It’s the first update of the Supply Chain Funding Index (SCFi) – and already there is hand-wringing about the general health of the business finance ecosystem.
The SCFi (see box, bottom of page) was first published in October 2016, aiming to give a better understanding of how businesses feel about the condition of their supply chain.
The overall ‘rating’ for supply chain health has come in at 6.2 out of ten for spring 2017 – having scored 6.6 in winter. The index value is even lower among those surveyed with turnover between £250,000 and £9.9m – where the key statistic fell to 6.1.
Ian Fitz-Harris, MD of supplier finance provider URICA, sponsors of the SCFi published by YouGov, warns that the downturn indicates we are getting closer to “a fundamental problem, a strategic fault” in the funding of supply chains. “Many major companies understand their tier one suppliers, but are blind beyond that,” Fitz-Harris warns.
Nearly one-third (31%) experienced a ‘break’ in their supply chain in the last 12 months – such as a failure or cash flow difficulty at a supplier – and of those, the majority suffered disruption to their business as a consequence.
Even though a third expect their turnover to remain static or to decline, a similar proportion expect their turnover to increase by at least 10% over the coming 12 months.
A flimsy foundation for growth
But expansion, coupled with a flimsy supply chain, do not make good bedfellows. “What entrepreneurs are really saying is, ‘We’re bullish about growth but we’re worried about our suppliers’ capacity to deliver’,” says economist Dr John Ashcroft, who works with URICA on the research.
But why do decision-makers feel the supply chain is fragile? First, Ashcroft suggests, there is an air of uncertainty hanging over business in general – “which they hate”. Essentially, the difficulty in planning for Brexit has been compounded by the impending UK general election, to be held on 8th June.
Many businesses operate with “narrow” purchasing teams that don’t focus on the broader supply logistics, Ashcroft says, and yet boards need to get a better grip of these issues.
Some respondents will be fearful of not really understanding supply chain risk. For those making that effort, the interdependency of companies that exists within sectors is complex, and therefore making it difficult to scenario-plan. Ashcroft highlights efforts in the Northwest of England to understand how business clusters operate and so bemoans the loss of the Regional Development Agencies – government bodies that were abolished in 2012.
Agreeing with Fitz-Harris, Ashcroft says that the new UK late payment reporting rules should help encourage focus on the supply chain in a broader sense. “A good CEO will be examining their customer base. It’s an issue that needs to be brought into a more open arena,” says Ashcroft.
“If we can improve funding and liquidity, this will give us a significant advance in productivity in the UK,” he says.
The index explained
Late payment indices, the Purchasing Managers’ Index, finance availability – there is a wealth of data and research around these topics.
But, for URICA managing director Ian Fitz-Harris, information about how well supply chains function was missing.
“If we talk about retail or construction, it’s about extended supply chains,” says Fitz-Harris. “Manufacturing in the UK is more about assembly, we’ve got to look at how the whole chain is working.”
With supply chains being “incredibly important”, URICA commissioned YouGov – along with commentary from economist Dr John Ashcroft – to gauge how businesses felt about the strength or weaknesses of the supply chains they operate within. The survey of more than 1,200 businesses, known as the Supply Chain Funding Index (SCFi) has now published its first update, following on from October’s inaugural findings.
The index itself is generated by an algorithm based on responses to questions about the strength of a company’s supply chain, the pressures caused by the time it takes to receive payment from customers and the pressures caused by the length of time allowed to pay invoices.