The 2018 Industrial Outlook: Supply Chain Management & Productivity Challenges
by Nick Behan, Industrials Practice Director at Norman Broadbent Interim Management
It’s fair to say the industrials sector has been benefitting from the devaluation of the British pound in the short-term. Taking into account the cost of importing, materials typically account for up to 30% of the production costs, which equates to a 10% price rise for many of the businesses in the UK.
Despite the increase in prices, stakeholders are beginning to raise questions about how business leaders are going to deal with the increase long-term. Will they become complacent, or can this opportunity be used for the short and long-term benefit as a stimulus to think about investments?
At Norman Broadbent Interim Management we often get to liaise with our industrials clients about the long-term effects that Brexit might have upon trade with Europe. Currently, the general view is that from a tariff perspective, organisations would be able to deal with it. Businesses which trade internationally are already set up to deal with the changes from a customs point of view, as they have already set in place the proper infrastructure. The real concern organisations have is whether or not the governments on both sides of the channel have the infrastructure to continue to support trade.
Supply Chain Strategy
To help put the matter into perspective, I recently learnt an interesting statistic: only 20% of lorries which currently cross the channel through Dover are customs checked, a process which requires circa two minutes. However, should this suddenly change to 100% of lorries having to go through customs post-Brexit, this would add approximately two extra minutes. For every two minutes added, a 14 mile tailback from Dover is effectively created. Therefore, if this was to increase by only eight minutes, the tailback would reach all the way back to the M25.
This anecdote is meant to emphasise that queuing for the customs check will become a real issue with the UK’s current infrastructure. Dover, as the main route into Europe, doesn’t currently have the capability to support the increase in traffic.
Consequently, numerous suppliers are revealing they can manage the effects of Brexit from an administrative perspective, but the questions being asked are:
- Can the government deal with it from an infrastructure perspective?
- What would that mean for working capital?
- How will the government manage it and how will it impact the issues of the customers and suppliers?
The UK isn’t home to many pure OEMs, but largely a country of Tier One suppliers, save manufacturers such as JLR and Rolls Royce. Taking this into consideration, we get to the point where we have to say the majority of the UK’s industrial businesses are part of a large supply chain. As a result, we are starting to see the OEMs announcing to their suppliers that it’s going to be their responsibility and they will be taking the risk. As a result, some of our clients are already planning their supply chain strategy in an attempt to find a solution to how they’re going to deal with the challenge.
Several solutions have been put forward, such as building up the working capital levels or dual sourcing in terms of supply chain. We are starting to see an increase in the appointments of Interims who are being used to bring the expertise and experience required to effectively overcome these challenges.
The other aspect of Brexit is related to labour access and its productivity challenges. Productivity is another heated topic, especially concerning the gap the UK is currently facing with its employee productivity issues. However, this is a sphere where Brexit could potentially act as a positive stimulus.
For example, Germany and France have very restrictive labour regulations compared to the UK. Investors looking to grow a business in these countries have had more success investing in capex and automation whilst avoiding the need to increase their labour force. The UK has a very flexible workforce with easy access to skilled engineering talent, particularly from Eastern Europe. As a result, sourcing the required talent is easier. When analysing the issue from this perspective, it makes sense that organisations are far more likely to invest in people rather than capital. Hence, while unemployment in the UK is low it suffers from low productivity.
Low productivity is a challenge on which Brexit could help apply pressure, as the industrial sector will start to see labour inflation coming through, a consequence which is already manifesting in the construction sector. We are also likely to see restrictions on labour and less flexibility, particularly if a change of government occurs. However, this may very well act as a stimulus and see the UK recognising it needs to be capital-led rather than people-led, which could turn out to be a real positive.
The Fourth Industrial Revolution
The issue of labour latches onto the ‘Fourth Industrial Revolution’, an article I wrote a couple of months ago. The world is changing, particularly when it comes to people’s mind-set. We’re starting to observe a new way of thinking within engineering businesses. Whilst the industrials sector in the UK has always prided itself on technical excellence, it is starting to recognise that, at the end of the day, it is a service industry just like everything else and the way organisations treat customers is at the core of their business.
Customer satisfaction is an area where Norman Broadbent Interim Management are starting to see a change as more businesses seeking to innovate start to ask ‘how do we use technology and connectivity to improve our customer service?’ Manufacturers, such as JLR, are fundamentally interested in receiving their orders from suppliers on time, to the right level of quality and within the target cost. Despite this, organisations still display a tendency to focus on the price point and place less emphasis on other factors such as the on-time delivery, which is a big cost to a lot of manufacturers. For example, if the delivery of 1% of the 1 million parts supplied is delayed, suddenly your customer will have a lot of cost that needs chasing.
Numerous clients of Norman Broadbent Interim Management are starting to recognise that they are now being seen as a service business and have thus began differentiating their products from the competition. As part of this change, our clients have identified the need to bring in different types of people as their business starts and continues to embrace transformation.
With the change and transformation occurring in the industrial sector, Norman Broadbent Interim Management are helping an ever-growing number of clients tap into a diverse range of people and experience from both inside and outside their sector to help them embrace and deliver change.
If you would like to learn more about how Norman Broadbent Interim Management could support your business, please contact Nick Behan on the following:
firstname.lastname@example.org or (0) 20 7484 0106