Why British firms are still stockpiling
Expecting the unexpected has been the name of the game for UK procurement professionals since the pandemic. And it shows. Firms are now routinely holding bigger inventories to mitigate the risk of further supply chain disruption cutting off their access to key materials and components.
That strategy has its downsides, of course. For instance, liquidity is key when times are tough, and all that extra stock isn’t necessarily good for cash flow. It’s a delicate balance to strike. So, how are British firms going about it?
Just-in-time models reliant upon long-distance supply chains fared particularly badly during Covid, and geopolitical unrest such as the war in Ukraine and US-China trade tensions have contributed to the ongoing uncertainty for businesses. It’s no surprise, then, that the average amount of stock held by British firms has nearly doubled over the past four years, with businesses feeling more cautious about the potential for supply chain disruption.
Unfortunately, the strategy of holding extra stock is also a costly one. And to make matters worse, the economic turmoil and rampant inflation of recent quarters has made it difficult for businesses to extract significant profit from their inventories. In fact, over the same four-year period, the average firm’s gross-margin return on its inventory investment has more than halved.
Looking beyond the averages, the situation is even more stark. Just one industry has been able to both hold more inventory and make a bigger profit margin on it. The rest have seen margins shrink significantly.
It’s not all downside, though. Holding extra stock has enabled lots of companies to reduce their fulfilment times, as they are no longer at the mercy of their supply chain partners delivering on time. As of the third quarter of last year, the average fulfilment time had fallen to 14 days, compared with the 25-day average seen at the height of the Covid-related disruption in the first quarter of 2020.
Customers will surely thank businesses for those faster deliveries and turnaround times, even if shareholders are bound to ask questions about the profit margins.