The recovery from the Covid-19 pandemic has brought with it severe supply chain problems. First, suppliers had to cope with lockdowns hitting their production. Then, as vaccines became available in the western world, manufacturing resumed, but the suppliers struggled to cope with this resurgent demand.
From car manufacturers to technology companies, executives have struggled to keep production going. Many have had to slow their output. With time, these shortages have become less acute, but executives have nonetheless realised, belatedly, how dependent they have become on one or two overseas suppliers.
Covid-19 brought this problem into focus, but the causes are something different. Manufacturers have gone for ‘just-in-time’ processing to increase their efficiency, which in turn has increased their profits. They have wanted profits to increase, preferably year-on-year, because this has meant the share price has risen in turn. Thus, the lean supply chain is a result of executives focusing on short-term shareholder value, while ignoring the long-term consequences.
The late Sir Francis Tombs saw where this was heading. In 1982, he was recruited to chair the disaster that was asbestos manufacturer Turner & Newall and had another take on using the supply chain to cut costs. He was worried that companies no longer had resilience.
It was all very well to get margin improvement and greater efficiency in the short term – and it was generally thought to be good. But with this cutting of costs, companies also got rid of redundancy. There was no longer any margin for error. So what used to be a drama got magnified into a crisis The lean supply chain is a result of executives focusing on short-term shareholder value, while ignoring the long-term consequences Sir Richard Greenbury saw this from the sidelines. He was chief executive of Marks & Spencer (M&S) in 1988, and his crowning glory in 1998 was to pilot the group to its first-ever £1bn profit.
But then Greenbury retired, and watching profits languish, M&S changed its suppliers. A feature of its clothing was that it was entirely British made, from companies like Nottingham Manufacturing and Corah. But as profits came under pressure, a succession of (not very successful) chief executives decided to source from Asia where it was cheaper.
M&S would have been challenged over time by the retail revolution but changing suppliers when it did was a cut too far. Its customers deserted in droves because they did not like the quality and design. M&S’s share of the UK clothing market peaked at 13.5% in 1997, but it fell to around half that by 2018.
In 2020, because of Covid-19, it managed just £41.6m profit before tax, compared to £403m the previous year. Only once has it ever come close to Greenbury’s achievement: in 2006/07 when Sir Stuart Rose was at the helm, it achieved £965.2m profit before tax.
You could say the same about Aviva. It was formed by the merger of General Accident, Commercial Union, and Norwich Union. One of its bright ideas was to scrap the back offices of these businesses and outsource them to call centres in India, thereby cutting costs. But it then experienced a huge and unexpected surge in calls, which required more staff in India, denting the profit model which lay behind the transfer.
There are other problems. An executive at an insurance broking conference in Manchester told his audience of a retail client in Canada that sold products that it sourced from Japan. But in 2011, the year of the nuclear reactor disaster in Japan, the client tried sourcing products in Thailand. But then came the floods in Thailand of July that year, so it, too, was out of action. The client turned to Bangladesh, which initially agreed but then found it had too much work, so the client finally sourced the products from South Africa.
But it was slow and the company in Canada was too late for its market. The client then decided to sue, but that left the broker wondering who should get the writ. And in which jurisdiction?
The outcome in the UK is that companies have greater efficiency but little growth. Management remains focused on efficiency and share prices. So are the investors. The long-term does not get a look in.
The full article was originally published in the October 2021 edition of The Review.
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