourcing raw materials and capabilities. Businesses could already be experiencing cashflow pressures if other areas of the organisation are underperforming or if repayments for pandemic-related loans fall due.
Combining balance sheets, cashflow and profit and loss accounts, three-way forecasting can be a useful decision-making tool, highlighting manufacturers cashflow requirements with or without the use of strategic reshoring. A third scenario can also be used, in which the business decides to adopt a partial reshoring approach, based on where the best return lie.
In order to bridge the cashflow gap while they get any new operations up-and-running, manufacturers may need to access loan finance, or consider alternatives, such as invoice finance. When seeking external finance, cashflow forecasting can help businesses to effectively present their position to the lender and communicate that there is a strong business case for the use of reshoring.
Protecting manufacturers working capital when adopting a reshoring strategy always requires good credit management and practices. This should involve caution around supplier terms, granting credit to customers and keeping the lines of communication with creditors open. Business should also take care to balance stock with levels of demand, ensuring that large volumes of capital aren’t tied up in finished goods left in storage.
Consider the impact of Reshoring before jumping on the trend
For many industry sectors, the pandemic has provided a reminder of the benefits of home-grown supply chains. For manufacturers that are able to adapt quickly, the reshoring trend could present an opportunity to enhance profitability and increase revenues. However, it is important to consider what impact taking this approach could have on cashflow in the short-term and take precautions where needed.