Uncertainty and the supply chain
Uncertainty and the supply chain
The escalating trade war between the US and China, and business worries related to EU exit feature heavily in the news these days. The current level of macroeconomic political uncertainty is affecting many areas of business.
But the reality is that uncertainty comes in many forms. It is perhaps the only constant in business.
Those large businesses that succeed in the long term and continue to grow, have not only the ability to adapt to changes in their trading environment, but in many cases, an appetite to meet these challenges head on.
What’s certain is that businesses that procrastinate in the face of uncertainty, regularly fail to make the important decisions that can create competitive advantage or propel them into a state of sustained profitable growth.
In this article, we review four of the challenges that businesses are facing as we move towards 2020. We will also explore some of the strategies available to help strong businesses thrive in the face of them.
Challenge 1: Macroeconomic uncertainty and the impacts of stockpiling
When there is political uncertainty – such as that relating to Brexit – businesses at multiple points in the supply chain prepare for the worst. This can lead to unpredictability of supply.
For many, this means stockpiling of raw materials and components, or of end products.
Stockpiling is also common when the price of a raw material drops sharply. For example, when the price of steel or cotton drops sharply, it can be strategically advantageous to buy at a below average price.
The net result is a warehouse full of goods and a significantly depleted pot of working capital. This is a potentially limiting situation for any business.
Those that have a significant working capital provision in place – for example by combining import finance and a discretionary supply chain finance facility with their existing bank overdraft and invoice discounting facility, will maintain an accessible fund of working capital.
Challenge 2: Consumer demand and the living world
Increasingly, consumer concerns related to sustainability, the environment and responsible manufacturing have caused businesses and whole sectors to change their production approach.
The pace of change can be immense.
The UK has a target to achieve carbon neutrality by 2050, but there is pressure from many sides to move more swiftly. And the task is huge – every gas boiler and every petrol-powered vehicle will have to be replaced – which is just the start.
As the impact of these objectives filters down, the step change can be significant. For example in 2017, the entire supply chain for plastic straws was thriving (as it had done for some time). By 2018, it was decimated. This affects not just those that sell the straws, but the manufacturers of raw materials, packaging, and even the machinery used to make the straws. A whole supply chain has been disrupted in a very short space of time. And whilst the demand for paper straws and other alternatives has increased, not every company in the supply chain will have been able to keep up with the pace of change.
Working capital agility and the pace of change
Whilst working capital agility cannot save whole sectors from these impacts, what it can do is offer businesses the capital needed to invest in the research, adaptations and innovations that are necessary to take advantage of the new opportunities that this ecocentricity has created.
As the facts about environmental issues such as climate change, the challenge of disposing of billions of tons of plastic waste, pollution and water scarcity become more pervasive, these concerns and legislation arising from them, will continue to impact businesses.
This creates opportunities for some but uncertainty for others, with both large and small companies, domestic and global businesses, all affected.
Preferred creditor status and the impact on cash
The rules around preferred supplier status are changing. From April 2020, HMRC will rank above floating chargeholders in terms of payment priority.
This will have a knock-on effect on any business that relies on stock finance to fund their supply chain. Typically, the stock finance provider might have advances of 50-60% of the value of stock. Grant Fraser, Sales Director of Woodsford TradeBridge explains, “this figure will certainly drop – in some cases perhaps to levels as low as 20%. Whilst there are no guarantees, and the situation will vary from company to company, this will without doubt affect every business that relies on a stock finance facility.”
If you believe your business many be adversely affected by the changes to preferred credit status, and you currently turn over £25m or more, then get in touch for a free working capital review.
Challenge 3: Automation and AI
Artificial intelligence (AI) is actively used in the science, manufacturing, healthcare and medicine, and robotics sectors to automate tasks and create efficiencies. But even industries that are completely dissociated from computer science and AI are benefiting from its innovations. This includes industries such as marketing, accountancy, human relations and recruitment.
Investing in new technology and benefiting from machine learning can be expensive and has a huge impact on a company’s workforce. With this in mind, not every business will choose to embrace the changes coming down the line.
However, in an uncertain world, failure to invest can leave an organisation – especially one with large amounts of legacy infrastructure – unable to keep up with more nimble competitors. These more agile competitors have embraced the new technology coming down the line, and it has become part of their make up.
We recently wrote an article on automation in manufacturing, and the move to “industry 4.0”. Here we looked at how the most successful manufacturing stories of recent years often relate to businesses who have access to the additional working capital they require to innovate and embrace automation and digital transformation.
As technology moves forward apace, only those manufacturers with a strong cash cycle will have the working capital agility to adapt to uncertainty, and to embrace new technologies coming down the line.
Challenge 4: Exchange rate fluctuations and international business
Exchange rates have always been volatile. But if we compare the situation now to a few years ago, increasingly the changes in exchange rates have become much harder to predict.
It’s not just global businesses that are affected by fluctuations in exchange rates either. Any business with either suppliers or consumers outside the UK is affected by uncertainty caused as a result of exchange rate variation.
At Woodsford TradeBridge, we work with many businesses who source components internationally, or that have international manufacturing capabilities, such as Matrix Polymers for example. For these businesses, the lack of exchange rate predictability can result in a reduction of agility in the business.
If they hedge too much, their prices to the end consumer may become un-competitive. Yet hedge too little, and they may simply cease trading.
Final thoughts on uncertainty, and predictability in the supply chain
In the face of uncertainty, particularly for those sectors exposed to rapid change, predictability in the supply chain is vital.
The relationship between uncertainty and the supply chain is undeniable. Businesses need to manage relations both upwards and downwards, keeping a close eye on markets, technology, consumer demand and a whole host of other factors.
Woodsford TradeBridge works with successful and high growth businesses turning over at least £25m, complementing their working capital toolkit with supply chain finance solutions that enable them to thrive in this fast-moving business world.
To find out more about how we work with strong businesses like yours, get in touch.