Driven by strained supply chains, Scotland’s construction sector continues to face a challenging trading environment.
Anderson Anderson & Brown’s Stuart Rose explains…
Key materials including timber and cement are in short supply with prices rising accordingly. Various labour shortages, including the well documented shortage of drivers in the UK, are also impacting the sector.
Some of these factors are unique to the UK (and indeed some predate the pandemic, such as the driver shortage) but the wider supply chain shock is affecting companies across multiple sectors and internationally.
Businesses are beginning to see this as more than just a short-term problem brought on by a surge in demand after the COVID pandemic.
Strategies are changing accordingly.
Supply chains that were optimised for efficiency had limited buffers built-in when something unexpected came along. Companies are now looking closely at how they can build resilience into the supply chain both for learning to live with the current situation and in preparation for the next challenge.
What will the next shock be? Is the industry prepared for a sudden shortage of steel, aluminium, or the impact of sustained high energy prices on input costs?
Challenges and opportunities
Strong demands in areas such as infrastructure and residential property are creating challenges and opportunities.
Clearly for some businesses that are still able to fulfil this demand, either through supply chain resilience or otherwise, there are opportunities for further investment in capacity as material shortages and price rises are forecast by some industry bodies to be with us for the medium term.
Scarcity and the price of materials may also accelerate wider change, for example by accelerating the adoption of new ways of working or materials.
Timber is a case in point as it makes up the majority of new homes in Scotland but most of our imports are sold long before they reach Scottish shores.
In other sectors we have seen that difficult trading conditions lead to more co-operation and collaboration.
This starts with the basic step of investing more time in building strong supplier and contractor relations and working closely with suppliers throughout difficult trading periods.
Getting the basics right
In the short-term, robust management of working capital is essential to allow business to forecast any challenges well in advance. Those that are well prepared can produce virtually real-time, accurate cashflow information that enables them to react quickly to change.
It also allows open discussions with customers and suppliers around payment terms and milestones to take place at the right time and enables co-operation. Cashflow information should be combined with an awareness of all the funding options and working capital tools available to the business, from the traditional to the less conventional.
Businesses should not be tempted by going quickly for the cheapest funding solution offer. Instead, take time to consider a solution that aligns most appropriately to the business needs and strategic direction.
Ultimately, rising and volatile prices and material shortages might become the new normal for Scotland’s construction sector.
For some this means an increasing order book, growing demand and now pressure to catch up with a backlog of work.
While the demand creates opportunities there are also risks of overtrading and experiencing working capital shortfalls and liquidity problems on top of supply chain issues.
Getting the right systems in place will help get provide the right financial information when it’s needed to react appropriately and mitigate risks in a challenging trading environment.
Stuart Rose is a director and head of construction & property strategy at Anderson Anderson & Brown (AAB).
