Managing your supply chain risk

Read time: 4 mins | Added date: 19/04/2024

What are the main challenges and considerations around supply chain resilience for SMEs? Dave Atkinson, Regional Director, Lloyds Bank, shares his insights to help small businesses avoid common pitfalls and manage risk.

The cost-of-living crisis is straining UK supply chains. With a reduction in consumer demand across many sectors, SMEs need to navigate challenges on price and availability.

A combination of geopolitical factors, the post-pandemic reduction in air freight availability, higher inflation and wages are increasing costs across the board.

During prolonged periods of uncertainty, it’s more important than ever for small businesses to do everything they can to strengthen their supply chains and plan for all possible scenarios. A report from Make UK, (PDF 3.45MB) found 93% of manufacturers agree supply chains will remain under pressure in 2024.

Critical considerations

While it may sound counterintuitive, many SMEs risk cash pressures or worse still, business failure during periods of growth by overtrading and running out of cash. Before entering into a supply chain agreement with a new customer, it’s vital to look at the entire picture and not get carried away. The lure of a lucrative new contract should be balanced carefully with forecasting the impact on your cash flow.

Asking the following questions at the outset can help prevent many supply chain resilience issues further down the line. Does the business have the capacity to meet the demand, including transport and distribution? How will it maintain cash flow with the agreed payment terms? Is the business at risk if it’s not diversifying its customer base?

Other answers SMEs need to have at their fingertips include how much initial investment they need to service new contracts, how they’ll fund this, and whether there are any demands around technology integration, quality control or legal compliance they need to address.

The list above isn’t exhaustive, but it can be a starting point for financial forecasts. SMEs looking to set up new supply chains in overseas markets should visit the Lloyds Bank International Trade Portal; it’s free for all businesses, not just Lloyds Bank customers. It covers guidance around many of the key issues, including regulatory compliance, transport logistics, international payments and how to create local partnerships.

“Sustainability is one of the biggest conversations we’re currently having with SMEs. People are now making choices based on businesses' green credentials. There’s a massive opportunity but also a huge challenge for those not ready or willing to embrace it.”

Dave Atkinson Regional Director, Lloyds Bank

Resilience red flags

Identifying potential problems at the early stages of a new partnership is critical. One of the main things to look out for is inconsistent communication. If SMEs can’t get the information they need promptly to make a decision and plan accordingly, that’s a potential red flag that could have serious consequences at a later stage.

For example, not having access to details about the financial resilience of a new customer or supplier should set alarm bells ringing.

It’s also important for SMEs to conduct their own research, which could be looking up businesses and directors on the Companies House website or paying for a credit check.

The potential pitfalls of entering new supply chains don’t just fall on the partner’s side. Many SMEs create their own red flags through a lack of due diligence, not having an exit strategy and an insufficient understanding of risk management.

A lack of clarity on what might go wrong can put SMEs in a precarious position. Contingency planning is fundamentally important so business owners can be agile and ready to adapt to new circumstances when supply chain disruption occurs.

Geopolitical events

Like all businesses, SMEs must stay alert to other significant factors, such as geopolitical events, natural disasters and global economic conditions. These can all influence the availability of raw materials needed in a supply chain and impact their transportation responsibilities.

In recent years, we’ve seen the huge reliance on Ukraine for the supply of sunflower oil impacting the food and drink supply chain through increased costs and lack of availability.

Shipping delays from incidents such as the Evergreen disaster and, more recently, the diversion of container vessels away from the risk of attacks in the Red Sea have pushed up air freight costs. This is due to shippers trying to keep Asian-produced goods and materials in flow despite delays to sea traffic. Contractual obligations under new supply chain agreements, as well as contingencies, all need to be borne in mind.

The importance of supply chain sustainability

“Sustainability is one of the biggest conversations we’re currently having with SMEs. People are now making choices based on businesses' green credentials. There’s a massive opportunity but also a huge challenge for those not ready or willing to embrace it”, Dave says.

Growing consumer awareness and demand around sustainability issues make it crucial for SMEs to build it into their supply chain agreement. It doesn’t end there, though. The regulatory landscape is also evolving rapidly and larger businesses with strict reporting requirements are demanding evidence of sustainable practices from SMEs in their supply chains.

Seeking out the right support

Strengthening supply chain resilience isn’t something SMEs have to do alone. Lloyds Bank and others can provide a wealth of support. “We can help SMEs understand their working capital through our Working Capital Management Tool and explore the cash flow impacts of growth, international trading and FX risk. Many SMEs lack the time and resources to find relevant partners and they trust us to connect them with experts at private firms, trade bodies and Chambers of Commerce”, Dave attests.