The pandemic has provided a reminder of the benefits of home-grown supply chains and manufacturers should prepare to capitalise on the reshoring trend, says Phil Wright, director and manufacturing sector specialist at Menzies LLP.
As many multinationals take steps to shorten their supply chains and transfer assets closer to home, there could be opportunities for UK-based manufacturers to fill the gap.
Taking on new contracts could put pressure on cashflow however, so steps should be taken to avoid this.
While the benefits of switching to domestic sourcing arrangements have been a talking point for a number of years, supply chain disruption linked to Brexit and the pandemic have encouraged some manufacturers to reconsider reshoring.
Manufacturers are turning their attentions to reshoring for a variety of reasons. For some businesses in the sector, moving production to the UK presents an opportunity to remove risk and increase supply chain resilience, while diversifying their supply network. In recent years, the price advantages associated with manufacturing in overseas economies, such as China and India, have also become less significant. As such, it increasingly makes commercial sense for manufacturers to switch to UK suppliers.
Alternatively, pressure from further up the supply chain may force manufacturers to look closer to home when sourcing parts or materials. In other instances, they may decide that the cost benefits of manufacturing key parts ‘in-house’ outweigh the risks of potential supply chain disruption, such as that linked to the recent blockage in the Suez Canal.
As well as helping to reduce product lead times and improve supply chain visibility, reshoring could enable some manufacturers to increase their profitability by taking advantage of an emerging area of demand. In some cases, this could result in the formation of potentially lucrative long-term contracts. A switch to domestic production could also enable businesses in the sector to make use of spare capacity, for example, unused production facilities or furloughed employees.
However, it is important to bear in mind that this change of approach could put pressure on manufacturers’ cash position. In order to effectively capitalise on demand for domestic production, businesses may need to take a leap of faith by buying critical parts or materials in bulk or investing in the new machinery required to bring manufacturing ‘in house’.
To maintain a healthy cash position, manufacturers must consider the bigger picture to determine whether reshoring really fits in with their overall strategy and business model. For example, while reshoring could potentially open the door to new contracts, will it work for existing customers? They should also ask themselves whether they have the required capital equipment and skillset to make a successful switch to domestic production. For example, this could involve significant changes to their factory layout and infrastructure. In other cases, onshoring production could involve investing in non-core activities, which will have strategic implications for the business.
Businesses may need to take a leap of faith by buying critical parts or materials in bulk
Switching to new UK-based suppliers may also involve agreeing to tighter payment terms, and there may be upfront costs involved in activities such as sourcing raw materials and capabilities. Businesses could already be experiencing cashflow pressures if other areas of the organisation are underperforming or if repayments for pandemic-related loans fall due.
Combining profit and loss accounts, balance sheets and cashflow, three-way forecasting could prove a useful decision-making tool, helping manufacturers to better understand what their cashflow requirements would be with and without the use of strategic reshoring. A third scenario could also be applied, in which the business adopts a partial reshoring approach, based on where the best returns lie.
To bridge the cashflow gap while they get any new operations up-and-running, manufacturers may need to access loan finance, or consider alternatives, such as invoice finance. When seeking external finance, cashflow forecasting can help businesses to effectively present their position to the lender and communicate that there is a strong business case for the use of reshoring.
Following good credit management practices at all times can support manufacturers in protecting working capital when adopting a reshoring strategy. This should involve caution around granting credit to customers, keeping lines of communication with creditors open and paying close attention to supplier terms. Businesses should also take care to balance stock with levels of demand, to ensure that large volumes of capital aren’t tied up in finished goods that are left sitting in storage.
For many industry sectors, the pandemic has provided a reminder of the benefits of home-grown supply chains. For manufacturers that are able to adapt quickly, the reshoring trend could present an opportunity to increase revenues and enhance profitability. However, it is important to consider what impact taking this approach could have on cashflow in the short-term and take precautions where needed.
Phil Wright is a director and manufacturing sector specialist at accountancy firm, Menzies LLP.