Are construction industry growth hopes built on sand?

Business Insights
24/05/2017

The construction industry has, arguably, the most extended supply chain of any industry. The more extended a supply chain the less visible it becomes. With construction projects often carrying heavy penalty clauses for late delivery, working with a supply chain that operates by the seat of its pants is a huge risk.

By their nature construction industry supply chains are a mystery. Until YouGov, supported by eminent economist Dr John Ashcroft, published its first Supply Chain Funding index (SCFi) in October 2016 there was no data about the strength of supply chains. The SCFi rates supply chains on a scale of 0 – 10 and in the first edition, construction industry supply chains rated a disappointing 6.0. So right from the outset construction businesses were saying their supply chains were running a 40% risk of failure.

In the second edition the situation has become decidedly worse: the construction industry supply chain has tumbled to 5.6 on the index. Construction is the worst performing sector across the entire SCFi with 46% of construction businesses viewing their supply chains as fragile.

The SCFi builds its results from the opinions of real businesses not a panel of academics; this is what gives it its credibility. The construction industry accounts for almost one-in-five responses.

So why have things got worse for the construction industry? Because 36% of construction businesses suffered a broken supply chain, that’s why. What’s more, almost two-thirds of them experienced disruption to their business; the other third escaped, this time. These experiences explain why three-out-of-ten construction businesses expect the pressure on their supply chains to get even worse during the next six months.

Surprisingly, given this backdrop, almost two-thirds of building firms say they’re looking forward to increased turnover during the next twelve months. Some might say this is optimistic, overconfident, or even an industry in denial. How can an industry talk about growth in one breath while simultaneously describing the supply chain that supports that growth as fragile and getting more fragile? Chief economist, John Ashcroft fears the worst: “An industry at 5.6 on the index and heading towards 5.0 should not be talking about growth. Instead, it should be talking about how to turn a dysfunctional supply chain into one that is robust enough to maintain an industry that is crucial to a major UK infrastructure build.”

Emico are a building services company that has recognised this threat and has launched a supply-chain charter. In doing so Emico has introduced more control and governance into the selection and appointment of its suppliers. David Perrotton, Emico’s Commercial Director believes creating a partnership with suppliers is the way forward: “We pay our suppliers on time and we expect our suppliers to do the same. If cash runs through the supply chain as it should the whole chain functions. We also expect our suppliers to be good employers because that attracts good employees. If we get the right behaviours in the supply chain, everyone wins.”

Lindsay Whitelaw, chair and founder of URICA, agrees: “Supply chains run on liquidity and, just like a car that runs out of petrol, when a supply chain runs out of cash it comes to a grinding halt. The idea of an industry talking about growth while fearing that its supply chain is about to fall over is mind-boggling. But the solution is there: get cash into the supply chain, move the index up by 10% and I genuinely believe that would generate growth of 3%.”

Improve liquidity in construction supply chains and 30% of businesses will invest in plant and machinery. Liquidity creates the confidence necessary for investment. If things don’t change then the outlook for construction is bleak.

URICA provides single invoice credit insurance and accelerated invoice payments. It was designed from the ground up, reimagining how business payments should work within SME supply chains.

www.urica.com