Small businesses in the UK have had a tumultuous 2 years dealing with COVID, Brexit and consequent ongoing supply chain delays, increased freight rates and changes to import and export rules.
Running a business means managing risk. Effectively managing risk to a business requires foresight, planning and experience! Few small businesses we come across have a formal risk management process. Most have elements or have put in place some risk management measures for example insurance, maintaining professional qualifications, HSE compliance, Company procedures manual to name just a few.
All businesses, new and established benefit from creating and maintaining a simple risk register which in its most basic form is a list of “What ifs” :
· What if XYZ happens?
· What impact will it have on the business?
· What can be done to avoid or reduce the impact?
Reviewing this list with the management team on a regular basis enables businesses to manage the risks before they become critical.
For businesses manufacturing, selling and transporting goods the last 2 years have thrown up more than one business critical challenge. The supply chain has been under enormous pressure since COVID first appeared in 2019. As waves of the pandemic spread across the globe countries responded by locking down to protect populations. This halted production of raw materials and manufactured goods as well as the logistics businesses moving them. Ongoing lockdowns, staffing shortages, closed ports and subsequent rerouting and the blocking of the Suez Canal, have exacerbated delays.
Scarcity of raw materials has driven up prices with wood, packaging and certain electronic components doubling in price in 12 months. This has partly been driven by supply issues but in the case of wood and packaging, businesses have moved from plastic to paper, wood and alternative types of packaging that are considered more sustainable. Supply and demand have yet to regulate.
In the UK, Brexit has added an additional layer of complexity for businesses importing or exporting. Many smaller businesses have stopped shipping direct to customers in the EU as they simply don’t have the time and resources to work out how to navigate the new customs and tax rules. Some businesses have simply determined that the cost of dealing with returns is too great to be worthwhile in the short term.
Whilst the backdrop has been challenging, UK businesses continue to navigate their way through the complex issues and necessity being the mother of invention, have found solutions to the immediate problems. Managing the ongoing risks to a business remains a challenge, we spoke to several small businesses to find out how they have dealt with the challenges:
Planning for increased lead times.
This is extremely challenging especially for small and developing businesses as generally they have less experience and resource to draw on when it comes to ordering further in advance or in greater volumes. Benefits of advanced ordering are of course securing supply but also include advanced planning time with more time to be put into marketing and developing sales channels. On the downside however, cash flow is affected with significant amounts of cash tied up in stock and packaging.
From a practical point of view storage space and storage costs need to be considered as well as the adequacy of asset protection. If a business doesn’t have storage space, they are either going to have to rent space or utilise a third-party warehouse both of which come at a cost which eats into profit margins. If a business has invested significant amounts of cash in stock or packaging it’s vital that insurance is in place to protect that investment in the case of fire, flood, theft or other physical risks.
Little Crafters Boxes founder and ex Deputy head Radha launched her business at the beginning of the pandemic in 2020, creating STEM resources for children 4-14. It has been a huge hit with parent’s keen to find resources to support home-schooling and since the return of children to schools many have continued with the subscription to support learning. The boxes are also very popular with permanent home schoolers and for gifts.
Despite the popularity of the products, the challenges of sourcing packaging and materials have been significant. The majority of the packs use wood as a component and there is a global shortage. Prices have doubled in the last 12 months and if these remain at this level long term, they will be reflected in the product price.
The business is now ordering supplies up to 6 months in advance and in 3-4 times greater quantities than they would have if they could guarantee supply. Storage is becoming an issue as the premises they moved into earlier in the year is now full.
Plan B and spreading the risk for Suppliers and Logistics options
Building your contact list for supplies is an extremely useful resource. In some cases, regularly splitting your orders between several suppliers can reduce the risk of all or any of them being unable to supply you at any time. However, in some circumstances (COVID) even that doesn’t help if the goods or raw materials aren’t reaching the suppliers.
Flexible thinking really helps here. As a consequence of the lockdowns in Europe in early 2021 Presca Sportswear found that their European manufacturers wouldn’t be able to produce their Autumn Winter 2021 collection on schedule. Presca returned to the drawing board, acquired some good quality deadstock fabric, redesigned their collection and were able to switch production for a short run to the UK. The designs for AW21 can still be used in AW22.
Lead consultant designer Lily from The Sportswear Designer says the result meant that the collection was ultimately more sustainable in that it used fabric that has already been manufactured. Also manufacturing the garments in the UK meant fewer miles travelled for delivery. For a brand with sustainability at its core, this is a positive.
Lily says “although I don’t design for fast fashion, I can see a move away from trend led design as brands look to become more sustainable and deal with the uncertainty of supply”
We can see more and more businesses creating core collections of their goods not just to improve sustainability but as a practical way to manage the risk of seasonal collections being delayed.
Some businesses have needed to evaluate costs and restructure to survive. In some cases, this has been downsizing, moving sales online but for others it has meant expansion and relocation.
