How to prepare for Brexit’s effects on supply chains
Trade and the supply chain between the UK and Europe are two of many areas that will be affected over the coming years by Great Britain’s withdrawal from the EU.
Though the exact nature of the changes will not become apparent for some time, mapping supply chains can help companies understand both the risks and the opportunities these changes might bring.
Risks generated by Brexit include the possibility of tariffs on trade between the UK and the EU, leading to higher costs for manufacturers and higher prices for consumers. Customs controls would increase the administrative burden on companies, and revised border controls could make crossings between the UK and continental Europe less predictable, resulting in longer lead times. Possible changes to freedom of movement for EU nationals means access to talent is another risk for the UK’s logistics sector.
These factors and the lack of concrete information about future trade arrangements with the EU have caused concern among UK businesses and their suppliers across the Channel. However, the event provides opportunities for businesses that stay abreast of the changes and seek ways to capitalise on them, said Richard Wilding, professor of supply-chain strategy at Cranfield School of Management.
Mapping risks and opportunities
Mapping your organisation’s supply chain can help you assess your level of exposure to Brexit risks and identify any opportunities, Wilding said.
Brexit will affect the four areas of supply-chain design (outlined below), he argues, and companies should explore the likely impact on each and scenario plan for those eventualities. Though the details of what will change may be uncertain, the process of thinking about the scenarios is vital and will reap benefits for all areas of the organisation.
Process: The need to update, adapt, and modify processes so they remain relevant in the post-Brexit context provides an opportunity to improve efficiency.
Wilding gives the example of border crossings: Customs clearance could be achieved more quickly if data about a shipment were sent to the relevant authority in advance of its arrival in that country. Fewer issues are likely to arise, reducing delays, because the authorities are expecting them and can perform security checks in advance. Wilding likens this to the pre-arrival visa system whereby passengers have to provide travel plans and passport details to immigration authorities in the US and Australia prior to their journey. Officials can conduct security checks in advance, speeding up processing time at the airport.
Network and infrastructure: When goods or components are sitting on a dock or otherwise delayed, the associated costs can be massive, including warehousing costs, lost sales, a reduction in customer satisfaction, and, significantly, inventory financing costs.
If Brexit leads to tighter border controls and less predictable crossings, UK export businesses may wish to create a central hub in Mainland Europe from which to supply key clients on, for example, 24 hours’ notice (and vice-versa for European businesses serving the UK).
Taking the example of the automotive sector, companies generally build a supply chain for each new model of vehicle that they produce, to enable them to purchase the components needed for that model over, for example, a six-year period. When structuring a supply chain for a model that will be assembled in the UK, Brexit may prompt the company to source a lot more of the components within the UK. European suppliers may then move production capabilities into the UK to meet that requirement. On the other hand, a vehicle manufacturer may relocate the assembly plant to another part of Europe so it can easily access the required parts. It will be interesting to see how suppliers and automobile makers adapt their supply chains accordingly, Wilding said.
In general, if lead times are extended, this could result in companies’ having to carry more inventory and take on additional warehousing capacity. Another option would be to make existing warehouses work harder by reclassifying the inventory portfolio, establishing inventory holding levels that are appropriate to the market that those supplies are coming in from (whether China, the US, Europe, etc.). These should be re-calculated if the risk or lead times for a particular source country have increased.
But companies should not be focusing solely on Brexit because considering the range of technologies available and how they can enhance your supply chain also provides a significant opportunity.
Information flows: Questions that organisations should ask include whether changes to existing regulation will have an impact on the information flows in their supply chain.
The goal is for information to flow seamlessly, without the need for constant manual intervention. Companies could look to automate functions such as customs pre-notification, Wilding suggested.
Organisational: An example of a scenario in this category would be, “What would the impact on our supply chain be if we were unable to source EU migrant labour as we have done in the past?”
Resilient supply chains are built on relationships
Organisations can also minimise Brexit-related risk by nurturing their relationships with clients and suppliers.
“In the wake of the Brexit vote, your EU-based partners are likely to be doing a similar exercise, looking at the cost … of doing business with you. Reliability is a critical aspect. If you can still be the most up-to-date, technologically innovative supplier in Europe and deliver on time, they are going to keep coming back to you, because effectively what you’re doing is lowering the risk involved for them in doing business with you,” Wilding said.
The duration of existing relationships and the way that they have been built is an important factor. “When you look at a lot of the research, long-term relationships are generally far more cost-effective than putting people through short-term annual bidding rituals. I think we are going to have to work a little bit harder on maintaining those relationships and reassuring those suppliers or customers that we want to continue to work with them,” Wilding said.
Brexit also may provide opportunities for companies to enter into productive new relationships, he said.
“There is an awful lot of opportunity to be had outside the EU in terms of trade and supply chain, and companies should explore new partnerships, especially in light of any new free trade agreements,” Wilding said, as an FTA will immediately have an impact on the cost to serve partners in that country.
Existing EU-UK supply chains are adaptable
Supply chains between the UK and EU are generally built on supply-chain network design principles and are built to adapt to sudden disruptions, Wilding said. An example of this is the crisis at the Port of Calais in 2015, when crossings were disrupted when migrants seeking to get to the UK gained access to the port and stowed away on vehicles bound for Dover. This unapproved entry heightened the risk of contamination of cargo, and the goods had to be disposed of.
In response to events such as the disruption at Calais, businesses may find that other modes of transport, whether air freight, road, or rail, become more appropriate, Wilding said. Business leaders have to look at the cost trade-offs on these things. The total cost to serve will change – if you are putting massive additional security checks on road haulage, for example, it might make other mechanisms more attractive because the cost to serve will start to change.
The Port of Calais disruption prompted supply-chain professionals to think very differently about how they moved goods, how they secured the loads, and so on. The challenge resulted in dynamic re-routing as companies found the most efficient and effective routes to bring their goods to the UK.
In the case of Brexit, companies have two to three years’ notice of the potential disruption and have plenty of time to plan and put contingencies in place.
Given the interconnectedness of UK and EU trade, Wilding noted that it would not be beneficial to Europe’s economies to impose punitive trade barriers on UK companies when the time comes to negotiate the terms of Britain’s withdrawal.
In 2015 the UK imported goods with a value of £218.7 billion ($291 billion) from the EU, and exported £133.4 billion ($177.5 billion) of goods in the opposite direction, according to Gartner’s Supply Chain Brief: What Does Brexit Mean for Global Logistics?
Taking the example of the automotive sector, UK vehicle manufacturers such as Jaguar Land Rover currently buy a number of components from French and German suppliers for assembly at their UK plants. These can be shipped without the need for export declarations, import tariffs, or value-added tax. Some of the vehicles are then sold to French and German consumers. Tariffs would damage the competitiveness of Europe’s components manufacturers, make British vehicles more expensive for consumers in Europe, and make French or German vehicles more expensive for UK consumers. “I would argue that this is an incredible incentive to actually make this work,” Wilding said.
—Samantha White (firstname.lastname@example.org) is a CGMA Magazine senior editor.