How four CAs working across the supply chain navigated recent bottlenecks

Just as “unprecedented”, “resilient” and “accelerated” were the business buzzwords of 2020, the past year has spawned its own – “a perfect storm” – that seems to crop up without fail whenever current supply chain woes are discussed. Whatever you call it, there’s no denying the constant disruption that has been stretching businesses to their limits, ever since spring 2021 when the Ever Given, a 220,000-tonne container ship bound for Felixstowe, blocked the Suez Canal.

Within six days, cargo delays and increased shipping costs saw global trade grind to a near-halt. The situation has barely improved since, with UK businesses hit by “pingdemic” staffing problems, post-Brexit red tape, plummeting stock levels, rising demand coupled with a huge shortfall in HGV drivers, inflation reaching a 30-year high and now, most tragically of all, the rising food and fuel prices caused by the war in Ukraine.

This – yes – perfect storm has thrown all manner of logistical puzzles and mind-scrambling maths at finance professionals. But, as four CAs tell us, far from being daunted by these challenges, they relish solving them. And their ability to crack these complex calculations has helped to safeguard employees, keep customers satisfied and even boost the resilience of their businesses.

Raw materials

The pandemic housebuilding boom and DIY revolution have fuelled demand for raw materials, such as timber, cement, copper and plasterboard. But both construction industry and shoppers alike were faced with bare shelves due to supply shortages and the increased costs of basic materials. Prices for timber, for example, soared by 50% in 2021.

If there's a silver lining to the crisis, it's that it has forced many businesses to scrutinise their supply chains"

On the frontline

Kirstin Donaldson CA
CFO/COO, Confor

We’ve seen a huge demand for timber at Confor [the body representing the UK’s forestry industry], whether from the construction industry or people suddenly working from home and planning garden projects or sheds. But the crazy thing is, the UK imports some 80% of its timber from overseas. Demand for timber was skyrocketing, but logistics were running incredibly slowly, resulting in our members raising their prices.

However, both consumers and the construction industry have seemingly accepted these increases. This has been good news for those British firms involved in the 20% of domestic timber, such as woodland owners. But what’s going to happen when everybody starts to feel the crunch that’s set to come?

If there’s a silver lining to the crisis, it’s that it has forced many businesses to scrutinise their supply chains, whether by developing better relationships with suppliers, conducting more due diligence or stamping out bad practice by looking for more sustainable and ethical solutions. For example, with natural gas going up in price, some businesses may replace it with an alternative source of energy. But I fear that many SMEs with strained cashflows might dial back from any sustainability commitments they’ve made because they’re on the hamster wheel of survival.

The supply chain crisis has confused many in business: not everybody can understand the statistics. But CAs are analytical: they’re good at standing back and looking at the strategic elements of the whole business. You can work in any industry, take a look at the numbers, see what problems are arising, before adding something to it.

Manufacturing

Factory production across the UK was hit by staff shortages brought on by the pingdemic, a scarcity of components and a slowing output due to bottlenecks. In January, the CBI warned that higher prices for manufactured goods were inevitable.

The war in Ukraine has highlighted the importance of not depending on a vulnerable source for materials"

On the frontline

William Hogg CA
Managing Director, Ecodek

During the lockdowns, many people looked at their gardens and said, “Let’s finally sort it out.” As a result, we’ve seen a big spike in demand for decking. Being a Wrexham-based manufacturer sourcing most of its materials in the UK has meant we’ve fortunately avoided some of the difficulties experienced by our competitors who import from overseas.

However, the cost of some of the smaller components we bring in from India, such as lubricants or pigments, has gone up by 40%. Even though it’s only relatively small, it can have a dramatic effect on cost.

We’re not helped by carriers not wanting to take “ugly freight” [goods that, due to shape or size, can’t be processed through regular couriers] either. Because our decking is bespoke and made to order, we ship boards that could be six metres long – which won’t go down a conveyor belt for sorting or fit in a standard-sized box.

In the past few months, the surge in the price of fuel has seen our delivery costs go up by 30%. The lack of hauliers – and companies paying their drivers more to hold on to them – has been challenging too.

We’ve also been hit by the Ukraine crisis. Although we don’t use any aluminium sourced in Russia, the war has pushed the price up by 30%, on top of the 133% price increase it had already experienced in the previous two years. For many firms, it’s highlighted the importance of not depending on a vulnerable source for their materials.

But you need to be able to roll with the punches and accept the power of things you can’t control. Being flexible and responding quickly to what’s going on is the best way to navigate your way through this.

Retail

Demand in the home improvement sector shot up during the pandemic lockdowns, with people stuck indoors looking to spruce up their homes. But higher shipping costs have led many firms, such as Ikea, whose flatpack furniture shot up by 50%, to transfer price rises to consumers.

The geography of supply chains will change – there’s a push towards manufacturing goods closer to home"

On the frontline

Donald Begg CA   
Managing Director, Begg Shoes

Supply chains work differently in the footwear industry. Look at the shoes you’re wearing right now, for example. You might think it’s all manufactured in the same place. But the upper section might be made in India, the sole in Vietnam, with the eyelets coming from Spain. Then it’s all assembled in China. It’s similar to the car industry, where components and semiconductors come from a multitude of countries. But with the current supply chain crisis, traders might end up with a pair of shoes that have soles, but no laces.

At the same time, supply lead times have gone from six to nine months, up to 12. Last November, I ordered some school shoes for the start of the 2022-23 school year. With luck they’ll arrive on time this summer!

All these issues meant our stock decreased by 15% last year, despite our annual turnover going up 41%. CAs will know that’s a bad mix. Unfortunately, we’ve had to pass on supply chain costs increases to customers as there are other overhead pressures to manage just now, chiefly wages and energy.

An optimistic outlook – call it contrarian if you will – helps. From September 2020 onwards, we ordered more stock at a time when other small retailers weren’t, because their footfall and sales were down. A negative mindset can become a self-fulfilling prophecy: if your stock declines, so does your revenue. You also end up with less selection, which isn’t great for customers. One competitor who didn’t buy stock during this period saw their sales drop by 49%.

Begg Shoes has also been fortunate in that both my brother – Gaven, who looks after our website and marketing – and I are CAs. Whether it was Covid-19 grants, cashflow projections or liaising with banks, we were able to work on it quite easily, whereas other businesses may have struggled. When making decisions, I often see a profit/loss or target gross margin in my head. And because our business is driven around data, I’ve been trying to recruit more CAs to help me look through it.

As for the future, the just-in-time model of supply chains is probably over. Pre-pandemic, we could do 20% of our business that way – now it’s 2%. We’re heading towards a less globalised world: for example, shoe traders will probably get their eyelets in Portugal rather than China, where transporting them could be a risk. Other financial pressures, such as rising energy costs, wage inflation and soaring transport costs mean I believe it’s unlikely supply side inflation in the shoe trade will end anytime soon.

Having the financial discipline to assess worst-case scenarios has got us through the lockdowns and helps the business with supply chain issues. And I’m sure it’ll help us avoid huge losses with any future crises, too.