The Changing Shape of Global Supply Chains
This month's Lloyds Markets Matter call had a slightly different focus - that of global trade entering a period of change.
Geopolitical tensions, higher energy costs, changing trade policies and the continued diversification of manufacturing are all influencing how goods move around the world. For businesses, the implications extend well beyond logistics.
Where products are made, how components move between countries, the cost of getting them to market and the reliability of those routes are increasingly commercial and financial considerations. For UK businesses in particular, the question is becoming less about simply finding the cheapest supply route and more about understanding the wider cost, risk and flexibility of the supply chain.
Global logistics remains remarkably busy
Despite the uncertainty surrounding global trade, demand for shipping remains strong. Global container volumes reached around 17.5 million containers in July - reportedly the highest monthly level on record. Asian exports remain particularly strong, with volumes continuing to grow despite the introduction of new tariffs and changes to global trade policy.
That doesn't mean every market is performing equally. Europe remains comparatively subdued, while the US and emerging markets have shown greater momentum. India is experiencing particularly strong demand, with supply struggling to keep pace in some areas.
That imbalance is having an impact on freight. Air freight costs from India have increased significantly, while container freight rates on some routes have also risen sharply. For businesses importing or exporting goods, these aren't simply logistics statistics as they feed directly into landed costs, margins, working capital and ultimately pricing.
Manufacturing is becoming more geographically diverse
One of the more interesting developments is the gradual diversification of manufacturing away from a reliance on China and the wider Far East. India is moving into increasingly sophisticated areas of manufacturing, including electronics, while Turkey is attracting more automotive and manufacturing activity.
For UK businesses, this is contributing to a broader interest in nearshoring - moving elements of production or sourcing closer to the end market. The attraction is understandable as shorter supply routes can potentially reduce transit times, simplify distribution and provide greater flexibility when demand changes.
But this is not an overnight shift, as manufacturing ecosystems take years to develop and moving production involves more than relocating a factory. Businesses need to consider suppliers, skilled labour, infrastructure, quality, transport links, regulation and the availability of raw materials.
The direction of travel is nevertheless clear: supply chains are becoming more geographically diverse.
The cost of moving goods matters more than ever
The pandemic demonstrated just how quickly logistics costs can influence the wider economy. Oil remains a major component of the cost of moving goods, while shipping capacity, port congestion, weather conditions and disruption to major trade routes can all have an impact.
The Red Sea is a good example - a return to more normal shipping routes could reduce journey times and remove some of the additional cost associated with vessels travelling around the southern tip of Africa. For businesses planning their 2027 budgets, assumptions around shipping, oil, LNG and aviation fuel therefore deserve close attention.
At the same time, the current freight environment demonstrates that there isn't necessarily a simple relationship between shipping costs and inflation. Freight operates through its own cycles. Capacity, demand, vessel availability and trade patterns can all influence pricing independently of wider consumer inflation.
For businesses, the important point is understanding their own exposure rather than relying solely on headline economic indicators.
The supply chain doesn't end at the factory
Modern supply chains are rarely straightforward. Raw materials and components can move between several countries before a finished product reaches its final market. A component might be manufactured in one part of Asia, assembled elsewhere, transported through another country and ultimately distributed into Europe.
That creates a much wider exposure than simply knowing where the final product is manufactured.
A business may therefore have exposure to:
Freight and shipping costs
Energy prices
Foreign exchange movements
Port congestion and transport delays
Tariffs and trade policy
Supplier concentration
Political and geopolitical developments
Availability of raw materials and components
Understanding that chain is becoming increasingly important for finance teams as well as procurement and operations.
Margin matters more than revenue
One of the key messages from the latest Markets Matter discussion was the importance of looking beyond headline revenue growth. If freight, energy, labour, FX or component costs are rising faster than selling prices, a growing business can still see its margins come under pressure.
That makes visibility increasingly important. Finance leaders need to understand not just what a business is selling, but what it costs to get that product to the customer and how sensitive the economics are to changes in freight, currency, energy and supplier pricing.
Scenario modelling can help businesses understand those sensitivities before they become a problem. For example, what happens to gross margin if freight costs rise by 20%? What if sterling weakens against the dollar? What if an important shipping route remains disrupted for another six months?
These are increasingly commercial questions rather than purely financial ones.
Cash remains important
Against this backdrop, liquidity continues to matter. Higher inventory requirements, longer shipping routes and increased freight costs can all tie up working capital. Businesses may need to hold more stock to protect against disruption, while simultaneously absorbing higher costs before receiving payment from customers. That puts additional emphasis on cash-flow forecasting and working-capital management.
The same principle applies to currency. With sterling currently moving around the $1.30–$1.35 range and the euro around €1.18, relatively small movements can have a meaningful effect for businesses with significant international purchasing or sales.
For finance teams, understanding these exposures and incorporating them into budgets and forecasts is becoming increasingly important.
2027 brings another change for finance teams
Away from the macroeconomic picture, there is also a significant accounting change approaching. Changes to FRS 102 come into effect from January 2027, bringing UK GAAP closer to IFRS in a number of areas.
For businesses, that means more than simply understanding the technical accounting changes. Finance teams will need to consider how reporting processes, year-end procedures, systems and audit requirements may be affected.
For some organisations, this could create a need for additional specialist support during the transition, particularly where internal teams have limited experience of IFRS or the revised FRS 102 requirements.
Looking beyond the next disruption
The direction of global trade is unlikely to become simpler. Manufacturing is becoming more geographically diverse and businesses are reassessing their dependence on individual markets. Nearshoring is gaining attention, while global freight volumes remain high and the cost of moving goods remains exposed to energy, capacity and geopolitical developments.
For UK businesses, this makes supply-chain strategy increasingly relevant to the wider commercial plan. The businesses best placed to navigate these changes will not necessarily be those that predict every disruption correctly. They will be those with a clear understanding of their costs, suppliers, routes, margins and cash requirements; and the financial visibility to respond when the assumptions change.
For finance leaders, that means having a seat at the table when supply-chain decisions are being made. Because increasingly, where a business buys, makes and moves its products can be just as important as what it sells.