Brexit uncertainty forcing review of supply chains

Supply chain and procurement professionals are feeling an unwelcome degree of uncertainty—in the form of new regulatory frameworks, currency fluctuations, free trade agreements, labor concerns, and much more—following Britain’s planned exit from the European Union. Still, even amid all that uncertainty lingers a dose of cautious optimism.

“A common misconception is that the U.K. is a nation in crisis, which is absolutely rubbish,” Sean Curly, a member of the European leadership team of the APICS Supply Chain Council, said during a recent webinar on Brexit. The U.K. is facing challenging circumstances, he said, but not a crisis.

Many supply chain executives seem to share that view. According to a survey conducted by the Institute of Supply Chain Management, the majority (61 percent) of supply chain executives believe Brexit will have a “negligible” financial effect on their companies. Another 33 percent believe it will have a negative impact, while the remaining six percent believe Brexit will have a positive outcome.

Among those projecting a negative outcome, respondents in both the manufacturing and non-manufacturing sector cited “changes in the exchange value of the dollar” as expecting to have the biggest effect. “Changes in demand globally” ranked second, while “changes in demand by customers in the U.K.” ranked last.

From a supply chain risk management lens, the current uncertainty that Brexit poses around global trade is where some of the greatest risks lie. U.K. membership in the European Union ensures zero tariffs on exports to, and imports from, the rest of the European Union. The European Union is also a customs union, which implies lower administrative costs of trade, such as from applying rules of origin, value-added taxes, and physical checks.

Furthermore, EU membership provides access to the European single market. According to the International Monetary Fund, “the single market is more than a free trade agreement (FTA) or customs union; the intent is a zone in which companies face no barriers to the movement of goods, services, capital, and people.” Exiting the European Union means—at least for a period of time—that the United Kingdom will likely lose preferential access, and exports from the United Kingdom may be subject to duties and other taxes.

“It’s a significant business issue and, therefore, all the key functions need to work together on this, because the implications could be very far-reaching.”

Duncan Brock, Group Customer Relationships Director, Chartered Institute of Procurement and Supply

All of this is to say that procurement and supply chain professionals have a vital role to play in the immediate aftermath of Brexit by acting as “guardians of the enterprise,” says Duncan Brock, group customer relationships director at the Chartered Institute of Procurement and Supply. That includes taking a fresh look at what the company spends and where, who its suppliers are, increasing supply chain agility, building robust relationships with suppliers, and more.

“As procurement people, we often wait for things to happen and we react to them,” Brock says. Brexit provides an opportunity for the procurement profession “to step up, be proactive, put the plans in place, and talk to the senior stakeholders in the business about what’s going on.”

Jeffrey LeClair, vice president of manufacturing and supply chain at industrial manufacturing holding and operating company Basin Industries, said during the webinar that “the number one issue that people in our position can do is raise awareness in our organizations.” From a very practical point of view, he said, it comes down to helping senior leadership really understand what impact Brexit will have on the business, and what needs to be done about it.

Some companies have set up a Brexit committee, Brock says, in which they are bringing together the heads of various departments—audit, legal, financial, operations, procurement, and other functions—to discuss the potential short- and long-term implications, and how to respond. “It’s a significant business issue and, therefore, all the key functions need to work together on this, because the implications could be very far-reaching,” he says.

Preparation is key. “You can’t control what you don’t understand, and you can’t approve what you can’t control,” Curly said. The important thing is “not to panic or make any knee-jerk reactions.”

Brexit provides supply chain executives with an opportunity to look holistically at the business, getting better visibility into current supplier relationships, and which ones will be affected most. “Most companies … simply don’t understand how an end-to-end value chain is structured, or even what those value chains are in the business,” Curly said.

