In recent months, the UK has experienced a number of shortages across certain industries.

From the recent petrol supply issues resulting from HGV driver shortages, to a shortage of semi-conductors in the automotive industry and a spike in gas prices due to lack of storage, these shortages are all stemming from fractured supply chains.

Many of these weaknesses have been exposed as a result of both Brexit and the COVID-19 pandemic, with dramatic increases in transport costs exacerbating the issues. Shortages are predicted to last for several months, with expectations that supply chain pressure will continue over the Christmas period. Production costs are also likely to rise as a result.

Whilst these two events are widely accepted as the cause of these shortages, there is a more fundamental issue at the root – and that’s the UK’s ‘just-in-time’ supply chains. COVID-19 and Brexit have, in effect, exposed the thin margins of spare capacity on which much of the UK economy runs. And, with the discovery of the rapidly-spreading new virus variant, Omicron, it appears that supply chain bottlenecks already holding back economic recovery are only going to be exacerbated by a wave of transmission that requires workers to isolate.

The origin of ‘just-in-time’ supply chains

‘Just in time’ (JIT) supply chains first became popular in the 1980s, originating from Toyota manufacturing plants in Japan. They were based on the idea that minimal inventories and lean production were successful ways of cutting back on costs and waste as they reduce the amount of capital tied up in stock.

In a JIT supply chain, businesses only receive stock as and when it is needed for the production process, with an emphasis on producing the exact amount of product required at exactly the time customers need it.

Whilst this approach has a number of benefits – such as helping to reduce the warehousing costs associated with keeping large stocks and preventing over-production – it does not cope well when faced with significant changes to supply and demand.

Why does the UK seem to be so badly affected by current supply chain issues?

In addition to supply chain issues, the UK has experienced a significant spike in gas prices in recent months, in the midst of a global energy crisis.

This is compounded by the UK having one of the lowest gas storage capacities in Europe, with stores only holding enough gas to meet the demand of four to five winter days – just 1% of Europe’s total available storage.

The biggest issue impacting the shortage in gas capacity is the government’s decision in 2017 to close the Rough storage facility off the east coast of England – which had provided 70% of the UK’s capacity for more than 30 years. The decision to close the site was made due to the costly maintenance required to keep it going, with predictions made that the closure would save the UK £750m over 10 years.

This move to a ‘just-in-time’ approach to gas distribution, mere months after the closure of the storage facility, led to the National Grid warning that the UK did not have enough gas to meet the accelerated demand caused by the freezing winter of 2018. Since the closure, critics have also warned that the UK would be exposed to the volatility of the global gas market and forced to compete to attract imports with high prices.

This spike in gas prices began in the spring, where consumer price inflation more than doubled to 1.5% in April 2021. In November, this rose to 5.1% – with speculation suggesting it could rise even further in 2022. In response – and despite the Omicron wave – interest rates have now risen for the first time in over three years in an attempt to repel the surge in prices.

Should businesses consider a move from ‘just-in-time’ to ‘just-in-case’?

The closure of the Rough storage facility, COVID-19, and Brexit all demonstrate the speed at which one single event can disrupt supply chains – at both a macro and micro level.

All products (plus their raw materials and ingredients) are transported via a complex distribution network that is designed for constant movement and replenishment. Just one minor disruption to any part of the system can have a significant and immediate impact on JIT supply chains.

With JIT, business owners are continually having to consider the balance between risk and resilience. Maintaining reduced-storage inventories increases the risk of shortages when a crisis hits but means fewer suppliers and lower prices, whereas resilience means higher levels of stock, multiple suppliers, and higher costs. Perfecting the balance between the two is fraught with difficulty.

In light of the ongoing shortages businesses are experiencing – which could continue to impact a wide variety of industries – it would be sensible for businesses to look to spread risk more effectively and put back-ups in place. It would perhaps be prudent to move towards more of a ‘just-in-case’ model instead, at least whilst supply chain issues continue.

Businesses should consider the following areas in order to effectively adapt to changes in demand and any disruptions:

  • Identify multiple alternative suppliers in the event that parts of the supply chain fail
  • Consider if there are options to source stock from abroad if it cannot be sourced domestically
  • Establish which/if any parts of the supply chain are financially vulnerable
  • Assess if any safety stock for integral products should be held, for example if running out of a particular product would cause production to cease entirely

For the time being at least, it looks like shortages, supply chain issues, and price rises are here to stay, meaning being prepared to adapt to the changing environment will be key for businesses over the winter months.

At PKF Smith Cooper, our business advisory team provides strategic business support, working with a large number of businesses operating in many different markets and territories – each with their own unique strengths, risks, and challenges.

Whether you need support with risk mitigation, restructuring, or fundraising, we are here to help. Please do not hesitate to get in touch with our expert team today.