At a glance
- Despite the recent construction industry revival, supply issues threaten to hold back recovery
- Supply chains have become more complex and riskier
- Zurich offers supply chain risk assessments and related insurance products to help protect against failure in a supply chain
Although the construction sector is showing signs of a sharp improvement, conditions are likely to remain tough – in the coming months at least – with the supply chain having an impact on the speed and nature of any recovery.
It is estimated that following the financial crisis, capacity in the construction sector contracted by as much as 20% at its lowest ebb – leaving the supply chain vulnerable. But with this steady return to health, demand is now outstripping supply in many areas, notably in building materials such as bricks.
How Zurich can help
Zurich’s supply chain risk assessments and related insurance products are designed to help protect a construction firm’s profits against one of the most significant areas of risk: failure in a supply chain.
This unique combination gives organisations the insights needed to help reduce costs, maintain cash flow and solidify the value chain. Understanding supply chain risks and taking steps to mitigate them can offer a major strategic advantage for consistent corporate sustainability and profitability.
In addition, Zurich’s new construction insurance proposition – targeted at builders, trades and civils – enables a customer to choose their cover and their control costs, by adding innovative options to the standard cover. Zurich’s specialist construction underwriters, risk engineers and award-winning dedicated claims handlers all bring their expertise to this bespoke proposition.
In the last five years, some of the UK’s leading brick makers – such as Hanson, Wienerberger and Michelmersh – shut plants as brick production dwindled due to waning demand.
But as demand has ramped up, due to growth in the commercial construction and private housing sectors, the number of bricks being produced has not yet increased enough to meet current demand – causing costs to rise dramatically.
Supply versus demand
Brick makers are now firing up dormant kilns and hiring extra workers, but production is not likely to catch up with demand until mid-2014 – as supply chains cannot simply be turned on like a tap.
“Popular and well-priced bricks may be more difficult to source than higher-priced products or less popular bricks,” said Dr Noble Francis, Director of Economics at the Construction Products Association, a trade body.
“This will, of course, correct itself by the action of normal market forces.”
And it is not just bricks, there are currently supply issues affecting blocks, timber and aggregates, not to mention replacing skilled labour. Government data revealed that 358,000 workers have left the construction industry since 2008, a 15% dip.
For construction firms, though, there are still options. According to the government’s latest figures, imports of bricks were 39% higher in the penultimate quarter of 2013 than a year earlier, but it is those firms with robust risk management strategies in place that are more likely to be able to successfully negotiate their way through the current malaise until more capacity in the supply chain opens up.
This is especially important for contractors as many contracts are fixed, so any sharp rise in materials costs could potentially threaten their profit margins – either through increased expenditure or creating delays to a project whilst alternative materials are sought.
Volatility in the supply chain has risen sharply in recent years as globalisation has become more entrenched.
Supply chain mapping is becoming increasingly critical, as construction firms – as well as their suppliers – look further afield for low-cost sourcing of their materials. Zurich’s Supply Chain Resilience 2013 study found that 42% of disruptions originated below the tier one supplier, an increase from 2012.
Popular and well-priced bricks may be more difficult to source than higher-priced products or less popular bricks. This will, of course, correct itself by the action of normal market forces
Dr Noble Francis, Director of Economics, Construction Products Association
Another consideration is the current inability of the whole construction supply chain to align supply and demand in real time.
In the case of bricks, there are hundreds or perhaps even thousands of ‘links’ in the chain. But if one link cannot see what the other is doing, then the entire chain can suffer – as is happening now.
Creating stronger ties with key suppliers, can thus keep the supply chain agile and shortages or disruptions kept to a minimum.
Expertise in supply chain and risk management can effectively address many of the above risks – even if some natural disasters and other perils are harder to plan for – allowing for construction firms to outperform the market and gain a competitive advantage.
And as the bricks crisis has shown, supply chains are significantly different and more complex now to that of even five years ago.