The COVID-19 pandemic has highlighted how manufacturing supply chains are critical to the process of delivering products and services essential to life. Whilst a series of ‘lifeboat’ projects are needed to protect manufacturing capability in the short term, now is the time for UK manufacturing supply chains to pivot and build capability for the future.
Over the last 30 years global manufacturing strategy has seen a shift to a model that has limited our structural flexibility, as we off-shored manufacture to large plants, leaving limited options in the network. In 2015 (ONCTAD data) UK manufacturing represented only 2% of global manufacturing output. In comparison, the US, China, Japan and Germany collectively accounted for 55% of world manufacturing output. At $244billion, UK manufacturing output is less than Germany, France and Italy. Against this backdrop, the significant impact of COVID-19 on UK manufacturing is becoming clear. The Office for Budget Responsibility (OBR) predicts a 35% single-quarter hit to Gross Domestic Product (GDP) and the largest deficit since 1945. A study by McKinsey suggests a 44% contraction in commercial aerospace, alongside 48% in oil and gas and 32% in automotive.
UK manufacturing supply chains are at a pivot point. In the short term it is essential to protect vital UK manufacturing capability through a programme of ‘lifeboat’ projects to sustain and enhance current UK manufacturing capability. These short term projects would provide support to those industries whose demand for products has been most severely impacted by COVID-19, but whose capability is critical to the long term success of UK manufacturing and the broader economy. This includes foundation industries such as steel, aerospace, automotive, oil and gas and construction.
This is also a time to pivot and build capability for the future. To do this effectively, there are five critical considerations for UK manufacturing supply chains:
1. What should the UK manufacture?
COVID-19 has highlighted that it is important for the UK to have domestically resilient supply chains for the products and services that are critical to life. This requires those supply chains to have core manufacturing facilities in the UK, which is one of the reasons why UK food supply chains have been so effective at maintaining supply, as much of their food production is based in the UK. The UK needs to strategically review the products that are critical to life, and ensure that there is the capability to produce these domestically, with the ability to ramp up volume if required.
In addition, the UK should take the opportunity to leverage its strong research and development base to identify globally competitive products and services, and evaluate where we have opportunities to make these products in the UK and export globally.
Be the first to adopt emerging technologies
The UK has typically focused on manufacturing components and final products. Other countries (e.g. Germany and Japan) focus on the manufacture of the equipment to make products. As we move into the post-COVID-19 era, the UK needs to start investing in a programme of research and development to support the next generation of manufacturing production technologies and identify opportunities for new emerging technologies where we may be able to ‘leap frog’ the competition. This may be a longer term investment plan, but one that is critical to long term success.
2. What critical infrastructure is required?
Creating smart cities and roads through connectivity
Despite COVID-19, UK suppliers supporting the development of China’s 5G network have seen unprecedented demand for their products throughout March. It is suspected that the Chinese government is heavily investing in infrastructure programmes to support economic recovery. COVID-19 has reduced distinctions between home and work, and has emphasised the importance of connectivity. With the advent of 5G, this connectivity is set to move beyond the bounds of our homes, offices and factories to create connected or smart cities and roads. Historically the UK has lagged behind other countries in the creation of a connected infrastructure. In June 2019, Britain ranked 35th out of 37 countries assessed by the Organisation for Economic Co-operation and Development (OECD) for the proportion of fibre in its total fixed broadband infrastructure. There is an opportunity to use the recovery period post-COVID-19 to make significant investment in the infrastructure required to ensure the UK has world leading connectivity. This will have the short-term benefit of supporting the construction and telecoms industries, but will have the longer term benefit of creating new business models that leverage connectivity to find new ways to manufacture and distribute products and services.
Reducing the UK’s carbon emissions
Another critical area for investment is industrial decarbonisation. The UK has clusters of large industrial plants for energy-intensive industries (e.g. steel, cement, refining and chemicals). Whilst they are significant contributors to the economy and their communities, they are also significant contributors to UK carbon emissions. The six largest industrial clusters have high emission plants totalling around 40 million tonnes of carbon dioxide per year, accounting for approximately one third of all business and industrial emissions. Investment in infrastructure to support industrial decarbonisation will have the short term benefit of supporting the construction and energy industries, but will have the longer term benefit of creating more competitive foundation industries to have access to cheaper and more sustainable energy.
