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.
Over the last few years, many businesses have been preparing to future-proof their supply chain in response to Brexit. But the global disruption caused by Coronavirus (COVID-19) has brought some of the challenges they anticipated into sharp relief, sooner than they might have expected.
In my role leading our UK Supply Chain practice, I work with clients across a range of sectors to plan for a world where trading relationships will be very different. As it stands, trade between the UK and the EU is based on agreements that allow free movement of labour, goods, services and capital. This means managing supply chains across the UK and the EU has been relatively straightforward. Many UK- and EU-based companies have built up high velocity, complex intra-EU supply chains, accessing innovations for their business while benefiting from there being no tariffs, low costs in moving goods across borders, and limited border delays. These beneficial characteristics may not apply if the UK is no longer part of the EU, and they will certainly not apply without a far-reaching deal agreed between the two, which is increasingly unlikely.
My recommendation for a ‘no regrets’ decision over a year ago was to future proof your supply chains. Since then, many organisations have realised, both through their response to the pandemic and through their preparations for Brexit, that accessing the data they need to fully understand their internal and external supply chain is harder than they expected. Today, businesses are facing complex supply chain challenges due to COVID-19, ranging from extreme sales growth to huge drop-offs in demand, labour availability and cost base challenges. And the reality is that as Brexit trade negotiations continue to unfold, the global trading environment will only increase in complexity.
Those businesses that do have clear visibility on their supply chains are able to model the impact of emerging customer needs on service, cost and operational capabilities. But many businesses have only just started the activities needed to create this level of understanding and knowledge of the additional resilience they need. Furthermore, none of us know the extent to which COVID-19 will have impacted the fundamentals of the businesses by the time we reach the end of the Brexit transition period. Our existing understanding may be out of date by then, as new sourcing models and risk management plans will impact the product flows and the tariffs they are currently exposed to.
Right now, many businesses will be focusing on making sure their supply chains are sufficiently resilient and flexible to withstand the short and long-term impacts of COVID-19. Fortunately, the steps that many organisations have taken to protect their supply chain in response to COVID-19 will stand them in good stead as they prepare to adapt it for the post-Brexit trade landscape. Still, organisations need to make sure they have the right trade agreements and authorisations and the data in place to allow them to continue to trade if customs are introduced between the UK and the EU from 1 January 2021.
This means addressing issues such as:
Think through your supply chain footprints so you can be ready for 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? And 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?
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.
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? Combine your COVID-19 risk-scanning exercises—including scanning for force majeure clauses—with your Brexit preparations. This will allow you to expand your scope of engagement and cut your sales costs in half. It will also open the door for on-sell opportunities into two different workstreams.
VAT: Be ready for extra costs and administration. At the end of the transition period, sales of goods between the UK and EU 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, this will mean accounting for and paying VAT on imports from the UK. How will this impact your cash flow? How will it affect your current systems and processes? And 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? Or will you serve the UK from a hub within the EU?
Lead times: Work out the impact on planning and margins. COVID-19 has shown that longer lead times can significantly affect service levels and margins—especially for goods with short shelf lives. New customs bottlenecks could cause similar issues. 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: Look out for news about how the 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?
Carefully considering these questions will help businesses identify the best way to distribute their supply chains. The government may see a new chance to stimulate manufacturing in the UK, but it may not have the funding to help every sector.
By balancing their response to COVID-19 with a strong focus on the UK’s changing position in the global trading environment, businesses will be able to future-proof their supply chain strategy. The pandemic has catalysed the need for organisations to refocus on their future market strategy, compliance and sustainability in global markets. With the trade landscape becoming increasingly complex and changeable, organisations should consider the knowledge, capacity and access to networks they need to take advantage of opportunities in the future.
Partner, PwC United Kingdom
Tel: +44 2072123392