RETAIL SUPPLY CHAINS POST-BREXIT

A survey conducted by Barclays finds that concerns surrounding post-Brexit could transform retailers’ approach to supply chain management. A summary of the results from the survey are discussed below.
The result of the referendum appears to have come as a surprise to lots of people and retailers are no exception. Even though over a third of those surveyed after the referendum (35.3%) say their supply chain processes are as prepared as they can be at the present time, over half of the respondents (51.5%) feel their supply chains are unprepared for Brexit. Only a small minority (13.2%) believe they are fully ready for separation from the European Union (EU), suggesting that the sector, as with most other businesses in the domestic markets, is waiting for clarity as to the long-term consequences of the result.
The overall attitude is one of caution. Less than a fifth (14.7%) expect Brexit to be positive for their supply chain, while, in comparison, almost half (44.1%) anticipate a negative impact. However, not everyone is so pessimistic and many have a neutral attitude towards Brexit. A significant proportion (41.2%) expect Brexit to have no real effect, while almost a third (29.4%) believe it will have only a slightly negative impact. The high proportion of neutral responses suggests that at least some retailers have mitigation plans already in place, with uncertainty the biggest current concern.
Foreign Exchange effect
According to our post-Brexit survey, the most immediate concerns are focused around currency, with 81% of retailers expressing negative sentiment over management of FX rates. While depreciation of sterling has been one of the more immediate effects of the referendum result, this could also have a longer-term impact. Many retailers are likely to be reasonably well-hedged going into next year, meaning that the real consequences could be seen from mid-2017 onward.
Hedging currency is therefore unsurprisingly the top priority for our respondents post-referendum, with 71% highlighting it as an action for immediate review. However, while a cheaper sterling will inevitably have a major effect on many retailers, particularly against the U.S. dollar and the euro, it may not be all doom and gloom for the sector. Currency volatility will have a very different impact on each retailer, depending on their circumstances. Those that are heavily reliant on imports will no doubt be looking to exploit opportunities to market their products more widely in new markets, while major exporters with a largely domestic supply chain could benefit from currency movements in the shorter term.
Cost consequences
Retailers might be worried about potential supply chain cost increases in the wake of a UK departure from the EU, but, according to the latest survey, the results may be less severe than expected. The majority of retailers surveyed expect that the costs of supply chain management will remain the same or increase slightly, while nearly 15% see a positive impact from Brexit in bringing their supply chain costs down. In comparison, however, over two thirds (69.1%) of retailers believe that Brexit could have a negative impact on their import costs. A similar proportion (64.7%) are worried about finding adequate labour of suitable quality for their supply chain operations, possibly resulting in higher recruitment and human resources costs.
Source: Barclays

Now is a key time to review the supply chain by considering, among other things, the following questions:

Where are our suppliers located?

Where are our customers located?

What are the trading flows within the supply chain?

How might import duties and export tariffs be affected?

By having answers to those questions, “you can then identify how exposed you are to changes in regulation,” Richard Wilding, chair of the Centre for Logistics & Supply Chain Management at the Cranfield School of Management, said during the webinar. “You can then be very proactive in terms of your risk management.”

Consider not just the risks posed by Brexit, but also the opportunities, as well. “Look at the countries lining up to do new trade deals with United Kingdom,” Curly said. “Consider whether there are any new opportunities that might arise when the United Kingdom is free to trade and create new trading relationships outside the European Union.”

In a blog post, Daniel Ball, co-founder of Wax Digital, an e-Procurement and spend control software solution provider, said now is the time “to start looking at supply partners to identify at what threshold any cost increase would trigger contract re-negotiations or the need to cast the net wider in search of fresh supplier options.”

Ball recommended the following five measures procurement should be thinking about:

Review the EU supplier base to gain an understanding of which supplier relationships could be affected;

Work with the business to advise on the potential commercial implications across affected suppliers;

Consider the potential for EU-based suppliers using the referendum outcome as a bargaining position or negotiation opportunity;

Start to explore other supply options, such as local supply or rest of world, and identify key strategic supply partners that could be affected; and

Agree on spend increase thresholds to trigger supplier renegotiations or new contract sourcing events.

Companies don’t always have time to prepare in advance during a time of great change. Unlike a natural disaster, for example, with Brexit companies have advanced notice; “we do know things are going to change,” Wilding said. Having this advanced notice is really important when looking through the lens of supply chain risk management, he said, because it enables companies to do scenario planning around this.

Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more