Johnathon Marshall, our UK supply chain lead, sets out how organisations can plan for a world where trade agreements will be very different to today.
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 work with clients across a range of sectors to plan for a world where these trading relationships will probably be very different.
While the UK has been within the EU, 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, low costs in moving goods across borders, and limited border delays. These characteristics may not apply if the UK is no longer part of the EU, and certainly not without a far reaching deal agreed between the two.
My recommendation for a ‘no regrets’ decision over a year ago was to future proof your supply chains. In an increasingly complex and changing global trading environment, it is already challenging for many organisations to understand their end-to-end supply chain, and Brexit will add another layer of complexity that organisations need to be prepared for. What many businesses have learned through their Brexit preparations is that accessing the data needed to fully understand your supply chain is harder than they expected.
Many businesses do by now have a good grasp on how their supply chains 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 has allowed them to model the impact of new supply models on service, cost and operational capabilities. However many businesses have only just started the activities needed to obtain any necessary approvals in good time.
Having the right authorisations and data in place to continue to trade if customs are introduced between the UK and the EU from 1 November should now by the primary focus. This means addressing questions such as:
Customs and tariffs - Think through supply chain footprints so that you can be ready for potential new duties on imports. What new approvals do you need to obtain? 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?
Systems and data - Look at the new data and processes required to submit import and export declarations, including information about product origin, and understand how this will be captured and made available to support the physical despatch and receipt of goods. 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.
Below are some further areas that businesses should consider as they appraise their current supply chains with a view to future proofing them to whatever comes next.
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?
VAT: Be ready for extra costs and administration. If the UK stops being a member of the EU, sales of goods between the two will become imports and exports for VAT purposes. With the introduction of postponed accounting, VAT won't need to be paid on imports into the UK but it will need to be accounted for. For some EU countries it will mean accounting for and paying VAT on imports from the UK. How will this impact your cash flow? How does the impact your current systems and processes? What are the additional administration costs?
Supply chain hubs: Assess how the location of supply chain hubs may be impacted. 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 the EU to be able to service them both quickly? Do you serve the UK from a hub within the EU?
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. This includes checking for news on how government will fill any funding gaps. 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? 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.
This is not an area where organisations can afford to take a ‘wait and see’ approach, and is one that for many the extra time provided by the flextension was particularly welcome. We have seen that in many cases considerable time has been needed to implement any actions necessary to support a post-Brexit environment - time which is now at a premium.
As well as these immediate priorities, businesses should also consider implications for
While organisations need to prepare for the potential impacts of Brexit in the short term, this should be balanced with refocusing on how they will respond in the medium term to the UK’s changing position in the global trading environment. The changing trade environment catalyses the need for organisations to refocus on their future market strategy, compliance and sustainability in global markets. With trade becoming more complex and changeable, organisations should consider the knowledge, capacity and access to networks they need to take advantage of opportunities in the trade world of the future.
Partner, PwC United Kingdom
Tel: +44 2072123392