Brexit and the Supply Chain

Lucy Harding, October 2018

There is little doubt that Brexit in any form will likely have a negative impact on the flow of people, goods and services. Our recent CEO poll makes concerning reading, with the majority, regardless of sector, deeply concerned about the consequences of a Hard Brexit / No Deal scenario. 

In practical terms, the short to medium term supply chain consequences of a Hard Brexit fall into 4 main areas:

• Physical disruption at borders as a result of blockages caused by new customs barriers for checking goods (administration related or regulatory in the case of food and medicines)
• Reduced access to labour due to the end of freedom of movement
• Increased tariffs as a result of less advantageous trade terms with the EU, plus additional tariff administration costs   
• Further increased raw material costs as a result of a weaker pound (￡)

We have been speaking with supply chain leaders from across industries to understand the implications for them, what their plans are and how to determine when plans turn to action.

Critically, we are seeing that for those whose supply chains have been built on the principles of efficiency, lean and Just In Time (JIT) (where component parts arrive at the assembly point precisely when needed - negating the need to hold inventory) worst case scenario planning aka No Deal or Hard Brexit, has now turned to action. We have seen in the press the Jaguar Land Rover CEO talking openly about his prediction that a Hard Brexit will cost them in excess of ￡1bn per year in profits. This is as a result of additional inventory requirements of both component parts and finished cars rising to counteract the time delays that border checks and controls could create. The BMW Mini plant in Oxford has brought forward its shutdown for planned maintenance to April 2019 in the hope of avoiding supply chain disruption, anticipating that by the time they switch production lines back on some form of order will be restored. The automotive industry in particular, closely followed by aerospace, has devised its manufacturing and assembly network on the premise of free movement of goods and people – the “frictionless trade” we hear referred to so often. To ensure they are able to avoid supply chain disruption, those who can afford to, mostly the large multinationals operating with good levels of profit margins, are now building additional inventory of both raw materials and finished product. This will ensure they are able to continue to serve their customers even if there is chaos at the borders immediately after 31st March 2019. This however, is not a tenable long term solution that can be sustained without passing on the additional costs to the consumer. Many of those smaller suppliers in the Tier 1,2,3,4 supply chain however, do not have the finances, the luxury of high profit margins or the spare capacity in their network to do this to the same degree. As a result, whatever the OEM does, they may not be able to prevent a failure further down the supply chain that halts the production line. In the medium term once the terms of the deal are known, manufacturing may move out of the UK to other locations if tariffs and increased lead times at the border prevail.

The pharmaceutical sector has again moved from scenario planning to action, bearing the costs of building additional inventories of raw materials in the UK and finished goods in Europe. Of course, not all pharmaceutical products have a long shelf life. Some last only days or weeks and must be kept in strict temperature controlled conditions so will face the same challenges as the food supply chain that we will cover later. The difference in pharmaceuticals is that medicine supply can mean life or death in certain cases, therefore as a minimum, a solution for these types of products must be found in the event of No Deal. Whilst the UK Government says it will stockpile pharmaceutical products and possibly food, it is actually passing the responsibility and cost of this to business and industry, a cost ultimately that will be passed to the consumer.

An additional major concern for the pharmaceutical industry as advised in the Government paper on the impact of Brexit on the sector is “As a highly-regulated industry, the prospect of regulatory divergence from the European Medicines Agency is the deepest concern for the industry. Any divergence could lead the need for the duplication of facilities and roles across the UK and EU to enable access to products, costing companies tens of millions to establish and millions each year to run” . Furthermore, the skilled labour force needed to fill these roles simply does not exist today on the scale potentially required.

The global consumer goods industry appears to be less worried. The large multinationals supplying the majority of our household brands across packaged and confectionary products with long shelf life seem more relaxed. In their case, much of the UK factory output is fulfilling UK demand. Impact on increased raw materials lead times and exchange rates may be a concern, but the bigger risk to the UK economy is a potential loss of manufacturing output from UK manufacturing sites that make products for export to EU markets. Whilst they may continue to manufacture to satisfy UK demand, if the factories are no longer cost and time competitive with their European counterparts to service demand in other global markets, then the multinational will simply reconfigure its manufacturing network. They will move production to a more cost competitive site within their global operations. This is common and on-going practice for many global organisations – it’s just good supply chain management in the face of political, social and economic change.  

