Have we traded out our national resilience for the transitional pleasure of cheap imports?

Article on Re- source

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The UK, like many Western countries, has become addicted to buying cheap goods from the East, and particularly China. It has largely become blind to this fact, in both commercial and public enterprises, and recent shocks from both COVID and the continuing war in Ukraine emphasise the criticality of this dependency. Particularly, it has led many to question whether we have over traded our nation’s resilience for low prices, and has this become too risky and damaging to our national survivability.

In this article I would like to consider the issue further, and propose some tangible measures that can be taken. It is no use wringing our collective hands and complaining that something must be done, for something must indeed be done, and for both public and private sector organisations this seems to be a challenge.

My own experience goes back to 2007, when a casual wander round our warehouse in NHS Supply Chain made me realise, just from looking at country of origin information on packaging, how very many medical devices were coming from China. On my first fact finding trip to investigate further, I visited numerous factories in Shanghai, Wuxi and surrounding districts, and was both fascinated and a touch shocked, not only to see much product was produced in China, but also that I saw finished goods in branded packaging sitting in the finished goods warehouse of companies with no obvious affiliation to the brand; and multiple brands sitting side by side, to boot. ?We decided to play the OEMs at their own game, developed our own label brand, and started buying direct from the manufacturers; we called this DFM, or Direct from Manufacturer. Clearly, in so far as the OEMs were concerned, this wasn’t very sporting of us, ?particularly as we were buying from the same factories, and able to significantly undercut the branded price. Complaints and challenges ensued, and eventually political pressure brought an end to our fun and games, but looking back I can see how addictive those low prices were, and how they were seen as essential to increase or improve the ultimate service; in this case, delivering cost effective patient care.

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We also learned, at around that time when bird flu first emerged on pandemic scale, that the Chinese had an interesting approach to contracts when they didn’t serve their priorities. I certainly remember supplies being arbitrarily reduced or even curtailed, because the Chinese Government did not support exports of products becoming scarce, or allow access to key materials that might be needed for their own industrial priorities.

We saw this happen again in 2020 as COVID arrived on the scene, and we, at the Ministry of Defence, first noticed something was really up when our supplies of clothing starting to reduce: up to that point COVID was really just an interesting news story on the BBC that didn’t seem have much to do with us. However, clothing supplies faltered, as the Chinese authorities redirected production to facemasks, gowns and other key bits of PPE necessary to protect their populace against COVID. Needless to say, their contractual obligations for supply became rather tricky to enforce. This was another clear indication that, in a critical situation, we could no longer rely on our Chinese suppliers, and we found no ready supply market in the UK, as our addiction to low prices had pushed it all offshore.

At that time in late Spring 2020, we looked at options to buy military clothing from Eastern Europe, and even from the UK. There was no UK capacity. Romania could give us capacity, but it came at a price; and we also needed to say YES almost immediately. It was our inability to decide quickly that was our ultimate failing and, in the week or two we had to secure supply, we just couldn’t get the necessary political alignment and approvals to buy capacity.

So what does all this tell us? Firstly, there is a genuine threat from having all one’s eggs in a single Chinese basket. If push comes to shove, the Chinese authorities won’t hesitate to put their own interests first. I suspect the same might be true in relying on any other sovereign states to meet our national demands, so this isn’t just a tirade against the Chinese. My second point is a challenge that we have become perhaps lazy and complacent in our thinking, in our own organisations and institutions, where being a good buyer means buying things cheaply, and frankly resilience is seldom considered. We’ve become a generation wanting the best price, without a whole lot of consideration for what happens if you can’t get supply: some might also argue we’ve cared less about the socio-economic impacts of our decisions too. In the public sector our use of MEAT (Most Economically Advantageous Tender) and Best Price almost always get us to an outcome which chases price down. Our evaluations, even if more sophisticated than just price, offer little leverage for other attributes to compensate for some nice low cost items from the other side of the world. Even the latest wheeze to inject ‘social value’ into the public procurement evaluation will struggle to show a UK supplier as a better bet (MEAT) than someone off-shore with very low labour rates. Are we not again just kidding ourselves that we will protect our economy and people with these tools? Don’t we remain focused on price in reality, and risk our national resilience in the trade?

