Supply Chains: The impact of stock shortages

Comments from Charles Brook, Partner at Poppleton & Appleby.

Several months ago, I commented upon the pressure that seemed to be accumulating across various industry supply chains.  The causes were numerous, but different sectors attributed it severally to Brexit, the pandemic, social trends, and general economics.

A repetitive media topic ahead of Brexit was the anticipated impact upon the cross-border mobility of key personnel in agriculture, transport, construction, hospitality, and health, but there was less emphasis on the likely effect on materials supply.

Now, as the UK economy continues to open up after 18 months of COVID-related restrictions, businesses and consumers are starting to feel the influence of Brexit and the pandemic in a very tangible manner.

Globally, delays in manufacturing attributable to COVID have contributed significantly to shortages of raw materials, components, and finished goods.  Supply chains that encompass the World but serve regional manufacturers, producing goods and consumables to regional standards and requirements on a “just-in-time” basis, have been severely disrupted. The consequences are shortages of supply at all levels of consumption.

manufacturing supply chain

Added into this mix are the changes to consumer habits which have also been fuelled by the response to COVID.  Door-to-door logistics has developed enhanced importance (especially in the UK), which has led to significant changes within logistics at large and a shortage of trained drivers.  This has made the debate around international trade no less important, but the soup of the discussion now has a much more complex list of ingredients in which the macro and microelements are equally important.

There can be no sector of the economy which isn’t going to be affected by this chaos for many months ahead. The uncertainty will make it particularly difficult for some sectors to forward plan.

It may seem quite banal to some people hearing that McDonald’s have suspended selling Milkshakes and Nando’s have had to close some stores due to logistical delays. Still, these should be clear indicators to the public at large that more serious issues exist, and who hasn’t noticed the empty shelves in their local supermarket due, not to panic-buying, but missed deliveries?

McDonald’s have suspended selling McDonald’s suspended Milkshakes

At a business level, this could be very serious indeed.  If the big players in the consumer market are experiencing these problems, the difficulties for smaller businesses must be almost insurmountable.

Consider, for example, a modest-sized business operating in electrical contracting.  The UK has hundreds (if not thousands) of such businesses that operate in the commercial sector, carrying out maintenance, refurbishment, repair, and infrastructure work.

Many of those contractors operate under fixed-price and performance-related agreements.  They quote against planned works and detailed client specifications, sometimes many months ahead, and may now find themselves struggling to deal with issues that have seldom (if ever) been a problem before; problems such as:

  • Increased component costs due to shortage of supply.
  • Delay to supply or forced changes to specification due both to scarcity of product but also logistical delays.
  • Shortages of personnel due to the loss of staff arising from Brexit and COVID-related measures. Perhaps even the loss of personnel as a cost-saving measure during the pandemic or due to individuals seeking a career change.
  • Clients changing their plans in response to a changed, post-COVID economy.
  • Increased costs of operating to accommodate changed working practices around safety and hygiene.
  • Wage pressure from employees that have a heightened understanding of their value in the marketplace and their own need to cover the inflation in their domestic budgets.

The consequence for these businesses will include:

  • Contract losses.
  • Lost business.
  • Contract penalties.
  • Inhibited cashflow.
  • Redundant, pre-ordered resources and materials.
  • Competitive pressure on new tenders.
  • Bad debts.
  • Staff shortages and additional wage pressure.
  • STRESS – in all interpretations of the word.

There isn’t a single sector of the commercial economy that is likely to remain unaffected by all this turmoil for months to come. The consequences are presently unfathomable and, as the UK Treasury sets about its plans to restore the health of the nation’s economy, it is very difficult to anticipate what we will be facing in another 12 months’ time.

Whether that includes significant inflation, interest-rate increases, increased (or decreased) unemployment, or volatility in property and investment values, it will take a very brave economist to predict.

There are certainly turbulent times ahead for all business sectors, from Micro-Businesses and SME’s through to PLC’s and Global Enterprises.  Seldom has it been more important for business owners to actively engage with their accountants and other professional advisers as they face the challenges of the future.

Smaller businesses will need to supplement their sector skills with the knowledge and experience provided by their advisers, who have a wider perspective on the economy and their clients’ best interests at heart.  Teamwork and Resilience will play a very large part in future success.

 

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