Are UK production costs too high when competing in a global market?

4th February 2015

There is rarely a week when the pressures on small suppliers to larger organisations are not in the news. Most recently, it was the beer company AB InBev imposing payment terms of 120 days and Heinz extending its payments to 97 days.  Before that dairy farmers supplying milk to the dairy firm First Milk were told their payments were being delayed due to a fall in milk prices that began in the summer of 2014.

The supermarkets also regularly get a bad press for the way they treat suppliers, charging them to remain in stores, applying downward pressure on their prices and fining them the equivalent of up to a year’s profit for a late delivery.

Generally, sympathies are on the side of the small supplier, for whom a contract with a large and well-known organization may be crucial to their reputation and their cash flow. It is rarely wise, however, for a small business, particularly in the food and drink sectors, to rely heavily on one or two contracts with a large organizations.

Supermarkets own the channel to market and their goal is to offer the lowest prices and to make the maximum profit for their shareholders. Consequently they will always be on the lookout for the lowest costs. And where there is a well-developed global supply chain, as there is in food sector, there are plenty of alternative sources of cheaper produce in Europe and elsewhere.

Similarly, for manufacturing industries, it is near-impossible to compete on production costs with places like China, with its abundance labour and rapidly improving engineering processes. Especially now that oil prices have been plunging with transport costs on the way down.

So it may be that SME suppliers would be wise to diversify their customer bases rather than relying so heavily on one or two big customers. For example, the “shop local” and buy local initiatives that are developing in many places may provide for new opportunities for food producers. Web marketing can also help to gain an additional channel to the customer.

With a relatively high cost of living, compared to other parts of the world, and employment protection laws coming thick and fast from Europe, it is difficult to reduce production costs in the UK.  The only option might be to improve productivity by introducing automated systems or outsourcing some services to try to keep labour costs as low as possible. All very well, but capital equipment needs to be funded and this is proving difficult for many small firms. Crowdfunding to the rescue?