Trade between the UK and the EU has been based on agreements that allow free movement of labour, goods, services and capital. In my role leading our UK Supply chain practice, I am working with clients across a range of sectors to plan for a world where these trade agreements will probably be very different.
Managing the cross UK and EU supply chain has been relatively straightforward. Many UK and EU based companies have built up complex intra-EU supply chains, accessing innovations for their business whilst benefiting from there being no tariffs, a low costs in moving goods across borders, and limited border delays. These characteristics may apply if the UK is no longer part of the europe.
My recommendation for a “no regrets” decision that all businesses can make now is to know your supply chain. To future proof global supply chains, businesses first need to understand in detail where and how they buy and sell products and services from around the world. Understand how these are distributed today, the product flows and the tariffs they are currently exposed to and how these may change depending on the final Brexit end-state. This will allow you to model the impact of new supply models on service, cost and operational capabilities. When required, they will be prepared to change business practices, adjust their core operating models, switch suppliers, renegotiate contracts or move parts of their supply chain activities into new territories, all from a position of knowing the best answer for them.
Below are some possible areas of impact that businesses should consider as they appraise their current supply chains. This list is not exhaustive and the relative impact and importance of each may change as more is known about the outcome of negotiations.
- Customs and tariffs - Think through supply chain footprints. Businesses have to be ready for potential new duties on imports. How easy will it be to absorb additional costs? Can preferred specialist suppliers be easily replaced? Does this impact decisions on where key activities - like production - are performed? What transaction costs will apply for your cross-border movements of goods? Are pan-EU distribution models exposed to paying duties more than once?
- Legal: Be ready for upsides and downsides. Businesses have to be ready to assess a three-way legal impact on contracts, people and intellectual property. How easy is it to renegotiate existing contracts, or leave them if you need to? What safeguards can you build into new contracts to protect against uncertainty? My colleague Mark Gough will talk more about this later this week.
- VAT: Be ready for extra costs and administration. When the UK stops being a member of the EU, sales of goods between the two will become imports and exports for VAT purposes and UK businesses with pan-European supply chains may also miss out on VAT simplification measures that avoid the need for local VAT registrations. How will this impact your cash flow? How does the impact your current systems and processes? What are the additional administration costs?
- Systems: Look at the new data required to submit import and export declarations and understand how this will be captured and made available to support the physical despatch and receipt of good. Consider changes to product flow, to mapping to new supply models, and ensuring all the commodity codes are correctly used and aligned with product master files. My colleague Jo Bello will talk more about this tomorrow.
- Supply chain hubs: Assess how it affects pan-European business. For instance, how do you make deliveries quickly, or for a specific time, with a border to cross, and an associated cost? Will you need to hold stock in the UK and Europe to be able to service them both quickly? Do you serve the UK from a European hub?
- Lead times: Work out the impact on planning and margins. Longer lead times caused by new customs bottlenecks could affect service levels and margins – especially for goods with short shelf lives. How is your stock management and warehousing affected? Do you need to bring on new UK based suppliers? What is their capacity to serve the market?
- Grants and incentives: Check for news on how government will fill the funding gap. Businesses across the EU currently benefit from incentives, from grants to R&D tax breaks. How do you benefit from grants and incentives today? Will grants be available at the same level? Will they attract the top academics? What will the process be for applying for funding, and what form will it come in? The answers to these questions could affect where businesses choose to base parts of their supply chains. The UK government may see a new chance to stimulate UK manufacturing, but may not have the funding to help every sector.
Businesses that are well prepared, have modeled the scenarios will be able to adapt effectively in response to the challenges brought about by Brexit, as well as being equipped to capitalise on the opportunities that will arise. Having a list of considerations and scenarios is important, but businesses need to also be aware of how quickly alternative arrangements can be implemented once concrete information does appear. These could provide you with a tangible “first-mover” advantage if your business has the response plans ready and can adapt, switch or remodel at pace.