By Raymond Greaves, Head of Research at finnCap Group plc

Inflation and rising energy costs are on top of all business leaders’ minds but so too is supply chain which remains a prominent challenge for businesses as it has done for over a year. Everyone is affected due to the Suez Canal blockage, labour shortages, Brexit-related administrative hurdles, Covid lockdowns and of course Russia’s invasion of Ukraine.

The question is what are companies doing about it?  And one of the key responses is reshoring. to mitigate these challenges, and one of the key themes that emerged was reshoring.

For years it was fashionable for British companies to outsource manufacturing due to cheaper labour. This trend is now in reverse with many companies reshoring, opting to switch from a global supply chain to continental and in-country. Price becomes fairly irrelevant if companies can’t physically get hold of the stock.

So, British manufacturers are bringing back production to the UK to address the supply chain chaos.  According to a survey by Make UK, the manufacturers’ trade group, three quarters of companies have increased the number of their British suppliers in the past two years.

The breakdown in the just-in-time supply chain processes means that UK companies are turning away from sources of lower-cost production, particularly in Asia, to suppliers closer to home.

However, some supply chains can’t be fully reshored because critical resources may exist in only certain locations in the world. So, companies are looking to pair reshoring with nearshoring or “friendshoring” as it is occasionally termed – using a network of trusted suppliers from friendly countries that offer varied independent supply paths.

Reshoring is being driven by several other factors, not just proximity to supply chain and the difficulties of managing and delivering from a long way away. Technology security, with increasing concern about infiltration of sensitive technology and know-how by Chinese government is a factor.  Increased freight costs for shipping containers and general transport costs (fuel and wage increases for haulage drivers) is another.  Furthermore, increased technical and data requirements combined with custom delays at ports has resulted in additional costs.

It’s increasingly clear that products based on a just-in-time business model are no longer reliable over long distances.  But reshoring does not just address the reliability point. Sourcing domestically also reduces the need for excess inventory and buffer stock, thereby improving working capital efficiency.

Nonetheless, whilst orders may be flowing into British factories, many manufacturers face their own supply-chain disruptions of varying degrees in their procurement of raw materials and parts from abroad, slowing their production.  Supply chain refers not just to products and materials for direct sale to customers but in the case of manufacturing industries, it can mean machinery parts needed to operate plant and factory equipment effectively.  Automation is a growing trend, accelerated by Covid lockdowns. However, whilst having great long-term benefits, in the short-term it is beholden to the delivery and availability of vital components.

The other key response is agility, being able to run a business flexibly and dynamically, responding to what’s going on and accelerating or decelerating as the situation dictates.

Companies need to pivot from one operating situation to another. Supply chain constraints may make a management team rethink its business model but CEOs need to make sure they are the right changes for the medium term, not just for today.

The last two years have shown it is imperative that businesses adapt to the circumstances – firstly with Covid and now with supply chain.

According to McKinsey’s US Consumer Sentiment research, 77% of consumers changed stores, brands or the way they shop during the Covid-19 pandemic.  The big winners of the crisis were companies that could keep products flowing to their customers in a difficult operating environment.  In a post-pandemic world, McKinsey argues, future supply chains need to be more dynamic – be able to predict and respond to rapidly evolving demands.

The drive for agility may require companies to reassess make-versus-buy decisions.   Agile supply chains will also need skilled, flexible people, with a wide range of skills so they can move between tasks as business needs change.

Another simple approach to agility is for companies to diversify and sign contracts with additional suppliers.  Fully 81% of supply-chain leaders surveyed by McKinsey this year are now sourcing raw materials from two suppliers, rather than depending on merely one.  Some companies are also buying up their suppliers both at home and abroad in the name of vertical integration.

There is a tendency for some leaders to want to have all the data laid out in front of them and to act only when the data is clear and sufficient. However true leaders can work with a certain level of ambiguity and are able to make decisions based on available information. They stay attuned to external dynamic forces that shape the environment in which they compete and mitigate the related risks. It is more important to act quickly and decisively than let time pass trying to build up the evidence to support a decision. Living with ambiguity is key.