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Taking stock of your supply chain

Shortages in supply chains have continued to generate challenges in businesses and for consumers. The Covid-19 pandemic forced production around the world to stop for periods of time as nations experienced lockdowns and businesses had to shut down. At the same time, there was disruption to shipping, meaning that even if goods could be produced, it was not always possible to get them to their intended destination.

So why have these shortages arisen and what can businesses do to protect themselves from a lack of supply, whilst also maintaining a strong financial position?

More demand, less supply

A lack of ability on the part of consumers to spend on services has led to more goods being purchased for home delivery. Demand for goods into the USA has been particularly high, driven by the government’s support measure from 2020 onwards of sending cheques in the post to millions of households.

Ports around the world have had to deal with being unable to operate fully. As goods have at times built up, storage at ports has been in short supply. An impact of the disruption to shipping was that containers were not in the location where they were needed. In particular, the transportation of goods from Asia was hampered by containers being elsewhere in the world.

In the UK, there was a well-publicised issue with haulage. A shortage of drivers meant that even where goods could be brought to the UK or produced locally, it was taking longer for them to be collected and delivered. Delays have also arisen from the requirement for more extensive customs declarations to be provided for imports following Brexit, adding to time lags at ports and of course cost.

Bottlenecks in global distribution channels, because of both lack of supply and difficulties in transportation, have caused price increases. In particular, where goods are required quickly, there has been a larger than usual premium to pay. At the same time, consumers have come to expect shorter and shorter delivery times, with some retailers offering same day delivery in central locations.

Managing stock

There has been a trend in recent decades towards “just-in-time” methods of production, whereby only the required amount of material is delivered at the time it is needed for manufacture or sale. Clear benefits of this approach are that it cuts the requirement to store stock, reduces the risk of holding obsolete stock and aids cashflow. However, the squeeze on supply has called into question whether this is always a good idea. In some cases, it has been the businesses who have stockpiled that have emerged the strongest, because they are the only ones that have been able to fulfil supplies for their customers. There will always be a balancing act in deciding the amount of stock to purchase and hold, but at the same time ensuring that the business has sufficient working capital to fund purchases and other expenses.

Where demand from customers is high, there is a risk that businesses take on too much too soon. Overtrading arises where there is not enough cash to fund the level of trading and can result in unfulfilled orders and unpaid suppliers. It is time well spent where a business owner pauses to consider the likely future level of trading and how it is going to be funded.

Taking control of supply

Businesses can protect themselves by increasing diversity in the supply chain. Being dependent on one supplier brings with it an inherent level of risk that the supplier may choose to supply elsewhere, increase its prices to an unacceptable level or even stop trading. Building relationships with alternative suppliers in advance of such a problem occurring could be key in avoiding disruption if the worst happens.

Backward vertical integration can be an option, where a supplier to the business is purchased or developed through organic growth. This allows the business to have more control over its supply chain and can make economic sense.

It is widely forecast that there will remain challenges with supply for some time to come. Understanding both the wider global issues and those relevant to individual industries and locations, as well as being alive to how the problems may be managed, will leave business owners in a strong position to make good decisions for the long-term benefit of their business.

For more information on how you can manage your supply chain, contact Rachel Lai below.

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