As I write this article, Prime Minister Theresa May is seeking agreement from EU leaders to a Brexit extension. The risk of a ‘no deal’ remains, with little time remaining before the UK officially leaves the EU. Such uncertainty is hitting UK manufacturing and engineering sectors hard, hampering investment decisions and damaging staff morale.
It should be born in mind that typically 50-70% of manufacturing costs reside in their supply chains, and in 2017 £258 billion worth of goods were imported by the UK from the EU. That’s why preparing for all Brexit outcomes to mitigate supply chain risks is business critical. How well prepared is your manufacturing business and how aware are you of how the different Brexit outcomes could affect your supply chains? What are the likely risks and what should be done to mitigate them?
UK Manufacturers fear the consequences of a hard Brexit; they fear the loss of client orders – a recent manufacturing sector survey conducted by Sheffield Hallam University found that 83% of UK manufacturers have confirmed they’re preparing for a hard Brexit by seeking new trading relationships outside of the EU as they fear a decline in orders from over the Channel. Other impacts highlighted by manufacturers include the 20% who predict further budget tightening; 21% predict increased trade tariffs on goods imported and exported; 18% showed concern with the possible divergence in standards and legislation. And non-trade barriers such as border checks and additional admin/time to process imports and exports, together with general supply-chain disruption, are identified by 18% of those surveyed.
So let’s consider the range of supply chain risks coming out of Brexit. Whilst arguably the greatest threats relate to food retail, technology and automotive sectors, most of these risks will impact on all manufacturing and engineering sectors.
- Tariffs - the key to this is the EU ‘rules of origin’ for goods and services. Any product currently with 55% or more of its make up being of EU origin is deemed to be EU sourced and therefore carries zero rated tariff for EU based manufacturers. Should the UK fall out of the customs union and single market, this arrangement will be under threat. For example, the Dutch government has advised Dutch manufacturers to avoid UK components for fear that post Brexit, including UK components (legally outside of the EU) could bring their finished products below the magic 55% level. In such cases, if EU manufacturers continue to rely on UK suppliers, their finished products may no longer qualify for free trade and so will incur significant additional costs. And for UK manufacturers who send parts over to the EU for processing, because less than 55% of their origin comes from the UK, they will struggle to qualify for free trade with non-EU export countries even if the UK can mirror EU trade agreements with these countries. So they will struggle to compete on price with their foreign competitors.
- Exchange Rates - sterling has fallen by over 20% since the Referendum result. Manufacturers should consider hedging to mitigate further currency fluctuations as import prices increase in real terms (though exports become more competitive). Procurement must assess the likely import price fluctuations and consider changing the currency in contract terms with overseas suppliers.
- Lead times & administration burden - there has been much talk about the likelihood of congestion at UK ports and nearby roads and how this might create serious headaches for those manufacturing companies who rely on frictionless trading for their Just in Time supply. Dr Ke Han of Imperial College, London, forecasts 30-minute queues at Dover and Folkestone if there are just 4-minute checks. Supply chain and logistics managers at UK manufacturing companies must seek to understand from discussions with HMRC and their freight agents how bad such delays are likely to be, and what plans are being made to reduce these delays. Are you clear which UK ports and ferry routes are being used when importing from the EU? And are you prepared for the additional import/export clearance administration? Are your systems and staff ready for a sudden increase in customs declarations? And are you involving your supply chains in preparing for these challenges?
- Contracts - the impact on legal contracts must be considered in good time, based on the different Brexit scenarios. Clearly there are challenges here – in a recent Chartered Institute of Purchasing & Supply (CIPS) survey, 20% of UK businesses were struggling to secure contracts that run until after March 2019. And 15% had postponed or cancelled contracts due to uncertainty. This highlights the need to evaluate all contracts to ensure post Brexit compliance, for example reflecting any legal or regulatory divergence.
Having considered the major risks facing your supply chains, how best to organise your preparation? I recommend that you map out the web of suppliers who serve your business.
This is not simply your immediate (tier one) suppliers, but tiers two and three as well. If you only consider direct tier one suppliers based in the UK, you will miss the potential risks being carried by these UK organisations should they have EU suppliers in turn. (nb: as procurement and supply chain specialists, Buying Support Agency Ltd can show you how to strategically map your in-bound and out-bound supply chains and then to develop appropriate mitigation strategies).
Should it be agreed that new (non-EU) overseas supplier relationships be explored as part of the strategic plan, you must research the possible new risks being introduced by such a move. For example, other markets have different regulatory regimes and trading with suppliers within those markets potentially increases the risks of non-compliance with UK and International law (e.g. bribery, corruption, child labour and slavery).
Summary – your supply chain plan for Brexit (and other external risks):
Adherence to the following guidelines should be considered when planning your approach to Brexit:
- Define specific risks for your company and financial impact
- Build a set of probable what-if scenarios and associated financial impact
- Devise a set of strategic options
- Develop a clear set of action trigger points – timing is key so you need to agree on when action will be taken, not just the options.
Brexit is not the only risk out there for the UK manufacturing sector; there’s cyber security, increased automation as technological advances continue at pace, global trade wars, environmental climate change and political instability. With such a changeable external environment, strategic planning is crucial in giving your business the agility to adapt at the right time which will give you competitive advantage.