We look at whether it is time for UK businesses to bring their supply chains back home...
Whether it was semiconductors and microchips piled high in distribution centres thousands of miles away, or supermarket shelves bereft of cornflakes and trainers, the pandemic demonstrated the inherent risks of complex, global supply chains in the most emphatic of ways.
For many manufacturing and engineering businesses, it was a time of existential shock as contracts and customers were lost amid the mayhem. It’s little wonder that by early 2022 over 60% of European and U.S. manufacturing companies had already declared their intention to reshore part of their Far East production capacity by 2025*.
So what are the main advantages in on-shoring or near-shoring these fragile ecosystems of supply and demand?
1) Decreasing Exchange Rate Risk
More than most, manufacturing and engineering businesses will be only too aware of the foreign exchange risks associated with a global supply chain - money can seem to disappear from accounts due to fluctuations in exchange rates, especially in a market as volatile as the current one. Consolidating as many transactions as possible into one currency by on-shoring - or a minimal number with near-shoring - significantly reduces the risk of being left high and dry by economic factors beyond a business’s control.
2) Heightened Logistical Efficiency
Bringing operations closer to home can also make supply chains more supple and responsive. Quality controls can be managed in-house, negating the reliance on third parties many continents away, while any changes to a company's business can be implemented at a much faster rate thanks to a more sympathetic time zone and fewer language barriers. This is all before you even begin to consider the cost and time saved by reducing global shipments.
3) Increasing International Labour Costs
The most common reason for reluctance to on-shore supply chains is the perceived higher cost of domestic labour. While there is certainly some merit to this argument, especially considering the current record domestic manufacturing labour shortages, increasing shipping costs and worker rights legislation in the Far East have meant that the saving from producing away from home has decreased significantly in recent years. In fact, many manufacturers have faced annual labour cost rises of more than 50% from Asian suppliers** while, for some time, labour has actually been cheaper in Croatia than it is in China***.
4) Reducing Carbon Footprint
Environmental, social, and governance (ESG) issues are no longer the preserve of the hastily concocted corporate CSR report. On-shoring doesn’t just help with reducing exposure to macroeconomic variables; bringing processes closer to home also vastly decreases the emissions produced from the transport of goods.
That the UK government has set the world’s most ambitious climate change target – to cut emissions by 78% by 2035 (compared to 1990 levels) and to bring it more than three-quarters of the way to its target of net zero by 2050 – should serve as a warning to all SMEs that such issues are here to stay.
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Rob Starr is a Partner - M&A at Shaw & Co
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