Supply Chains Are Important

Supply chains are important. In Sunderland, 7,000 people are directly employed by Nissan, a further 27,000 in the U.K. are indirectly employed in the supply chain. Of the 6,000 components involved in car manufacturing, over 60% are imported from manufacturers within the EU.

The big four supermarkets in the UK have over 7,000 suppliers supporting a 76% market share in sales to 25 million households in the UK. Payment is often a problem. Supermarkets who are first to receive the household Pound often delay the payment down the “food chain” to the supplier network.

Now We Can Measure the Efficiency of the Supply Chain

Now for the first time thanks to the URICA Supply Chain Funding index [SCFi] we can begin to measure the efficiency of the supply chain and the impact of slow payment amongst suppliers. The SCFi on a scale from 0 – 10 is a measure of the efficiency of payment or the stress of low payment within the network.

In the first edition of the SCFi, the supply chain scored 6.6. Construction is the worst performing sector with a score of 6.0. Wholesale,  Retail and Distribution has the best performance scoring 7.1. Manufacturing and engineering performed broadly in line with the average performance.

It Pays to Be at the Front of the Queue…

For suppliers in the lowest or middle tier of the chain, the supply chain is more protracted, performs less efficiently and is more vulnerable to disruption. The scoring is on average over 10% less than that of those at the front end of the cash queue. These suppliers are also more vulnerable to supply chain failure. The effect can be highly disruptive and a significant setback for the business.

Economics Professor John Ashcroft

AUTHOR

Dr John Ashcroft PhD BSC. (Econ) FRSA CBIM

John Ashcroft is an experienced businessman and business economist offering a pragmatic approach to economic analysis and forecasting. He is author of The Saturday Economist and was recently ranked by CityAM as one of the top ten most influential economists in the UK and Ireland.

Payment terms are obviously important. Scaling from payment within 14 days to 60 days, the SCFi scores 7.3 down to a low of 5.5. Liquidity within the supply chain impacts on the overall efficiency of the supply chain.

So Why Is Supply Chain Liquidity So Important?

Firms at the lower end of the supply chain are less positive about growth prospects, than those that are end user suppliers. They have also been more susceptible to disruption and have greater requirements to hold stock impacting on working capital ratios.

The report confirms, greater liquidity in the supply chain would improve overall business performance. Greater confidence in cash flow and liquidity levels, would result in higher levels of investment, more employment, and higher growth rates. Higher confidence in the security of the supply chain, would also result in greater investment in labour skills and the level of apprenticeships. There can be little doubt from comments within the survey: business productivity would improve as a result of improvement in supply chain liquidity.

Business Productivity Would Improve as a Result of Improvements in Supply Chain Liquidity

In construction, 31% of firms said they would be able to recruit more staff, grow more quickly (28%) and invest in plant and machinery (25%). In manufacturing, the priority was to spend more on higher levels of investment 33%, enabling (21%) to grow more quickly. In the services sector growth and recruitment were most likely to be the beneficiaries.

The view within the construction sector was that of a significant and progressive deterioration in supply chain strength since 2009. In every sector, it is the largest firms who take the longest to pay. “Payments from large suppliers are crippling us,” the comment often heard.

Now thanks to the URICA SCFi Supply Chain Funding index, we can quantify the strength or weakness of the supply chain by sectors, size of company, amongst importers, exporters and where businesses are positioned in the supply chain.

The Real Gain from the Supply Chain

“With the benefit of the URICA SCFi, we can begin to realise the benefit to the economy from greater liquidity and improved payment; it is much more than improving a lot of the small business and those at the end of the food chain.”

Improvements in supply chain liquidity will lead to higher levels of capital investment, more jobs, faster growth and improved productivity. Security of cash flow would lead to higher levels of skills training and greater investment in apprenticeship levels in construction, engineering and manufacturing specifically. Sectors most likely to benefit would be construction, manufacturing and engineering.

Should We Look to Government to Intervene?

Government intervention is unlikely to yield much improvement in mandated payment terms or approved financial penalties for late payment. Small firms will always be more vulnerable to the larger customer on whom cash flow depends. Taking the biggest customer to the claims court is not great for future trading relationships.

Improvements in supply chain liquidity are best achieved by a private sector solution. Improvements in the URICA SCFi will emerge from the liquidity acceleration.

We believe a 10% improvement in the Supply Chain Funding index would lead to a 3% increase in growth and productivity. The URICA Supply Conditions Funding Index has provided clear insights on how this can be achieved.

We look forward to the insight updates in the years ahead.

Economics Professor John Ashcroft

About the Author
Dr John Ashcroft PhD BSC.(Econ) FRSA CBIM

John Ashcroft is an experienced businessman and business economist offering a pragmatic approach to economic analysis and forecasting. He is author of The Saturday Economist and was recently ranked by CityAM as one of the top ten most influential economists in the UK and Ireland.

John is a visiting Professor at MMU Business School, specialising in Economics, Strategy and Social Media and is an occasional lecturer at Manchester Business School.

Educated at the London School of Economics, London Business School and with a PhD in Economics from Manchester Metropolitan University, John is a fellow of the Royal Society of Arts, a companion of the British Institute of Management and a member of the Society of Business Economists.

John Ashcroft is Chief Executive of pro.manchester and a member of the (AGMA) Business Leadership Council. John has served as a director of Marketing Manchester and Chief Economist at the Greater Manchester Chamber of Commerce at some stage, over the last five years.

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