Here at Consortium Procurement, we have been keeping a close eye on the apparently escalating trend of shortages and rapidly increasing prices across supply chains. This has become a hot topic this year with many webinars attempting to explain why you may be experiencing increased costs, or longer lead times, the challenges that have arisen and the implications for you.
Whilst these challenges cannot be attributed to either Covid, Brexit or the Suez Canal crisis in isolation, the fact that these events have coincided with each other, as well as other contributing factors (such as lack of HGV drivers, IR35 tax implications, the Government’s Carbon Tax) is resulting in a pretty concerning picture for some elements of the supply chain.
A lot of the issues do point to Covid being one of the main factors that is causing the current supply chain issues around lead times for parts/materials etc. Factories which were shut down or operating under capacity in the early stages of Covid are now finding themselves having to operate at over capacity to meet demand, but this has knock on effects such as increased breakdowns of equipment. In addition, the displacement of vessels and shipping containers throughout the globe is still causing knock on effects as the shipping lines are not yet operating to full capacity – this was further impacted by the Suez canal blockage and it’s envisaged that it will be circa February 2022 before these issues are resolved and shipping lines start to operate at near normal levels.
Shipping costs are at an all-time high. Pre Covid, a 20ft shipping container used to cost around £1,500 from the Far East to the UK, this cost is currently around £15,000 per 20ft container – an increase of ten-fold! Whilst it does appear that the costs have levelled off to some extent now, we are fast approaching the busy Christmas period for goods being brought in from the Far East and this is traditionally a more expensive time of year to ship goods. The cost of metal is increasing month on month, and timber costs are at record levels of inflation – currently around 30-40% where previously this was around 5-7%.
The main materials that we’ve heard are currently difficult to obtain are cement and minerals, metal, and timber products – all of which to some extent are used in construction projects (but even so far as down to issues in obtaining parts for plumbing and heating products for example). In particular with timber, Travis Perkins mentioned that there is a global shortage and if the current levels of demand are sustained, timber products are likely to start running out completely within a couple of years.
At Consortium Procurement, we have undertaken a research exercise to learn from our suppliers what challenges they are facing and how this will affect their ability to deliver the services to our members. Whilst the construction industry is the most heavily affected by the issues, and no immediate concerns have been identified by our suppliers who work predominantly in service based industries, we have experienced requests for price increases outside of the usual CPI mechanism, so no industry is completely unaffected. Interestingly, even Consultancy providers have reported a knock on affect, with clients keen to bring design projects forward to secure a level of cost certainty.
So what can you do? We understand that your budgets are stretched as it is and if you have procured contracts that provide cost certainty over their lifetime, so why should you agree to a price increase or accept increased lead times on products that are critical to your business? However, it is our view that the public sector as a whole will not overcome these challenges unless we work collaboratively across the supply chain. If there is scope to work together with your supply partners in your contracts, and vary them compliantly where appropriate, you may be able to realise the benefits of this collaborative approach further down the line. Remember, it may cost far more in the long run to reprocure a contract unnecessarily, than it is to work with your existing suppliers through this difficult time.
As well as collaboration with your supply partners, collaboration with your peers will be as equally important. If you have an alternative viewpoint, want to share your experiences or ask other organisations for advice, please do contact us. Consortium Procurement run quarterly roundtables for procurement professionals to explore trends and best practice, discuss ongoing or emerging issues in the sector or share experience on particular projects. The agenda is set by you, our members, and we secure expert speakers to explain the issues at hand. We also provide an email correspondence network so if you want to ask other organisations questions on their experiences or for advice, you can contact us, and we will disseminate it to the wider group. To join the contact list and receive the invitations to the roundtables, please contact email@example.com.