3. How can the UK ‘mine for materials’?
Manufacturing supply chains have typically been designed on the principles of a ‘linear economy’ - One where we mine materials, make products and then at the end of their life they go to landfill. As resources in the world become scarcer, rather than continuing to mine for materials from the ground, we need to consider how we can extract and recover materials from products already in circulation. For instance, by 2050 the UK steel industry could ‘close the loop’ and only use recycled steel as a feedstock.
Innovation at the source
Currently, the UK is a net importer of steel, meaning that we buy more from other countries than we sell. We tend to import high volumes of low grade steel, and manufacture and export low volumes of high grade steel. To close the loop, we would need to consider more carefully what the sources of steel were, and how to ‘mine for the materials’. This may lead to the development of new industries for example aircraft disassembly, and is also likely to require investment in sortation equipment to separate materials.
Supporting a circular economy
As the UK looks to recover, there is an opportunity to rethink the role of UK manufacturing so that the focus is not solely on the production of original products, but consideration is given to how UK manufacturing can support the principles of a more ‘circular economy’ and innovatively support the repair, remanufacture and redistribution of products. Where this is not possible, suitable long term material recycling methods should be implemented. The nature of these activities will also require a more localised solution.
4. How can the UK design future fit manufacturing supply chains?
COVID-19 has triggered the identification of products that are less obviously critical to life for the average person, (e.g. personal protective equipment and ventilators). The demand for these products in normal times may not be very high, but they are strategically important assets in a certain type of emergency.
Overcoming disruption through flexibility
Supply chains needs to be designed and co-ordinated. As we rebuild the network of UK manufacturing supply chains, we need to do so in a way that enables our manufacturing networks to be both ‘dynamically flexible’ to the more normal upturns and downturns in demand, but also be ‘structurally flexible’ to reconfigure when there is an unprecedented disruption. This will not happen by chance. It is easier for supply chains to be structurally flexible when they are local, rather than global. Ineos plans to build a hand sanitiser plant in North East England within 10 days, to provide 1 million bottles of hand sanitiser per month to the NHS. The main ingredient comes from a plant in Scotland. They will replicate this model in Germany. Structural flexibility requires a focus on economies of scope (efficiency through variety) rather than economies of scale (efficiency through volume), as it is easier to switch production. It can also require a co-opetitive approach, as organisations collaborate with their competitors to share the bandwidth for assets. Structural flexibility is also easier to achieve if supply chains are designed with a greater number of nodes in the network. Having two factories is more structurally flexible than having one, as volume can be switched between them. This requires a different approach to costing, one that looks at the longer term and factors in an option value. This may result in a supply chain cost that is more expensive today, but provides greatest flexibility in the future.
There is the opportunity for the UK to develop a world leading capability in supply chain design, to support the creation of future fit resilient manufacturing supply chains for the UK.
5. How does the UK build a bedrock of fundamental manufacturing and supply chain skills?
An opportunity exists to create a Supply Chain Innovation Hub to enable UK manufacturing supply chains to become global exemplars. The fundamental skills for manufacturing and supply chain remain critical. Whilst technology may change, the supply chain principles and skills remain the same across all industrial sectors. The fundamental principle of supply chain management is to balance demand and supply, creating flow of product through the end-to-end supply chain in line with demand. This is enabled by sophisticated planning systems that recognise the differing demand patterns for products. The right supply strategy can then be determined. This includes the ‘right sizing’ of buffers to ensure customers are protected against uncertainty in demand or supply. Its aim is to deliver customer value at the lowest possible end-to-end supply chain cost, in a sustainable way that ensures a fair return to all companies in the supply chain. In this way it supports the profitable growth of all companies in the supply chain.
Over the last 30 years, the core of these fundamental skills has increasingly been overlooked when deploying manufacturing and supply chain strategy. UK manufacturing supply chains could be more competitive if they were proactively designed and managed. In doing this, we could overcome the inefficiencies of optimising the performance of individual functions or companies, and instead holistically create productive and sustainable UK manufacturing supply chains that are globally competitive. There is expertise and leading practice throughout the UK, across companies, consultancies and universities that could be curated and shared. There is an opportunity to match the manufacturing and supply chain issues that companies face, with the right knowledge and leading practices to solve that problem. At the moment, this is widely being missed across the UK.
Now is the time to pivot
Whilst it may be difficult to currently see the silver lining from the cloud created by the COVID-19 pandemic, it has provided a point of reflection. It has highlighted the criticality of manufacturing supply chains to deliver products and services essential to life, and the fragility built into supply chains over the last 30 years. Now is the time to pivot and to build globally leading UK manufacturing supply chains that are resilient, productive and sustainable.