I think it’s time to wake up. Now, a bit like me in the morning, knowing that I need to exercise, I can wake up and choose to do nothing at all. Perhaps if chosen with conscious thought that is okay, and maybe I’ll get out on the bike later in the day. But some kind of imperative and strategy is surely needed if we are to improve our commercial fitness.

When we looked at those shirts from Romania in 2030, they had about a 30% price premium on them and, if we could’ve located a British factory, I suspect the premium would’ve been well over 50%. ?Anyone in business or in the public sector is going to be hard pressed to explain to their equally hard pressed customers that they should pay those kind of premiums for home-based supply. When given a choice they surely follow the money, even more so in these times of high inflation and high interest rates? ?But perhaps we can be more nuanced. Perhaps we can have our resilience cake and eat it, too!

Here’s the first strategy. Don’t single source. I remember this, when I was less than half my current age, as a thing we just did. There was danger and risk in single-sourcing, and you only did it where there was a very high cost of capital, the intellectual property was in one organisation, or the volumes were so low it didn’t make sense to dual or multi-source. We even used to have to write single source justifications at IBM in the 80’s for such a strategy, explaining why we thought it a good idea to place all our eggs in one basket. Nowadays we seem to have even outsourced that kind of thinking, in the public sector particularly, to the tendering process that we use. The process is everything, and, even if it spits out some frankly daft outcomes, we all bow to the process and absolve ourselves of any perverse results. I think this is how we end up with huge amounts of single-sourced products coming out of China. Because that’s what the process tells us is the right answer. We need to stop. And think.

Let’s think up front. We want good pricing, and we also want some resilience; we might even want to take some positive action toward climate change. Let’s set our competition to have say 2 winners but whose manufacturing cannot be from the same country or even continent……that’s right, we’re going to have to start knowing where things are made! We might want to give ourselves the flexibility to shift volume between suppliers, so a framework would be better than a contract, perhaps. Whilst the suppliers might not be happy with this, if explained upfront then they should at least be bidding eyes wide open. We’ll now think through our evaluation criteria, and ensure we’re selecting the right ones for the products we’re buying. We might also do some modelling that we apply in the actual ordering phase, to mean that we put say 50% in Far East, and 50% with our second supplier perhaps closer to home. The latter maybe more expensive, but we’re diluting the impact by continuing to buy some of the requirement from China, and have built in some supply resilience in the process – we’ll also be generating domestic production capability, and reducing our transportation footprint on the planet. We might adjust these splits depending on the assessment of product risk, and as this could change over time, we should revisit regularly. The point is we have baked in choice and flexibility of supply, which in many cases we don’t have today.

That’s all well and good, but where are these non-Chinese suppliers? There are plenty of other low cost supply countries emerging, with India, Malasyia and South America in the frame – I’d use the phase BRIC, but I think Russia’s current posture makes that abbreviation useless for anytime soon!

As a separate strategy, and perhaps more one for Government to consider, I would like to see some of these industries come back on shore in the UK, or at least into Europe, where shared values, standards, short supply journeys (environmental improvement) and common perceptions of quality prevail. For the UK to evolve, we’re going to need Government to be more interventionalist than it has dared to become so far – a bit like the stance China takes in driving economic investment and development regionally. It is going to have to lead the charge in deploying multi-sourcing strategies in its procurement, as discussed above, recognising that paying a higher price has longer term benefits for UK prosperity and resilience, in a challenging global economy. It needs to invest in developing centres of expertise, much like I saw the Chinese government doing for industry, when I was there 15 years ago. This doesn’t mean talking about it, or encouraging industry to do something, it means building factories in (probably) the North (actually delivering a Northern Powerhouse!) and in other regions - where we haven’t already completely killed off the industrial base and workforce. This will make it easier for business to invest and grow. Build units and make them available rent free; provide easy access to cheap capital; as a starter for ten.

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Intervention in a free market economy is not something most of us would advocate but, post Brexit, in a world of conflict, unpredictable risk, and as a little island nation having reduced influence on the global stage, it is time to think hard about whether we can really afford not to be rebuilding our manufacturing capacity, and finding a more sustainable balance between price and risk. Government particularly needs to find a way of delivering focus on the long-term, rather than our short cycle electoral drum-beat. It’s akin to thinking across the decades, as we have been doing with (hopefully) some success on climate change. I’m not sure the fora exists to do this for a substantial shift in how the nation renews its aquaintence with manufacturing, however. Something must be done!

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