Act now to mitigate Brexit supply chain disruption

By Dom Tribe

Manufacturers are not immune to post-Brexit uncertainty and supply chain risk – far from it. While some may have been slow to respond initially, there is still time to minimise any impact on business performance.

In the run up to the June referendum to decide Britain’s future in the European Union, many advanced manufacturers preferred to take a ‘wait and see’ approach and few went to the trouble of preparing detailed contingency plans. In some cases, they believed that orders in the pipeline would see them through any short-term volatility.

Taking early action, however, could have helped to mitigate the impact of the Leave vote and the period of economic uncertainty that has ensued.

For example, it was widely predicted that the value of sterling would weaken in the event of a vote to leave the EU.

Companies with the foresight to plan ahead on this basis were able to hedge against this currency movement. A close examination of where they ‘buy’ and ‘sell’ products or raw materials also meant some businesses could make immediate supply chain adjustments to protect their cash position.

When it comes to planning ahead for other eventualities, such as future trading relationships with the EU, the situation is far less certain. These relationships will be subject to lengthy negotiations, which are expected to last a minimum of two years.

The uncertainty surrounding any tariffs that might be imposed on UK-based businesses exporting to the EU makes it difficult to gauge their impact accurately. It is also hard for manufacturers to grasp the full extent of supply chain risks, particularly if there is a general lack of visibility beyond tier one.

There is no excuse for inaction, however. There is much that original equipment manufacturers can do to ensure they are agile and flexible enough to react to developments promptly and to gain a better understanding of their supply base. To improve their agility, for example, businesses should consider introducing a dual sourcing strategy, which would enable them to turn the supply tap ‘off’ in the EU and turn it ‘on’ elsewhere if required.

They could also take steps to improve their understanding of the entire supply chain and its exposure to risk. For manufacturers, the main risks are likely to come from smaller suppliers or those supplying raw materials, which may well be lurking beyond their tier one suppliers. It is also worth noting that while the risks posed by Brexit-related changes might have a minimal effect on suppliers individually, cumulatively they could start to encroach on the manufacturer’s profitability or productivity.

Manufacturers need to stay alert to early warning signs of trouble in the supply chain. The first indication could be as simple as a late order or an unexpected quality control issue. These events could be caused by a supplier further down the chain experiencing cash-flow difficulties due to a rise in supply-side costs, for example.

A lot of business risk management frameworks look at a number of metrics in isolation, but with complex changes afoot, such as those the Brexit decision has brought about, it is important to understand the compound effects they could have.

If supply chain issues arise, the best risk management framework and contingency planning in the world is no substitute for good relationships. While it might be unrealistic for manufacturers to strike up a direct relationship with every supplier in the supply chain, they can take steps to get closer to those at the tier one level and ensure they are adopting best practices.

By fostering open and honest communications, suppliers at all levels of the supply chain will be encouraged to report problems upwards proactively, without the fear that these matters will be used as a lever in contract negotiations in the future.

Another key area of supply chain risk relates to the free movement of people, which is likely to be restricted in the future. With plans already in place to raise the minimum wage in the UK to £9 per hour by 2020, manufacturers could face a serious shortage of unskilled, low-cost labour and this could have a direct impact on products and services exported to mainland Europe.

As the availability of such staff diminishes and costs increase, some UK-based manufacturers may decide to review their operational footprint and consider stepping up investment in automated solutions.

In summary, businesses which are currently sourcing goods or raw materials from the EU should consider building in greater agility and flexibility and look for creative ways to reduce costs. If long-term agreements are in place, it may be possible to fix pricing or secure a discount to help offset additional costs that might apply later on. Some businesses could also consider holding stock in an EU country in order to offset the weaker value of sterling.

Net exporters to Europe should experience some near-term advantages as a result of forex changes. However, from a risk management perspective it may still be sensible to consider establishing trading relationships beyond the EU to dilute reliance on trade in this particular region.

Regardless of their exposure to Brexit-related risks, all businesses should consider appointing a dedicated manager with board-level responsibility to guide decision making and ensure steps are taken to boost supply chain visibility and strengthen supplier relationships.

 Dom Tribe is a manufacturing sector specialist at supply chain firm, Vendigital