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Businesses need better warning systems

Firms ‘pile up cost by relying on too few suppliers’

Phil CharlesCompanies are failing to mitigate risks, such as relying too heavily on a small number of suppliers and customers, according to new research.

Scotland’s mid-market businesses lost approximately £3.8 billion last year due to a failure to adequately tackle risks directly within their control, including security and tax compliance says KPMG Enterprise. ,

The findings come as it launches masterclasses in Aberdeen (24 May 24) and Edinburgh (1 June) to advise mid-sized businesses on how to minimise risks associated with growth.

Both events will feature a keynote talk from the chief executive of DC Thomson, Ellis Watson, who will talk about future-proofing businesses.

The latest KPMG study, which questioned 222 leaders of UK mid-sized businesses (with a turnover of between £10m to £500m), asked executives to reveal their approach to mitigating risks relating to their workforce, customer base, supply chain, data security, regulation and tax compliance.

A total of 41% of those surveyed expressed concern they have an over-reliance on a small group of suppliers within their supply chain – leaving them at greater exposure to price increases, changes in commodity prices and quality control issues.

This is in spite of 38% of companies experiencing a failure in their supply chain over the last twelve months, with each incident costing the company, on average, 0.95% of their turnover.

Furthermore, despite half of respondents stating the threat of losing major customer accounts was their most pressing day-to-day concern, over a quarter (29%) admitted they rely on their top five customers for more than half of their turnover – again, leaving them exposed to the risk of bad debt, or a significant loss of income, should those key customers switch loyalties.

Phil Charles (pictured), head of KPMG Enterprise in Scotland, said: “These leaders are leaving the back door open by failing to adequately address the many and varied risks that threaten their business.

“Whether related to customers, suppliers, data security or regulation, never has the adage ‘fail to prepare, prepare to fail’ rung more true – and the financial impact that this lack of preparation is having on business is startling.

“Relying on a small pool of suppliers is a particularly common vulnerability amongst middle market companies, yet we’ve seen many high-profile examples of organisations that have taken a substantial financial hit as a result of a fracture in their supply chain.

“And these fractures aren’t solely caused by suppliers going bust. Ethical lapses such as poor working conditions, data security breaches, substandard production, a flouting of environmental regulations or irregular financial transactions can all translate into significant reputational – and ultimately financial – damage to the contracting business.”

So with such high stakes, what steps should businesses take to protect themselves?

Mr Charles said: “Businesses should watch out for early warning signs, such as suppliers delivering late or demanding early payment. Often, it’s the employees on the ground who pick up on the signals first – we know of one company which only discovered there were problems afoot at its largest supplier when a delivery driver made a passing remark that he had been paid late to a warehouse manager.

“Business leaders need to ask themselves which suppliers would seriously interrupt their business if they failed, and perform a credit check on them. If they turn out to be high risk, businesses should consider splitting procurement over one, two or even three more suppliers. That way, if one breaks down, the others can pick up the slack.

“Finally, don’t underestimate the cyber threat posed by suppliers. ‘Whaling’ – where senior executives are targeted with fake emails from suppliers asking for payments – is massively on the increase. And don’t assume that if you are hit, your cyber insurance will automatically pay out. Check the small print.”



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