The retail sector is very anxious about a Hard Brexit. Just last week the Next CEO raised his concerns for chaos at the ports if a sensible deal is not done. Whilst it will be frustrating that fashion and general merchandise retailers may not have as much stock on the shelves as they desire or will have to hold higher levels of inventory, the bigger consumer outcry will come from the impact on our fresh food supply chain. Contingency stocks cannot be built; fresh and perishable goods cannot be stockpiled as with automotive components and non-perishable pharmaceutical products. This will inevitably mean produce going to waste as its sits on either side of the ports, plus less availability, less choice and less shelf life when it does reach the supermarket aisle. For others in the food supply chain such as food producers - think of the thousands of sandwiches and ready meals we consume daily - whilst they are made in the UK from UK produce, getting access to labour to work in these facilities has already become a challenge, and could get worse with a Hard Brexit. This concern extends to those working in all parts of the supply chain, from those in warehouses to delivery drivers to staff in the retail stores themselves. 

The winners in the short term could be the distribution suppliers (3PL); those companies who run warehouses and transport fleets on behalf of their clients. To build additional inventory also requires a place to store it and then deliver it to the point of use or retail outlet so there is opportunity here; along with those property owners and developers who build and lease these facilities. 

And how will our port infrastructure cope with this potential Hard Brexit scenario? 95% of UK trade moves through our ports; one third of this in lorries through the Port of Dover and Eurotunnel. In the case of Hard Brexit there will undoubtedly be disruption. Businesses have begun to execute their contingency plans as they prepare for the worst to cope with the initial disruption post 31st March 2019. Once the terms of the deal are known, they will take a more strategic review of the medium to long term options.  

It must be remembered that much of our trade that passes through other ports, particularly in containers at Southampton, Felixstowe, Liverpool and Tilbury, already comes from outside the EU. These ports are already well used to handling goods from Asia and the Americas and they enter and leave the UK without any problem or delay. In the medium term, it is possible that Dover and Eurotunnel will be able to do the same when receiving goods from the EU, however this will require investment in similar infrastructure and technology that is not in place today (because it has not been needed).

It is clear that a No Deal Brexit has the potential to create havoc, particularly for the Port of Dover and the South East roads infrastructure if the time taken to process lorries and people travelling on the 120 daily crossings is increased. It has been widely reported that a 2 minute delay at Dover for customs checks will translate to a 17 mile tailback on the M20 in Kent. In addition to the increased congestion, the impact of a Hard Brexit will likely be seen and felt by the consumer, at least in the short term. This will be by less availability, less choice and higher prices. In the medium term, global supply routes and manufacturing networks will be reconfigured and a new order will be established.

A smooth Brexit which delivers a degree of certainty soon, remains in the best interests of business. Our companies, government and industry have to plan for the worse and hope for the best – a sensible deal and transition period that allows for trade and people to move with limited barriers, avoiding the need to redesign supply chains that have been built on this premise. But, like any good negotiation strategy, both sides are likely to take it to the wire before making any concessions. So with the clock ticking and in the absence of white smoke, businesses that can, have now moved from scenario planning to action.  

Let’s hope the feared queues and supply chain disruption will turn out to be much like the Y2K non-event of this millennium thanks to the hard work of those who are now putting their contingency plans in to action…..just in case.

LUCY HARDING

Partner and Global Head of Procurement & Supply Chain Practice

Odgers Berndtson

Lucy Harding is a Partner and Global Head of the Procurement & Supply Chain Practice at Odgers Berndtson based in London. The Practice operates across all industries in both the public and private sector. Lucy has significant experience operating in the procurement and supply chain search environment following 10 years operating in a leading boutique firm. She has successfully completed appointments across a range of leading global companies in both the UK and internationally.

Lucy is an advisory Board Member with the Supply Chain Faculty at Cranfield University and a member of the Appointments Committee for the Chartered Institute of Procurement and Supply (CIPS). She is also Fellow of CILT and is a VP for their Advisory Board. After graduating with an Economics degree, Lucy’s early career was spent in an operational procurement role in the FMCG sector.