Time for some serious supply chain risk assessment

19 December 2011
What a difference a year makes. The UK economy lurched into 2011 sluggish but hopeful, with predictions of GDP growth of 2.2 per cent, surging to a healthy 3 per cent in 2012. Inflation was thought to be a temporary worry at an RPI rate of 4.7 per cent. Unemployment was stable just below 2.5 million. The October 2010 Spending Review had set the scene for an austerity programme to reduce the budget deficit. There was more fear of cutbacks than actual pain – although that was to come soon enough. The eurozone crisis was focused on the three small-enough-to-bail-out economies of Ireland, Portugal and Greece. Commentators whispering about contagion and threats to the survival of the euro were dismissed as hysterics and the UK was still a functioning member of the EU, or at least it thought it was. As 2011 unfolded, spending cuts began to cause real distress in certain sectors, most notably construction, leisure and, above all, the high street, where a string of high profile failures including Jane Norman and Habitat prompted the government to concede control of its retail regeneration strategy to TV shopping guru Mary Portas. Growth prospects have plummeted, to the extent that the 2011 outcome will be no more than a marginal 0.7 per cent. Unemployment has hit a 17-year high of 2.62 million and inflation has actually risen to 5.2 per cent, even if economists continue to insist it will soon fall back. Government borrowing projections are significantly up and the debt mountain is rising. Blame the eurozone crisis or heavy-handed austerity, the outcome is an economy somewhere nobody would choose to start from for 2012. But there are surprising shafts of sunlight. The government may berate the banks for not lending enough, especially to the vital SME sector, but perhaps we should be grateful that business is so reluctant to borrow. And we should be reassured that British businesses are allegedly sitting on a record cash pile as they react to the lack of credit available from traditional funding sources, with the UK clearing banks under pressure from the Bank of England to horde cash in the face of eurozone uncertainty. Something strange has been happening to our attitude to business risk in the UK, which may explain the borrowing strike. For the first time in decades, management teams have stopped chasing growth for its own sake and turned away from the busy fool option. They are learning to live with a low growth/no growth environment. Without growth, there is much less pressure on working capital resources. This is why, after the worst world recession for over 70 years, corporate insolvency rates in one of the most globalised economies on earth are at a 30-year low, measured as a percentage of active UK businesses. Historically, insolvencies peak between one and two years after GDP starts to grow again, but not this time, it seems, and the lack of growth is the underlying reason. But this cannot continue, as austerity bites deeper into consumer confidence and spending, and as the eurozone slow motion car crash accelerates and chokes off prospects for the UK’s biggest export market. Anecdotally, credit insurance claims are rising sharply, which means that businesses are struggling to meet their commitments. There has never been a time when procurement professionals need monitor the financial health of their supply chains more closely. When (it’s not an ‘if’) it all starts to go horribly wrong next year, the descent into financial distress will be headlong and precipitate. Time spent on Plan B right now will be the best investment most companies could possibly make. * Nick Hood is head of external affairs at Company Watch
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