UK manufacturers have had a lot to go through over the last three years with Brexit, the slowdown in global output and the macro political environment dominating most agendas. But what we are facing today with the impact of COVID-19 is something quite unprecedented - a simultaneous shock to both supply and demand.
Of course, it doesn’t end there, not only is the shock global, but different parts of the world are at different stages in the crisis. This is having a major impact on supply chains, as the complex process of modern manufacturing sources parts and raw materials from across the globe. So while businesses have long been used to supply chains being highly efficient, just in time, with tremendous visibility on procurement lead times and logistics, this is all changing in a matter of days and weeks.
Two sides to every story
On one side there is an issue of falling demand for some manufactured products because they cannot access their sales markets. As China emerges from its lockdown measures and their production output gradually increases, much of Europe and the US are in lockdown with many factories closed or on reduced output (with some exceptions). They therefore have no need for the products that Chinese manufacturers have made.
On the flip side there are other issues for those businesses looking to meet higher demand. For those manufacturers still operating at high output, barriers of reduced shipping operations, closed ports and logistical labour restrictions mean getting raw materials and components on time is proving difficult – even if they were willing to absorb higher costs of these in order to fulfil the demand they are experiencing.
Whichever side businesses fall, the challenges and disruption are increasingly felt and this will only intensify in the coming months. Whether businesses have Brexit planned or not (and some will have done better than others), the knock-on impact of COVID-19 has taken supply chain disruption to a whole new level.
Creating resilience – tips for manufacturers
What is clear is that supply chains are not resilient to the shocks we are experiencing today and many companies are realising just how exposed they are to products made in China. Now more than ever, companies will need a new level of understanding of their supply chains, as well as the risks they are exposed to and how to mitigate against them.
There are a number of practical issues companies can consider when revaluating their sourcing strategies. Identifying and, where possible, addressing them may help many manufacturers react to the disruption more effectively:
- Don’t underestimate the delay in how and when the impact may reach you. It may not necessarily be your immediate components and supplies that are affected, as these may have been produced before lockdowns, but the materials you need for June and July are the ones that may not arrive
- Reforecast sales and assess production operations for any sudden shifts in demand. Customer patterns are changing swiftly and agile production capability will need to be factored in
- Optimise inventories and identify early where you have product and component shortages in your production needs
- Open dialogue with your key suppliers. Even if they are local, understand where they have delays and where they are exposed geographically, as this will have a knock-on impact on you
- By understanding your geographical exposure, direct and indirect, and the current rules and restrictions in those areas, steps can be taken to reduce reliance on any one area
- Prioritising the sourcing of scarce resources and pursuing alternative sourcing strategies will help avoid any future bottleneck supply issues
- Work with your customers to minimise the disruption to their supplies from you and understand their priorities
- Review contractual risks, with expert guidance where necessary, to consider where obligations cannot be met and what the implications of this are
- Factor in higher transportation costs for both goods in and out, whether through longer times, less-efficient routes, or market demand pressure creating price rises
- Now more than ever, companies will need to be on top of their numbers and be financially agile. The current circumstances could mean previously agreed terms may no longer be applicable, so these need to be reviewed