With the future of customs arrangements between the UK and the EU so hotly debated both in the UK Parliament and with the European Commission, many businesses are feeling uncertain about how they can progress with their plans and preparations for future proofing their cross-border supply chain. However, as the potential scenarios and the common impacts between them become clearer, more and more businesses across the Pharmaceuticals and Life Sciences sector are starting to examine, test and adapt their supply chains.
Let’s start with the scenarios we know many businesses are planning for. First, there’s the customs union. We have had more clarity this week with the vote in the commons to reject the House of Lords amendment to the Withdrawal Bill that this option is - for now - off the table. So what customs arrangements could be in place? The first suggestion from the UK government is the “New Customs Partnership” model whereby the UK would collect tariffs on behalf of the EU and companies would then be able to file for reimbursements where applicable. Though reported as a cost neutral option to business, this would have an impact on working capital requirements and requires systems to track imports to the UK and where they move to. The second option being considered is the Maximum Facilitation “Max Fac” model which would use technology enabled solutions to accelerate processes to provide a close to frictionless movement of products. It is predicted that additional processing costs to companies could amount to £20bn a year, in addition to the set up costs for new technology.
The final scenario that shouldn’t be overlooked is the “no deal” scenario. With a solution to this challenge fundamental to the withdrawal agreement, a lack of resolution presents a threat to the overall negotiation. In a worst case scenario, if no position can be agreed between the parties by March 2019 then trade between the UK and the EU would default to WTO “most favoured nation (MFN)” terms. Whatever outcome emerges, from best to worst case, there are going to be significant supply chain implications that require proactive assessment and management.
Firstly, companies with the point of import or release into the EU market currently established in the UK, will need to review their supply model to import and release product from an alternative EU country. This may require companies to obtain or update Manufacturer’s / Importers Authorisations and ensure their Qualified Person is based in an EU-27 country. Furthermore, many companies have begun to implement wider changes to their European supply routes to account for these new restrictions.
New UK / EU border processes are likely, at least initially, to slow down the movement of goods as well as increase processing costs. Indirect tax liabilities, such as customs duties or processing costs, are also likely to increase (see next post). This can be particularly problematic for cold chain products as temperature fluctuations may lead to the degradation of product, leading to disposals. Even where product quality is not compromised, delays in stock movements can negatively impact the manufacturer’s reputation.
To manage the additional complexity associated with a UK / EU border, companies will need to update their S&OP processes and systems to build in agility, prepare for additional data collection (an export declaration contains far more data elements to be completed compared to an intrastat declaration) and accommodate necessary changes to material flows, stock holding, pricing and turnaround times. Companies will also need to identify the cash flow and working capital requirements to support supply of raw material, intermediates and finished product movements.
We are also currently supporting a number of clients to obtain Authorised Economic Operator (AEO) status; a mechanism for expediting the movement of product at the EU border. This requires the authorised person to have sufficiently well controlled and managed supply chain, IT, duties and security processes to successfully pass HMRC’s audit and be approved. AEO status should offer faster border crossings as well as the potential to gain valuable import duty reliefs more readily.
We have also seen that many companies have also begun to assess the risks associated with their key suppliers, who will have the same impacts on their own businesses. The greatest supply risks are likely to come from those organisations that do not invest in Brexit preparedness as well as those dealing in time critical products (e.g. radioisotopes, human tissues or cells etc.). Even in situations where the risk to availability is low there is likely to be additional costs to factor in due to border tariffs which will impact the pricing and profitability of the finished products.
The good news is that UK-based companies are not strangers to supply chain innovations, with many advanced technologies emerging from the UK. Indeed, the challenges posed by Brexit, particularly in operating a frictionless border between Northern Ireland and the Republic of Ireland, could set the imperative for the creation of a new wave of Supply Chain innovations; providing an incentive for companies to establish Supply Chain Centres of Excellence in the UK.