Supply chain management and risk in the construction sector

As 2020 ended and we ushered in 2021, construction businesses welcomed the continuation of tariff free trading with the EU and the absence of further trade barriers, which was a significant risk in a ‘no-deal’ Brexit scenario. The reality, however, is not quite so simple.

As many construction businesses importing materials from Europe have found, trade has been impacted by administrative and customs irregularities, which is yet another blow for an industry already struggling to keep pace with demand and creating complications for supply chain management.

The sector is under significant pressure with cost and supply of materials. The Federation of Master Builders (FMB) State of Trade Survey for Q3 2020 highlighted that 87 per cent of builders have said that material costs are rising, 11 per cent more than the previous quarter.

According to the UK Department for Business, Energy and Industrial Strategy (DBEIS) there have been consistent price indices increases in Cement, Timber and Joinery and Metal products over the past year. We have had first-hand client feedback that, in late 2020, prices for certain materials were being quoted up to 70 per cent higher than before the first lockdown.

As these material cost increases continue to put pressure on already thin margins, what can businesses do to optimise supply chain management and monitor key risks effectively?

Consider the Customs and VAT implications

Supply Chain management According to the DBIES, c.£18bn of construction materials were imported in 2019, which equates to 24 per cent of material supply for the UK industry. Coronavirus and Brexit have only exacerbated the exposure to VAT and customs duty risks by forcing many businesses to adopt new supply chains.

Businesses must evaluate the impact on customers and suppliers in the UK and rest of the world. As the sector adjusts to the new trading relationship with the EU, there is an opportunity to recalibrate the supply chain and ensure absolute certainty in the delivery of project pipelines.

Further VAT implications brought in by the introduction of the Domestic Reverse Charge for VAT on 1 March 2021 should also be considered.

Monitoring your suppliers

Whether your supplier is domestic or international, monitoring their operations and financial health is a vital component of risk management strategy. Checking the financial stability of key new suppliers before engaging with them, together with monitoring the financial health of your key existing suppliers, can minimise the risk of sudden disruption to the availability of materials. Businesses who do not enjoy the benefit of a significant cash surplus will rarely plan to stockpile extra materials, which makes monitoring supplier health that much more important.

Multi-sourcing suppliers for stock of a certain material, particularly if your existing sole supplier is showing signs of distress, by seeking out alternative providers is an important measure to protect against possible supply issues. Software products such as Tracker provide up-to-date financial and credit information, enabling license holders to monitor supplier business performance. Get in touch here if this of interest.

Use technology to optimise supply chain management

Proactive supply chain management is an essential but often a time-consuming task. Adopting technological solutions, which spot key risks through demand forecasting and utilise risk management tools, are an increasingly attractive option for the sector. In the event of supply chain disruption where materials cannot be sourced when needed, lengthy procurement processes can further delay construction projects. This in turn could put the contractor at risk of breach of contract.

Technology solutions which optimise supply chain management have been steadily gaining traction with the sector, with tier one contractors spending millions of pounds on IT systems in 20191. To safeguard against operational disruption and drive efficiencies, Enterprise Resource Planning (ERP) systems can be integrated into existing systems and manage crucial operations such as inventory, sub-contractor management and project management. In the event of supply disruption, the system will drive faster decision-making processes and enable quicker solutions.

We can help

Contact Paul Dowell for more information on your construction company's supply chain management.

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