Grant Thornton: Customers pay the price as volatile supply chains pressure mid-market
Research from Grant Thornton UK’s latest Business Outlook Tracker shows that over half (52%) are finding it harder to operate their business today, compared to 12 months ago.
To manage cost pressures, 61% of respondents said that their suppliers have agreed to more flexible (longer) payment terms, and 55% said increasing costs in their supply chain are being passed onto their customers through higher prices for their products/services.
A total of 42% of the respondents had already increased their prices, with a further 51% planning or expecting to raise prices this year. This increasingly challenging operating environment has been fueled by headwinds such as commodity prices, increased trade administration, energy costs and political uncertainty.
Building a resilient and agile supply chain is now a top priority for 57% of respondents, with around 48% saying that their business did not have a good enough understanding of their business’ supply chain to be able to respond quickly to disruption over the last 12 months. The top risks to mid-market supply chains were identified by business leaders as cyber security, Brexit disruption, ethical breaches by suppliers and rising inflation.
Andrew Howie, managing partner in Scotland for Grant Thornton UK, says business leaders should keep action simple and practical, first creating a risk benefit analysis and then finding opportunities that have the most buy in and can be actioned quickly. He said: “Businesses need to take a risk and profitability-based approach to their supply chain as changes that affect businesses are happening constantly, whether you are prepared or not.
“Business leaders should take time to identify the most likely and damaging risks to identify improvements that can help build resilience, increase supply chain predictability and reduce supplier risk. They should then add analysis of profitability to the picture, which will help to identify the most resilient products and customers.
“It will likely take 18-24 months for organisations to make any meaningful changes to their supply chains, and this timeline will depend on the maturity of the supply chain approach. Businesses should plan for 12 months at least to put systems in place. Look for simple steps that you can action right away, such as measuring and mapping, as many improvements do not need large investments.
“Finding the opportunities that have the most ‘buy-in’ and investment from the business is also vital. For example, if your internal ESG strategy isn’t in order, then your supply chain will be a long way off. Identify which initiatives bring business benefit and are either established, or will be supported in your own business, and focus on those initially.”
Grant Thornton has identified five actions businesses can take to build sustainable supply chains:
You should use relevant data to identify risk, map the supply chain and identify existing profitability by product, country or customer. This will help you to make and prioritise decisions in the supply chain - whilst knowing the cost impact of the decisions.
All supply chain activity is underpinned by the growing ESG agenda. Often, prominent ESG risks are in line with general supply chain risks, such as location of suppliers. Also, lenders and other stakeholders are more likely to support businesses with strong ESG cultures – for example by offering lower lending rates. Lenders and other stakeholders will increasingly look to ESG reporting and adherence to regulation, so having data ready, even before they ask, will be key. In addition, your supply chain partners need to be able to provide you with assurance that they are operating in line, not just with regulations, but with your standards, and in an objectively ethical manner.
Tax and reporting policies are designed to raise revenue and change behaviours of businesses. You need to keep on top of the direction of travel in the key territories in your supply chain. More taxes are likely to be introduced relating to sustainability - such as plastic packaging taxes and, most significantly, carbon taxes and pricing mechanisms. These taxes will add significant costs into your supply chains that you may not yet be aware of or have planned for.
Understand how tax and reporting sensitivity scenarios can be built into the data you are already collecting and ensure your suppliers are doing the same.
You will start to feel pressure from larger customers to adhere to their reporting requirements, perhaps even internationally. TCFD and EU initiatives will play a bigger role – many businesses are not compliant today and need to do more. If you feel you are behind, that is ok, as there is time to catch up. Start by reviewing the data you are already collecting and identify the gaps in terms of supply chain and ESG. You also need to ensure that all the suppliers and partners involved in your supply chain, from start to finish, are transparent, that they’re adhering to legislation and that you get early visibility of potential cost increases.
Findings from the Business Outlook Tracker around COP26 last year showed that 1 in 3 mid-market businesses had not calculated their carbon emissions for the year, and half (49%) had not set a net zero strategy. It is vital that all parts of your business understand emissions (internal and external) and their impact on the environment. If you haven’t already, you should begin by measuring your impact in terms of Scope 1, 2 and 3 emissions.