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British companies, as well as multinationals with subsidiaries in the UK, depend heavily on imports from the European Union (EU). In fact, the EU accounts for 54% of all goods imported in the UK.
So far, one major concern Brexit has introduced is the uncertainty of goods being supplied. Being able to count on raw materials and products being provided in time is key for a well-oiled supply chain. So the inability to accurately predict when (or more importantly if!) goods will get into your possession makes supply chains across different industries vulnerable. Experts say this uncertainty could last for the next 10 years or even more.
For most industries, this only has financial implications - like in the automotive industry, where Peugeot is seeking compensation to keep its UK factory open. For others, like pharmaceuticals, for example, the implications are a lot more serious - not being able to count on much-needed medication can potentially disrupt the whole health system.
The UK and EU supply chains are tightly intertwined
The European Union is UK’s largest trading partner, accounting for 54% of imports and 49% of exports.
But perhaps more importantly to note is that a large proportion of all these imports and exports are in the form of intermediary products. This is a key indicator of the high degree of interconnectedness between UK and EU supply chains. A slight change in any of the two can lead to critical consequences in the other.
Trading with the EU is of utmost importance for UK companies in the food & drinks, chemicals, and automotive sectors as they depend on crucial commodities being imported from there. For example, gin brewers depend on berries imported from the main continent for production.
Since Brexit, these commodities have been subjected to high duties, border friction, and delays at ports. So far, the consequences have been minimal, as many companies have been stockpiling key products. But only time will determine how these restrictions will impact their supply chains when they run out.
The full consequences of Britain leaving the EU
Following Brexit, the UK waved goodbye to low costs for moving goods across borders, zero tariffs, and limited border delays, and instead welcomed new duties on imports, more VAT, and extended lead times.
Here’s the full extent of the consequences of Britain leaving the EU:
1. Customs and tariffs - higher duties and taxes for imported goods and services.
2. New data and processes are required to submit import and export declarations, including information about product origin. Changes to product flow and mapping new supply models.
3. Legal implications - businesses are dealing with a three-way legal impact on contracts, people, and intellectual property. Contracts are now either renegotiated (so companies can protect themselves against uncertainty) or canceled.
4. Extra costs and administration - sales of goods and services between the UK and EU are subjected to higher VAT taxes. This has a strong negative impact on companies’ cash flow, as well as their systems, processes, and administration.
5. Delayed deliveries - supply chain hubs are also affected. With a border to cross higher associated costs, same-day deliveries (as well as regular deliveries) are constantly delayed.
6. Lead times - longer lead times caused by new customs bottlenecks are affecting service levels and margins, especially for goods with short shelf lives.
What organizations can do to diminish the negative impact Brexit has on their supply chains
“Events such as Brexit tend to amplify the importance of a well-oiled procurement function in organizations. As companies scramble to either identify new internal partners, or to renegotiate terms with vendors from outside the UK, cloud-based procurement platforms streamline this process and allow buyers to quickly and efficiently qualify, negotiate, and onboard new suppliers", notes Alina Naftanaila, Co-Founder and Head of Business Development at Prokuria.
To build greater flexibility into their supply chains and diminish the impact of Brexit as much as possible, buying organizations should:
1. Redefine their sourcing strategies: UK companies need to explore onshoring opportunities and develop relationships with local suppliers or the local subsidiaries of international suppliers to ensure reliable supply at a competitive cost. Moreover, they should renegotiate their contracts to protect themselves against short and medium-term risks.
2. Revisit their footprints: UK companies also need to optimize their manufacturing and logistics footprints, reconsider the scope and timing of investments, and assess ways to reallocate production.
3. Adjust their inventory tactics: by adjusting their inventory tactics for the short-term, buyers can ensure business continuity and maintain service levels despite Brexit.
4. Use forecast software to predict and manage the impact of changes in demand on their volumes.
5. Strengthen their workforce: changes require a suite of new capabilities to build a more flexible organization. This means attracting (and retaining!) new talent.
All in all, Brexit has imposed major uncertainty on the supply chains of UK buying organizations. And this comes on top of already dire consequences caused by current global geopolitical and economic trends. However, if companies manage to demonstrate great flexibility and reinvent their supply chains, they can rest assured they’re protected from any disruptions.