Brexit and the supply chain Lucy Harding is Head of Procurement & Supply Chain, and Paul Butterworth is Head of Maritime and Shipping, at Odgers Berndtson Brexit in any form looks set to limit the flow of people, goods and services. Chairs and chief executives we work with recently voiced their fears for its impact on their companies. More than half would prefer to reverse Brexit, and a further 40% choose some kind of trading arrangement – reflecting deep concerns about the consequences of potential hard Brexit/no deal scenario. Their fears reflect practical concerns over both the short and medium term for supply chains. These include physical disruption at borders, due to blockages caused by new, customs barriers for checking goods; reduced access to labour due to the end of freedom of movement; increased tariffs due to less advantageous trade terms with the EU, plus additional tariff administration. Finally, companies also face higher costs raw materials due to a weaker pound. The overall effect of this is to propel effective management of global supply chains to the forefront of board-level concerns. For the first time in a generation, this is now almost universally recognised as a mission-critical issue, and vital to manage costs. So, the pressure is on for those currently in top roles across the function, but at the same time offers tremendous opportunity to demonstrate strategic value to the business. To understand this more fully, we have conducted a series of interviews with supply chain leaders from across industries to understand the implications for them, their plans and thoughts around when and how to translate plans turn to action. Overall, we found significant variation between industry sectors. Critically, companies whose supply chains have been built on the principles of free trade, efficiency, lean and Just In Time (reducing the need to hold inventory) are now acting on scenario planning for a Hard Brexit. Jaguar Land Rover has publicly predicted that a hard Brexit will cost in excess of £1 billion per year in profits – arising from potential tariffs applied to raw materials and finished product, and additional inventory requirements for both component parts and finished. 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. Many other automotive company CEOs voiced similar concerns at the Paris Motor Show held recently. In short, the picture is not pretty. If the UK defaults to World Trade Organization rules in a No Deal scenario, the automotive industry will have to comply with rules that the majority of a vehicle must be produced in the country of origin. Currently the UK portion of components going into finished vehicles may not be enough to comply with some free trade agreements. In Europe, both the automotive and aerospace industries have built manufacturing and assembly networks on the premise of free movement of goods and people. To avoid supply chain disruption when the UK leaves the EU, those who can afford to, (mostly large multinationals), are now building additional inventory to continue to serve their customers even if there is chaos immediately after 31st March 2019. But this is not a tenable long-term solution as it promises to pass additional costs onto consumers or reduce profits of UK companies. Moreover, their production lines may still be halted by smaller suppliers who lack the finances, profit margins or the spare capacity to stockpile to the same degree. Looking further ahead, once the terms of the deal are known, manufacturing to support European trade may move out of the UK to other locations – and we would expect most Heads of Supply Chain to be actively examining this option now. Our understanding is that, during the current uncertainty, such issues are being handled by those currently leading the global supply chain and procurement function. It has always been part of the job to consider geo-political impacts on the movement of raw materials, manufacturing and costs and Brexit, rising protectionism and tariffs are the latest issues. But, whilst managing in the face of geo-political turbulence has always been part of the job, the sheer scale of it now – not just in one, but multiple parts of the world, demands leaders who are increasingly strategic and able to lead the board. The pharmaceutical sector has also moved from scenario planning to action, bearing the costs of building additional inventories of raw materials in the UK and finished goods in Europe. 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 – with the significant difference that medicine supply can mean be a life or death issue for which a solution must be found in the event of No Deal. Whilst the UK Government says it will stockpile pharmaceutical products and possibly food, in practice the responsibility and costs have been passed onto business and industry – which in turn may ultimately pass them to the consumer. An additional major concern for the pharmaceutical industry as advised in the Government paper on the impact of Brexit is that, “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. We hear from leaders in procurement and supply chain management who we have recently interviewed that many of these companies could move production to a more cost competitive site within their global operations. This is common and on-going practice for many global organisations – and good supply chain management in the face of political, social and economic change. The retail sector is very anxious about a Hard Brexit. Just recently the chief executive of Next expressed concern that there could be chaos at UK ports if a sensible deal is not done. Consumers may find this frustrating, but a bigger outcry is likely if there are shortages of fresh food. Companies importing fresh foods cannot build contingency stocks or stockpile fresh and perishable goods and it seems inevitable that produce will go to waste as its sits on either side of the ports. There may also less product choice and shorter shelf lives for products that do reach UK supermarkets. Elsewhere in the food supply chain, for instance those handling procurement for food production companies (think of the thousands of sandwiches and ready meals we consume daily) labour is perhaps the most pressing issue. The food may be made in the UK from UK produce, but access to labour is a challenge now which looks set worsen with Brexit. The UK Government has confirmed its position that leaving the EU will mark an end to freedom of movement of people, much of which is low skilled, low cost labour. This will directly impact those working in all parts of the supply chain, from those in warehouses to delivery drivers to staff in the retail stores themselves. Social care and hospitality industries are also deeply concerned by the impact of this on their ability to recruit key roles. None of this means there may not be some winners in the short term, perhaps to include distribution suppliers who run warehouses and transport fleets on behalf of their clients. We hear from clients that many see an opportunity to strengthen their businesses, as retailers and manufacturers look to store goods prior to delivery. The property owners and developers who build and lease these facilities may also see Brexit as an opportunity to grow their businesses. In addition, a weaker exchange rate may boost exports to certain markets. Meantime management teams across UK ports are also struggling to cope with the impacts of a potential hard Brexit? 95% of UK trade moves through ports – a third in lorries through Dover and Eurotunnel. A hard Brexit will bring disruption here and indeed at other ports, particularly in containers at Southampton, Felixstowe, Liverpool and Tilbury. These latter already handle many goods from Asia and the Americas which enter and leave the UK without 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. A No Deal Brexit has the potential to create greatest havoc for the Port of Dover and roads across the South East if it takes longer to process lorries and people travelling on 120 daily crossings from Europe. Some estimate that a two-minute delay at Dover for customs checks could result in a 17-mile tailback on the M20 in Kent. Consumers will certainly increase congestion, but also a reduction in the availability and range of many products and increase in their price. Companies we work with advise that in the medium term, global supply routes and manufacturing networks will be reconfigured and a new order will be established – but this will take some time and also come at cost. As 100 chief executives made very clear in response to our questions, a smooth Brexit which delivers a degree of certainty 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. As in 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. About Odgers Berndtson Odgers Berndtson is a leading executive search firm in the UK and globally, with 58 offices across 29 countries and more than 250 partners specialising in over 50 industry sectors. The firm offers a wide range of role and sector expertise to find and develop senior executives and non-executive for quoted and privately held businesses and public organisations and has recently acted for over two-thirds of FTSE100 companies.
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

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