Post Brexit Dr Zigs, a unique manufacturer and supplier of Eco friendly and ethically produced bubble toys, encountered significant supply delays. Dr Zigs proudly manufactured in the UK but found that the lead time for some of their materials which they source from a community farm in Vietnam, extended threefold. Not wishing to change suppliers, as ethical sourcing is at the heart of their brand identity they have taken to ordering and shipping well in advance.
Brexit has made fulfilling their European orders almost impossible so Dr Zigs has opened a company in France and will be switching the manufacturing of their EU orders to France. This is a big step for the company but the founder, Paola, sees this as a long-term positive enabling the business to actively grow their customer base in Europe. The Factory that they will be using for their French manufacturing employs a larger than usual proportion of workers with disabilities which fits well with the inclusivity ethos of the brand.
In some cases where supply of raw material is compromised then the product itself must be adapted. This can be hugely complicated and challenging to do in a short timeframe, especially if packaging has been sourced to fit the final product.
Bumble & Goose, a virtual Bakery based in County Down saw significant growth in demand for baked gifts by post over the Pandemic period. Switching to becoming a virtual bakehouse meant ensuring that packaging worked for shipping the bakery products to their recipients in pristine condition.
Sourcing packaging and reliable logistics partners has been an ongoing issue with suppliers simply not stocking what they need and their original logistics partner unable to ship to the UK post Brexit. They now use several logistics partners, depending on where they sending their goods and capacity.
Brexit meant that the business was no longer able to source the French butter they used for their vanilla biscuits. Their unique recipe required butter with a particular fat content which they had been ultimately been sourced from France. Eventually they were able to find an Irish supplier producing butter with a similar fat content. They are pleased maintain the quality of their product and to support a local supplier.
Changes to a product must be considered extremely carefully as Anna, Founder of Zeez, a revolutionary device to enhance and improve sleep patterns, discovered. During the pandemic they were unable to source a particular part for the manufacturing for their Sleep Pebble product. The only alternative came with size variation that meant the new product would no longer fit in the original packaging. This led to a redesign of the packaging which delayed supply to customers.
Sometimes the best course of action is to do nothing and accept that there are some things you cannot control.
Originally due to launch in October 2020, Ducky Zebra an ethical children’s wear brand, experienced 12 months of delays. Manufacture of their collection was agreed with a Global Organic Textiles certified (GOTS) factory in India. Following the regional lockdowns in India in the wake of COVID sweeping the country, the Factory closed down for 6 months. Switching suppliers was never an option for a brand that had ethical production at its heart.
When the factory reopened, it had a backlog of orders to work through and then when the goods were shipped, they ended up stuck in Spain for several weeks waiting to be transhipped to the UK.
Sally, founder of Ducky Zebra remains philosophical, although enormously frustrating, the 12 months gave her time to work on marketing the brand and building a customer base ready for launch. Those 12 months also gave her the opportunity to develop retail opportunities and enable her to open a pop -up in Oxford’s historic covered market in November 2021.
Risk management applies to internal and external factors that affect a business. Internal factors include staffing, premises, accounting, credit control and every aspect of the business that determines how it delivers its product or service to the customer. External factors are manufacturers/suppliers, Pandemics and subsequent lockdowns, changes to legislation (Brexit), changes to the cost of materials etc.
A useful exercise for all businesses but particularly supply chain businesses is to draw up a flow chart showing the process of delivering a product to a customer right from sourcing or manufacturing.
Looking at the links in the chain you can more easily identify vulnerabilities of the business.
Flowchart for a retail business selling products manufactured to their design
The next step is to consider each part of the process and consider “what ifs” and responsibilities at each stage. For example:
Step 1 Manufacturing
Using this you can develop a risk register (your list of what ifs). How you populate it depends on the risks facing your business, how you perceive them and what decisions you make to address them.
Creating a risk register early on for a business helps with the decision-making processes when you are sourcing goods, negotiating contracts, choosing a payment network or even thinking about acquiring premises or hiring staff. The more robust your risk management process is, the more robust your decision-making process will be. Even if you are a company of one it’s a really useful business planning tool.
A very basic risk register is available to download from our website.
Using the Impact scale to consider the severity of the impact and likelihood of a “what if” occurring is a helpful way to prioritise which risks to tackle first and which ones to keep a close eye on, especially if your mitigation solution doesn’t greatly reduce the impact rating.
The reality is that no matter how well you plan there will always be risks that takes you by surprise. I mean no-one had comprehensive plans for COVID in place! But businesses that had plans that addressed delays in product delivery at least had some plan Bs to consider when the pandemic hit.
As businesses become larger, risk management becomes vital because as a business becomes larger it becomes less agile. For example, larger businesses that are tied into leases or contracts for long periods of time and have to consider the impact of not being able to meet their obligations.
We remain in a highly volatile time with the emergence of the Omicron variant of COVID showing just how fragile the situation is. Maintaining a risk register is a step towards flexible planning to navigate an everchanging trading environment.
As insurance brokers, we make it our business to understand the risks facing our clients and can assist businesses in finding insurance solutions to reduce the financial impact of many “what if” scenarios. Contact us at www.fcinsurancebrokers.co.uk to discuss insurance and risk management.