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Supply chain management: how will it link up in the future?

Senthil Alagar Senthil Alagar

As lockdown restrictions ease and the economy opens up it looks like customers will quickly return to UK shops. This will be a welcome sight for owners, managers and staff, but it will also put extreme pressure on supply chain management. Patrick Woodall explains the prospects for these vital links. 

Before we consider the implications of the last 15 months of trade disruption, we need to think about why the UK is so uniquely dependent upon a global goods supply chain. 

What's the UK's supply chain story?

As the world’s first industrial economy, the UK became the global leader in the manufacture and export of products, textiles and chemicals for nearly two centuries. This fuelled the expansion of the British Empire that allowed the UK to import many of the raw materials it needed to make the vastly more valuable finished goods it exported.

As recently as forty years ago most of the consumer goods we bought were made here, although the UK, almost uniquely among large, developed nations, has for nearly two centuries imported more of its food than it produces itself.

Longstanding and relentless pursuit of logistical efficiency has left little room for manoeuvre if there is even the slightest disruption to the chain. It was widely known that some sectors would experience post-Brexit difficulties, but it was impossible to prepare for the impact of COVID-19. As we look towards the future, however, there is definitely some scope for investing in recovery.

How has COVID-19 impacted supply chain management?

According to the International Monetary Fund (IMF), real global GDP fell by 3.3% in 2020. The unique form of this disruption (intermittent localised lockdowns around the world) means that the drop was also marked by extreme volatility. 

In developed economies, trade hit the buffers in the first half, but has since recovered sharply. Some supply lines, however, were actually stretched to breaking point. A shortage of microchips forced the closure of several automotive factories because vehicles can't be produced without them. This ongoing disruption has exacerbated the problems caused by unrelated incidents, such as the extraordinary blockage of the Suez Canal by the MV Ever Given in March 2021. 

Even in a situation like this, the specific impact on supply chains will vary between types of retailer and sales channels.

Many fashion retailers are sitting on mountains of unsold inventory and cancelled orders: a bottleneck of working capital that will have to be unwound before both retailers and suppliers can commit to future orders with confidence.

Some suppliers also face additional issues. For the UK food supply chain, post-Brexit trade barriers remain a formidable challenge. Increased bureaucracy, and uncertainty over how quickly perishable foodstuffs would be processed through customs led to shortages of items that had previously moved seamlessly across borders. For many suppliers this is a short term period of adjustment, but for some sectors, like the UK shellfish industry, the impact appears to be permanent and catastrophic: the EU has indefinitely banned imports of un-purified shellfish, effectively blocking sales for UK suppliers who do not have the appropriate facilities to pre-purify them. 

Globalisation or localisation?

'Post-COVID' is not a definite date. It remains uncertain everywhere, but many countries will struggle to move on from it more than others. Nevertheless, we can still make some predictions for what supply chains will look like in this world. 

In spite of the controversy around globalisation in business, a significant return to localism is not likely. The reality is that for many sectors, around the world and in the UK, it is simply not a viable approach. 

For both food and non-food retailers in the UK, the interdependence of global trade makes any rapid shift to local production hugely challenging. For example, the UK produces only around 23% of the fruit and vegetables sold in it. A move to home production seems attractive, but it does not look like a viable option in the near future: suitable land is not readily available, and post-Brexit caps on migrant labour are causing significant shortages in farm pickers.

In non-food sectors, competitive local production of goods, such as apparel, would require major capital expenditure to build the automated factories necessary to keep up with low cost economies. The financial and opportunity costs of this approach are not sustainable for most producers. The increased emphasis on Environmental, Social and Governance (ESG) is also leading a move away from the type of corner cutting that ultimately depends on poor practices, such as using suppliers that pay workers less than minimum wage. 

This does not mean that there is no scope for diversifying supply chains.

What will supply chains look like in the future?

One South African company that I work with has, in the past 12 months, reversed its 60/40 import to home sourcing ratio; enabling shorter lead times, improved usage of local capacity and higher margins. This business has, in spite of the current circumstances, actually had a fantastic year, generating its highest ever revenues. This success depended on decisive action: management closed one of its four factories, discontinued one retail brand and amalgamated two others.

Restoring resilience into global supply chains will require investment, and ultimately it will be the consumer who has to pay for this.  Given how competitive the sector is, that may be challenging. So, it’s probable that, like with London’s 150 year old sewerage system, we will clear one blockage or patch up a leak, only to see another one occur further down the line.

If you would like to discuss any aspect of supply chain management in the retail sector get in touch with Senthil Alagar

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