Author: Paul Moody
For the past two years, the discussions about what happens after the British leave the European Union (EU) have naturally focused on the British perspective – often at a fairly abstract level. But that’s only part of the story.
The reality is that after 45 years as part of Europe’s common market, not only is British business tightly integrated with business on the continent, continental business is also integrated with the United Kingdom (UK). In fact, more than one-half of the UK’s exports and imports are now intra-European. This means that whatever happens to British supply chains in the UK on March 29, 2019, will also happen to a lesser extent to those of its EU trading partners. In other words, if you’re a continental manufacturer, it’s your Brexit too.
Of course, we have 17 or 18 weeks before the deadline, and the impending crisis could still be postponed or even resolved. However, given the negotiators’ performance in the past two years and the current differing views in the UK Houses of Parliament, it’s hard to imagine a deal being worked out, so come March 29, those parts you usually get from Birmingham will be stuck in a lorry on the wrong side of “La Manche.” To head off a crisis, risk-conscious companies have been building up inventories during the last weeks and months. A number of pharmaceutical companies, for instance, have as many as six weeks of additional safety stock. But in many businesses, it’s not that easy to decide what to stockpile, especially in the case of fabricated goods, such as motor vehicles where the different plastic compounds, components, subassemblies, assemblies and finished vehicles may cross the channel multiple times before becoming a finished product and sold to the end user.
So what should you do NOW, before it is too late?
Review your current supply chain to identify touch points with the UK. This may take some digging; as noted above, complex products often make multiple trips. Your subcontractors may not even know the origin of some of their components.
Identify alternative routes for shipment. In the event of a “hard Brexit,” the main ports are expected to be backed up for days or weeks until officials can sort out a new mode of operation. Investigate other delivery possibilities, including the option of bypassing the UK altogether if your supplier has operations in Ireland.
Communicate with your suppliers. Conduct due diligence on each of your supplier’s Brexit readiness and their plans for business continuity management. Suppliers at most risk are likely to be smaller organisations for which Brexit poses financial and regulatory challenges that cannot be immediately resolved with existing resources. If the answers aren’t reassuring, you should rapidly identify alternative suppliers with less UK exposure.
Set a safety stock target. Decide how much extra inventory you will need to avoid a shutdown. Conservative estimates are about four weeks of buffer stock, but in certain cases, as many as six weeks may be prudent. At the same time, you will want to earmark a budget specifically for managing your Brexit challenge, taking into consideration not just the added inventory costs and working capital needs, but the additional logistical, legal and accounting expertise required to avoid this disaster.
Appoint a Brexit coordinator. In the 4.5 decades that the UK has been a part of the EU, thousands of regulations have grown up around the conduct of cross-channel business. As the UK’s gates close, keeping up with the new treaties and last-minute political improvisations to cope with the fallout of that shift will demand constant vigilance.
Finally, even when the present crisis passes, it will be important to take a clear-eyed view of the country the UK is becoming. The globalist Cool Britannia of the ‘90s and noughties is a thing of the past. Even if a hard Brexit is averted, populist politics will continue to be a part of British business. Before forming partnerships or opening facilities in the UK, you will need to take the same kind of close, skeptical look previously reserved for other markets, such as France, Greece or Hungary, where politics often take an active and sometimes destructive interest in economic life.
Otto von Bismarck said that politics is the art of the possible. Unfortunately, sometimes it’s also the art of the impossible. At the moment, policymakers in London and Brussels are struggling to transform what was largely a protest vote against the modern European economy into workable policies – so far with little success.
In the meantime, business leaders don’t have an option but to stay focused on reality. Already a number of companies have announced plans to close facilities in the UK, citing the additional risks associated with Brexit as one factor that led to their decision.
Such a move will not be right for every manufacturer, obviously, but it’s indicative of just how seriously smart businesses are taking the risks posed by Brexit. In the end, whether the UK stays in, gets out or finds a way to stay just a little married, you will no longer be able to take its steady commitment to European trade for granted.
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About the Author
Paul Moody, Associate Principal, The Hackett Group
Paul Moody has more than 30 years of experience optimising working capital and supply chains, including consulting and operational roles in production planning and production engineering functions. He has operated across a wide spectrum of industrial sectors, geographies and cultures. As a “Brit” in Germany for more than 20 years, Paul is frequently asked to comment on the latest Brexit negotiations and guide The Hackett Group’s international clients in the pros and cons of operating supply chains that traverse “La Manche.”