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A sudden disruption to that chain can be enough to cause serious operational challenges. In fact, in some cases, it could be the catalyst for a major financial issue and even result in insolvency.
Most business owners are focused on sales and revenue. This is very much how it should be. We repeatedly advise people to know their numbers and keep a close watch on the cashflow. Everyone appreciates that the sales must happen to keep the money coming in. However, we often also see insolvencies that were less a result of poor sales and more a result of not being able to meet demand due to supply issues.
For many businesses, particularly those involved with highly specialised areas and a significant number of the 5.5 million SMEs, the supply chain often comprises a limited number of suppliers. In some cases, a business may rely heavily on just one key supplier for essential components or inventory. This creates a single point of failure—a solitary vulnerability in a business that is enough to result in catastrophic financial collapse. That may sound overly dramatic, but some very profitable and thriving businesses find themselves in insolvency because of it.
I do a lot of network events, and I’m a regular speaker on the causes of insolvency. While the businesspeople in the room are usually well aware of the sales end of the process, fewer have given as much thought to the supply chain. When it does get raised, I hear a lot of ‘oh, my supplier is absolutely reliable’ responses. OK, you are probably right, but what if that changed?
So, my question is a simple one. If your major supplier stopped supplying, or one of your key component suppliers vanished, how long could you survive as a business?
There are a variety of reasons a supplier may suddenly change focus or vanish entirely:
Insolvency: Suppliers are no more immune to financial difficulties than anyone else and could suddenly, from your perspective, become insolvent. When this happens, they are very likely to cease trading immediately for legal reasons.
Increased demand from other customers: If a supplier receives larger orders from a more profitable customer, they may need to refuse orders from smaller accounts or even terminate them altogether. Not every business can scale instantly to meet demand. Think back to the pandemic and all the shortages that suddenly appeared while businesses adjusted to the lockdowns.
Supplier retirement or business closure: Many small UK-based suppliers are family-run businesses. If the owner retires, or becomes ill, without succession planning in place, the business may simply close. It isn’t unusual for a Members Voluntary Liquidation to take some time to go through which may give you some breathing space, but it won’t be for long.
Pivoting to new products: Has your business ever needed to pivot away from a product or service? Well, the same may be true of your suppliers.
Better money elsewhere: Many suppliers are involved in more than one product. The hard business truth is that some of those will be more profitable than others, and sometimes that leads to discontinuation.
These are just the main reasons why a supplier could suddenly stop being part of your supply chain. In all these circumstances, the first you hear about it could be when you try to place an order.
It’s a pretty difficult market out there right now in many industries. Margin is everything, and intermediary businesses absorb a significant chunk of the profit between supplier and end user. It’s not unknown for a supplier to choose to bypass resellers or intermediaries by selling directly to customers. In fairness to them, vertical integration, where a manufacturer takes control of two or more key supply stages of the route to market, makes financial sense in many ways. Sadly, it can also result in resellers suddenly being cut out of how products reach the market. What benefits the manufacturer is financially ruinous to the reseller.
E-commerce businesses, such as those selling on platforms like Amazon or eBay, are vulnerable to supply chain changes in general and specifically because of vertical integration. These businesses often compete on thin margins and depend on inexpensive imported goods. A sudden shift in supply or the arrival of low-cost competitors selling the same or similar products can undercut your pricing strategy overnight.
Additionally, Amazon’s own fulfilment service (FBA) allows overseas manufacturers to ship directly to consumers. This bypasses UK-based sellers and intensifies competition. Essentially, you can easily end up trying to compete against your own suppliers or the manufacturers of similar ones… and they have more margin than you to play with. It becomes a war of attrition that, frankly, they will soon win.
When a key supplier disappears, the effects on your business will almost certainly be immediate. Your financial wellbeing then topples like dominoes.
Without stocks of goods or a secure supply of those essential components, you cannot fulfil customer orders. That creates a cashflow crisis when the sales dry up and overheads such as rent, wages, and utilities continue. Even if you manage to keep going, delays in delivery and unfulfilled customer expectations can damage your reputation. This is difficult to recover from and may have long-term consequences on customer loyalty. Not only that, but businesses may find themselves in breach of contract if they fail to deliver goods or services on time, potentially leading to penalties, legal disputes, and further financial loss.
It's remarkable how a part of your supply chain, that single point failure we mentioned earlier, can escalate into a full-scale financial crisis that results in insolvency.
Overconfidence in your current setup is one of the most common business mistakes. Play safe and assume that supply chains that have functioned perfectly for years can unravel rapidly. We suggest you regularly stress-test your resilience to supply problems and always maintain a set of viable contingency plans.
Here are a few practical steps to consider:
Diversify suppliers: Don’t rely on one supplier for your most important components or products. It seems like this is an obvious action, but we see sole supply issues a lot in insolvencies.
Maintain a buffer stock: Where feasible, hold a small amount of safety stock to cushion against short-term disruptions. You need to base this on how long you would need to switch suppliers and what your bills are going to be for that period of time.
Understand your supplier: Monitor your key suppliers for their financial health. If the ownership structure changes, for example, a buy out or buy in by new directors, keep a close eye on what is happening because of it.
Have a contingency plan: Run scenarios around what would happen if a major supplier failed. Who can you call? What alternative suppliers are available? Would you inform customers, and what about stakeholders?
Protect cash flow: Work on modelling potential financial scenarios. This will help you understand your exposure and prepare accordingly. Knowing your numbers can make the difference between survival and insolvency.
Anticipate the potential for change: From insolvency and retirement to competitive threats and global issues, the risks are varied and often unpredictable. For example, you only need to look at the problems in supply caused by the events in the Ukraine or the red tape post Brexit to see how fragile shipping can be. Neither were expected and neither could be avoided. Could you survive even a few days delay in your supply chain if something similar affected your business?
No company can afford to take its supply chain for granted. Ensuring a secure and flexible supply chain is not just good practice; it’s essential to financial stability and long-term survival. So, yes, always keep vigilant when it comes to sales and revenue, but don’t forget the other end of the chain, or it could result in real problems.