Brexit’s impact on your supply chains and steps you can take to improve matters
There are longer queues at the ports (1), the value of our currency has crashed GBP (2) and it is estimated that extra tariffs and duties on goods imported into the UK could add 20% to the cost of food overnight (3).
These are risks that well highlighted by the national media, but Brexit has the potential to disrupt businesses in numerous ways that are less widely reported.
Here are three other risks UK businesses face because of Brexit:
1: Competitive market shifts
Brexit is an important factor for any company that trades in or with the UK. Businesses have already drastically changed their strategies and priorities in face of the uncertainty and disruption.
Multiple EU companies have stopped selling to UK companies because to the uncertainty (6) and Belgian companies had been recommended to avoid exporting to the UK before the previous March 31st Brexit date (7). The Federation of Small Businesses also estimates that 11% of SMEs could stop exporting to the EU in the event a no deal Brexit (8).
Factories are not always wholly capable of reducing their outputs in line with their costs hence there may be a temptation to keep production high and drive sales at home by reducing prices; unsurprisingly this is rarely a good tactic in the long term. That said it may be possible for some factories to replace some of the volumes that were previously sent to export with products that were previously produced abroad.
Another market driver is customer demand. At numerous points throughout history bad political relations has resulted in consumer boycotts of UK goods (9-11).
These shifts in supply, costs and demand could have a large impact, especially in niche industries.
2: An inability to purchase goods due to quota limits
Examples in the media include fishing quotas (4), but many products have quotas agreed within the trade agreements or domestic policy.
Investopedia defines quotas as:
“A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries” (5).
Quotas are therefore important for two reasons: the UK will need to negotiate quotas to export to the EU post-Brexit and the UK will need to get agreements with the EU to use their share of the quotas agreed in the current EU trade agreement (12).
This could lead to issues selling product to the EU if a quota is not negotiated and difficulties getting goods from outside the EU if there is no agreement come Brexit day (13).
3: Extra costs due to the Incoterms that are in your supply chain
All business that import or export within their supply chain could be at risk of increased costs either with their direct customers and suppliers, or further up and downstream.
The image above shows the different International Commercial Terms that exist and where the handover of goods happens in the delivery. Each system has its benefits and drawbacks. When it comes to potential extra tariffs, the responsible for paying for these tariffs will depend on the Incoterms: for Ex-Works (EXW) deliveries, the buyer will need to cover them and for Deliver Duty Paid (DDP) it is the seller’s responsibility.
Your business might have covered your direct suppliers and customers to ensure that the supply chain is secure and the prices are locked in, but it is also important to understand the suppliers’ risks as they might not be aware of the downstream process and it could cause disruption in your supply chain. The same argument is valid for customers and the upstream process. This risk has become more publicised recently by the request from Sainsbury for their suppliers to cover the extra costs in the case of a no deal Brexit (13).
There are of course many other ways in which supply chain costs could increase, such as transferring goods, funds and tax between branches between the UK and the EU, extra admin costs to manage the additional paperwork and potential increase in stock holding to cover the disruption.
Of course, the only thing that businesses can be sure of post Brexit is change and change gives rise to both risk as well as opportunity. Supplies that can no longer be brought in could be produced here, the removal of quotas will de-shackle certain suppliers and tariffs are just as able to go up as well as down.
What next steps can businesses take now?
There are 2 clear next steps that all impacted businesses should be taking right now:
1: Perform comprehensive risk analysis of current supply chain
Making sure that your direct supply chain is covered should be your first step, including reviewing your Incoterms and your contracts.
Going the extra level to identify potential risks in the upstream and downstream processes is also important.
Some of the actions to mitigate these risks might be to select more local suppliers for example.
2: Identify the opportunities that Brexit could bring your business
Although there are risks and actions that businesses should be taking now, there are also many opportunities for companies to use Brexit as a strength and grow.
Many companies that LEC has been working with over the past three years see the changes that could come with Brexit as a potential for growth in the UK. They foresee market openings with EU competitors leaving the market and new export opportunities with the removal of EU trade restrictions. In some cases, it will be possible to buy-out EU competitors from the UK market and sell EU branches to competitors.
Increasing the volumes sources from the UK has many benefits in marketing (“Made in the UK” products), reduced transport cost and carbon emissions, reduced lead times, increasing flexibility to respond to customer demands and reduced storage costs with increased just-in-time opportunities in the supply chain.
Next week we will look at some of the work Libra has previously conducted to mitigate these risks with our clients.
Written by Sean Pickering, Business Analyst
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