How SMEs can mitigate supply chain risk

Read time: 4 min Date Added: 19/04/2024

Taking practical steps to make sure supply chain resilience is vital for SMEs. Learn about some of the issues, common mistakes and how to manage the risks from Dave Atkinson, Head of Manufacturing, SME & Mid Corporates, Bank of Scotland.

During ongoing periods of economic uncertainty, it’s critical for small businesses to strengthen their supply chains and plan for all possible scenarios. A Make UK report (PDF, 3.45MB) found that 93% of manufacturers agree supply chains will remain under pressure throughout 2024.

UK supply chains are under strain from the cost-of-living crisis. Consumer demand has waned in many sectors, and SMEs are having to take an agile approach to navigate price and material availability challenges. Other influences taking effect include:

Geopolitical events.
Higher inflation and wages.
The post-pandemic reduction in the availability of air freight.

Global supply chain factors

The recent risk of attacks on ships in the Red Sea has forced the diversion of container vessels and caused a rise in air freight costs. Despite sea traffic delays, businesses are trying to maintain a steady flow of goods and raw materials from Asia.

SMEs need to bear in mind their contractual obligations under new and existing supply chain agreements and ensure they have robust contingency plans in place for every eventuality.

For example, we’ve seen the reliance on Ukraine for the supply of sunflower oil impacting the food and drink supply chain through higher costs and a lack of availability.

SMEs also need to be prepared for things like natural disasters and the impact of global economic conditions. These external factors can reduce raw material availability and have an adverse effect on transport responsibilities.

“Our Working Capital Management solutions help SMEs better understand their position and examine the potential impacts on cash flow caused by international trading, FX risk and business growth.”

Dave Atkinson Head of Manufacturing, SME & Mid Corporates, Bank of Scotland

Essential questions to explore

Before joining a new supply chain, SMEs need to consider the big picture. For example, how might a new contract of significant value impact your cash flow? Unfortunately, many small businesses risk financial pressures or even failure during rapid growth by overtrading and running out of cash.

There are several questions small business owners should be asking to make sure their supply chain is resilient:

Is the capacity available to meet client demands, including distribution and transport?
Is the future of the business at risk if it’s not diversifying its customer base?
How will any investment be funded to service new contracts?

Business owners also need to carefully examine the implications of demands around legal compliance, quality control and the integration of new technology on their staff and bottom line.

The above list doesn’t cover everything but provides a good starting point when preparing financial forecasts. The Bank of Scotland International Trade Portal features guidance around transport logistics, how to create overseas partnerships, regulatory compliance and making and receiving international payments.

“More SMEs now understand their customers are making choices based on a businesses’ sustainability commitments. There’s a huge opportunity for those willing to make positive changes, but also a considerable challenge for those unable or uninclined to embrace it.”

Dave Atkinson Head of Manufacturing, SME & Mid Corporates, Bank of Scotland

Supplier-side red flags

Rushing into new supply chain agreements without carrying out due diligence comes with risks. Awareness of potential red flags in the early stages of a new deal is vital so issues don’t escalate and cause more issues later.

One of the behaviours to watch out for is inconsistent communication. Not having access to every piece of information needed to base a decision on is a major red flag. An example of this is financial resilience - it’s unwise for SMEs to enter into a supply chain with a business that’s being secretive around its accounts and trading position.

It’s also essential for SMEs to conduct their own research and not rely on what they’re being told. This groundwork could take the form of running a credit check on potential suppliers and using the Companies House website to learn more about a business and its directors.

The missing ingredients for SMEs

Many SMEs create red flags through a lack of planning. Here are some of the fundamental questions they must be able to answer.

Is there a clear exit strategy if things don’t go to plan?
Has detailed due diligence been done or only a few basic checks?
Does anyone in the business have a strong knowledge of risk management?

When supply chain disruption happens, the SMEs that typically fare best have robust contingency plans to help them adapt quickly.

Sustainable supply chain considerations

Large businesses within supply chains are increasingly demanding evidence from SMEs because of the reporting requirements and regulations placed upon them.

The rise in consumer awareness around sustainability issues makes it essential for SMEs to build it into their supply chain agreements. “More SMEs now understand their customers are making choices based on a businesses’ sustainability commitments. There’s a huge opportunity for those willing to make positive changes, but also a considerable challenge for those unable or uninclined to embrace it”, Dave says.

Here to help you thrive

Bank of Scotland and others can provide a wealth of support, so SMEs don’t have to manage supply chain risk alone. “Many of our small business customers lack the time and resources to find suitable partners and they trust us to connect them with experts at private firms, trade bodies and Chambers of Commerce.

Our Working Capital Management solutions help SMEs better understand their position and examine the potential impacts on cash flow caused by international trading, FX risk and business growth”, Dave concludes.