Taking stock of supply chain disruption: what are CBI members doing?

In our September surveys, we asked our members how they were responding to global supply chain disruption. The results suggest that a majority of UK businesses still face significant supply chain challenges. Furthermore, their efforts to overcome these challenges show early signs of re-shaping the pattern of Britain’s trade with the rest of the world.

It has now been two years since an unprecedented surge in shipping delays and freight costs first convulsed the global economy. Soaring lockdown-induced demand for goods overwhelmed global supply networks already struggling with shortages of materials and labour. Congestion and bottlenecks have left businesses unable to reliably replenish inventory or meet production targets, hampering the post-pandemic economic recovery.

Are pipeline pressures receding?

However, the data suggests that pipeline pressures are receding. The Federal Reserve Bank of New York’s Global Supply Chain Pressure Index has improved for five consecutive months. The Freightos Baltic Index - a measure of the market rate for 40-ft containers for ocean freight - has fallen by 70% from its peak last September. Likewise, delivery times for cargo moving through the major sea lanes have declined steadily since April, according to Flexport’s Ocean Timeliness Index.

However, the improvement in freight costs and shipping times reflects slowing trade more than anything else. High inflation continues to attenuate consumer demand around the globe, releasing spare capacity that has eased congestion in global supply networks.

Continued disruption

Nevertheless, when we asked members about supply chains in September, roughly 75% of distributers and manufacturers, and 50% of service firms, reported that they continue to face disruption. We hear of uncertainty around when ships will arrive at UK ports and the unpredictability created by Covid-related shutdowns in China. Materials shortages still pose a significant challenge to sourcing from abroad, leading many firms to search for second or third suppliers. Finally, Brexit-related paperwork issues remain a perennial headache for UK businesses trading with the EU.

Views differ widely as to how much longer the disruption will last. Only 2% of firms expect supply constraints to be resolved by the end of the year. There is a weak consensus for Q4 of 2023 among manufacturers and distributers, whereas services firms think that supply disruption will be resolved sooner - by Q2 2023 - albeit still by a slim margin. But a large section of those surveyed don’t feel confident making any forecast whatsoever. Distributers are the most uncertain, with 35% responding “don’t know” when asked how long disruption would last, compared with 18% of manufacturers and services businesses.

How are businesses tackling the problem?

Businesses have navigated supply chain disruption by diversifying their sourcing and temporarily holding higher inventories. In September, 66% of manufacturers reported that they were diversifying supply chains, up from 48% in May. The proportion of manufacturers holding higher inventories declined to 56%, from 68% over the same period. Distributors are resorting to the same strategies but prefer temporarily holding higher inventories, with nearly 60% taking this approach. However, diversification has become more popular since May (rising to 45% from 36%).

Neither manufacturers nor distributors have shown much interest in onshoring or nearshoring. Roughly a quarter of respondents in both sectors were choosing to hold permanently higher inventories in May but, by September, less than 20% of manufacturers and less than 10% of distributors were pursuing this strategy.

By deciding to diversify their sourcing, UK businesses have taken steps to re-orient the international profile of their supply networks. Manufacturers have, on balance, increased their sourcing from domestic suppliers while decreasing their reliance on European suppliers. We see a small increase in sourcing exposure to China and a small reduction in exposure to Asia ex-China, on balance, over the last year. Distribution firms are increasing and decreasing sourcing from the UK in roughly equal numbers, but we do observe a generalised retreat from international suppliers. The data shows a pronounced decrease, on balance, of distributors’ exposure to Europe and Asia over the past year.

In the case of Europe, anecdotal evidence supports the view that Brexit has made sourcing from the EU more difficult and costly, which has been compounded by shipping delays. As a result of longer lead times and an increased administrative burden, manufacturing firms have sought to switch to UK-based suppliers where possible. Many businesses have also expressed dissatisfaction with the cost of shipping and the longer lead times seen from suppliers in Asia but, in many cases, it is not possible to source these inputs in the UK.