UK manufacturers’ supply chain costs are increasing at the fastest rate for 25 years, yet output growth is at a 32 month high. What does this tell us, and what should we be doing about it?
A recent report by the Chartered Institute of Procurement & Supply describes how a weakened sterling coupled with significant price hikes in energy, steel and oil-derived products (mainly plastics) are damaging SME margins. Order books are buoyant and recruitment levels strong, but expectations are that soon SMEs will be forced to pass on increased costs in the form of price rises, pushing UK inflation upwards.
Service industries are also feeling the pinch from higher supply chain costs. A comparable CIPS survey indicated that although managers of service firms are optimistic about the next 12 months, current business activity has fallen slightly and rising operating costs (mainly fuel, salaries and import costs) have already forced price increases for the service sector.
The Office for National Statistics recently published figures for the first full quarter since the Brexit vote. The profitability of UK manufacturers fell from 13% (Q2 2016) to 12% (Q3). Over the same period the profitability of our service industries rose slightly to 18.7%.
The latest figures available (Q3 2016) show that productivity grew in the service sector but not in manufacturing. Wages and other labour costs increased at a greater rate than productivity, causing a 2.3% increase in unit labour cost (ULC). And the UK’s productivity is poor – we lag 18% points behind G7 averages and a massive 36% behind Germany – both the largest gaps ever recorded.
What does the future hold?
A blend of strong output growth, rising staff levels and low productivity tends to suggest that output is being increased solely by hiring more bodies as opposed to greater efficiency. If true, any UK manufacturers who are active exporters will be temporarily assisted by a weak pound but the wider economy will bear the brunt of price increases in the form of higher inflation. How can UK manufacturers compete effectively with our G7 neighbours? Regaining control of supply chain costs would be a start – fortunately an area in which Auditel has considerable expertise.