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Achieving profitable growth amidst supply chain challenges and rising costs


In our latest industrial round table event hosted by Nigel Wright Managing Consultant, Chris Kent, we welcomed 12 Northern business leaders* representing companies from the chemical, engineering, manufacturing, logistics, construction and building products sectors. The discussion focused on supply chain challenges, materials shortages and rising costs and how these converging issues are impacting the ability of companies to achieve profitable growth. Themes that emerged from the event are summarised below.

*Leaders at these UK industrial companies are experiencing challenges that are equally relevant to consumer companies across Europe.

High demand met by supply chain issues across sectors

High demand for industrial products is adding strain to an already pressurised environment. Leaders are thinking differently and committing more to longer-term agreements with customers and suppliers, as the frequency of allocations applied throughout the supply chain increases.

At one local manufacturer, customer acquisition is driving growth. Yet, due to various supply chain-related issues, the business still hasn’t traded with two new customers acquired earlier this year. A lack of raw materials and factors such as lost containers and problems with legacy manufacturing equipment not being able to match the pace of demand is creating difficulties. Lead times have gone from 6-8 weeks to 6-9 months because of these issues.

Allocation is another stress point compounding supply chain issues. As much as 85% of purchased raw materials are allocated for 2022, according to one attendee. This has limited their company’s ability to grow. While some “entrepreneurial firms” bought materials ahead of these converging pressures, other companies are left without stock: “For most manufacturers in the UK, these are significant challenges that we have no control over. It's a very complex situation and there are no obvious solutions.”

Demand is evident in the uptake of shipping container orders. One supplier noted how unit deliveries have almost doubled in the last 12 months and demand has been “excessive at times,” a situation exacerbated by the challenges of acquiring and moving containers around. Sourcing from China is particularly difficult. Rising energy prices and issues related to high levels of pollution are forcing factories there to reduce production. Port congestion too, means some orders have eight-month lead times.

Another attendee highlighted how a lack of raw materials at the beginning of the year means that their business is now fulfilling a backlog of orders. This is stretching the development, production and supply chain teams, and creating a “frantic” environment as the year-end approaches. With no indication that demand will fall in 2022, there's “some anxiety” of whether the business can acquire the necessary raw materials to fulfil demand.

Impact of rising costs on margin consistency

The rising cost of raw materials and fluctuating freight prices are causing ongoing issues for industrial companies. Further, according to attendees, energy price increases and the likelihood of sustained high shipping costs means 2022 and 2023 could be ‘make or break’ years for other industrial firms that are already struggling to create a profit.

Companies represented at our event highlighted ongoing price negotiations with suppliers and customers. Some attendees noted how they had experienced raw material price increases “three times during the last four months.” This environment is making it difficult to set ambitious bottom-line growth targets over the next few years. And by introducing rising energy prices into the mix, firms are now having to make substantial price increases themselves:

“We’re experiencing price rises across freight, raw materials and packaging. Most customers understand the situation and are happy to absorb costs. But, at some point, these costs will impact consumers who will stop buying.”

One individual admitted how the “extended trend” of price increases has created challenges at their company. While stock holdings for key raw materials were fine at the beginning of the year, subsequent shortages have put huge strains on project budgets with some projects experiencing 30–40% increases in raw material costs. 

The price of steel has doubled since January 2021, according to some attendees. One business leader explained how the anticipated fall in steel prices in 2022 must be carefully managed by steel mills, to avoid manufacturers facing financial difficulties. Others were optimistic that a “smoother transition to lower prices” was inevitable, though admitted that profits will decline as a result.

Further, high steel prices have, in some cases, tippled the cost of importing TEU shipping containers from overseas. In 2019, for example, a 20-foot high-cube cost $2,500 to import from China. Today, the price is anywhere between $12,000 and $15,000. A general consensus was that high prices in shipping will likely last for 2–3 years or longer because shipping lines will be "reluctant to let go of those rates."

Queries were raised by several attendees regarding the future sustainability of materials imports from China. The high cost and delays in sourcing from China are leading some firms to look elsewhere for raw materials. According to one individual, having the foresight to move production to Asia has benefited his business during this challenging period. If more companies switch sourcing from China to India, however, it could put pressure on India’s legacy infrastructure, they said.

Representatives from other firms discussed their experiences with fluctuating freight costs. One attendee highlighted how sending goods via air freight to North America can cost anywhere between £10,000 and £20,000. In 2019, the price was around £1,000: “This makes forecasting margins very difficult."

A key takeaway from our event was the admission that increasing gas and utility prices have yet to impact any industry. This may "tip some companies over the edge" when the impact finally kicks in. Further, a general market correction in the next 4–6 months will cause some businesses to run out of working capital, according to attendees.

Generating profitable growth

Despite the challenges outlined above, it was encouraging to hear how Northern manufacturers had managed through this difficult period to generate some fairly significant profitable growth during the last year. The balance between remaining loyal to suppliers versus sourcing immediate stock and components from new suppliers was a constant theme throughout the discussion.

Businesses have had to provide clarity to customers during the last year. While emphasising how “global pressures” are causing delays and price hikes has helped placate existing customers, firms highlighted how managing new customer expectations is key "from the first conversation" due to increasing lead times. A solution adopted by some companies is to expand the supply chain outside of the UK to secure necessary components to meet demand. As one attendee explained: 

“One of our challenges has been an over-reliance on a small number of suppliers. It’s a key lesson for us this year and something we intend to review on an ongoing basis moving forward.”

Other business leaders emphasised how supplier loyalty had been key to their company’s success. By consciously “sticking to a small number of suppliers,” firms had ensured they remained first in the queue for materials. As one attendee highlighted, engendering guaranteed reciprocity is always the best approach when allocation lead time scenarios occur.

Some businesses noted how margins are now restored “to where we want to be” thanks to a supplier-loyalty strategy. Though it was acknowledged how companies have more cash tied up in materials and working capital than a year ago – a situation leaders don’t expect will change as prices continue rising.

Looking ahead, companies represented at our event noted how strengthening supplier and customer loyalty would be a major focus in 2022: “Long term relationships go a long way. When things settle down and the dynamics around pricing have changed, that is when companies will really be tested. It’s all about how well you manage circumstances to achieve the best outcomes.”

Acting early to increase stock levels, as well as fixing core prices were additional factors attributed to business resilience. Some attendees highlighted how a decision to fix 2021 prices had led to “healthy profits.” In situations where extended lead times were agreed with customers, the company also used those as a selling opportunity, leveraging uncertainly about the market to secure orders on 2021 prices right through to mid-2022.

It's clear that firms have handled the doubling of steel prices effectively. And a stabilisation of steel prices in 2022 will benefit those firms with robust pricing strategies. 

Other firms spoke about the strength of long-term customer contracts and the importance of providing volume visibility, as well as annual pricing agreements that include formula based annual adjustments. Interestingly, one attendee noted how their company’s decision to resist postposing orders and advertising at the start of the COVID-19 pandemic has given the firm a competitive advantage as the market recovers:

“Yes, things slowed down for a few weeks but we pushed on through. Our competitors, however, furloughed staff and mothballed facilities and they have consequently struggled.”

The importance of looking after your people

The challenge of attracting and retaining high-quality employees is evident across different sectors, and the situation is even more pronounced today than at any time since early post-war Britain. Businesses, therefore, should be aware of the need for staff engagement. An impending lorry driver shortage demonstrates how blue-collar, as well as white-collar workers, are in an advantageous position amidst a buoyant employment market. Good management at all levels is essential if firms want to remain competitive over the next few years.

Certain companies represented at our event highlighted how difficulties in recruiting enough staff to meet demand had impacted growth. Firms forced to make redundancies in 2020 have now hired the equivalent number of people again. But that process has been fraught with problems related to ensuring the right mix of skills, as well as retaining talent. Some firms are experiencing high levels of indirect staff turnover creating pressure on labour costs. 

A question was raised about the challenges of accommodating millennial workers. One individual noted how the employment preferences and mindset of the newest generation of workers is something the industrial sector has generally been unprepared for. With younger people moving frequently between different employers, firms are seeking to evolve their cultures to better meet employee needs. The question: “What can we provide in our working environment to attract and retain a workforce with a different mindset to our own?” is front of mind for many business leaders today.

Attendees raised concerns about HGV driver staff shortages. In anticipation of heightened competition for staff, one business has recently made a significant increase to driver wages. The expectation is that the talent market will remain competitive as we move into 2022.

Generally, it was agreed that these were exciting challenges for leaders and their HR departments. One attendee noted how “the winners” will be those firms that develop an attractive culture, as well as provide adequate leadership training for middle managers – from supervisor level upwards – to ensure poor management practices are eliminated from businesses:

“Companies might have been able to get away with poor management in the past, but they're going to be found sadly lacking in this new environment.”

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