Brexit Update: Still More Questions than Answers

Categories : All Resources | Market News | Evaluate Supply Market | Reduce Risk Published on : Nov 26 2018

It’s been more than two years since British citizens stunned the world and voted to sever ties with the European Union. As embattled UK Prime Minister Theresa May defends her Brexit draft plan amid calls to resign, there is still not a clear path forward on a deal for the two sides just months before the March 29, 2019 deadline. While the EU has agreed to May’s Brexit deal (as of November 25, 2018), she still faces a major obstacle in selling the deal to the UK Parliament, and many people believe the Parliament will not accept it.  

In the absence of an extension on negotiations or a second referendum, a no-deal Brexit would open up Pandora’s Box for British and European markets. May’s plan provides a 21-month transition period to smooth the UK’s transition out of the EU. But if no deal is reached, then consumers, businesses and government agencies would have to respond immediately. The UK would be forced to trade with the EU on World Trade Organization (WTO) terms, with up to 90.0% of the value of British exports hit by either tariffs, onerous regulations or costly customs checks, according to British business leaders. 

The uncertainty of a Brexit deal is already causing supply disruptions. A survey of more than 2,000 European supply chain managers by the Chartered Institute of Procurement and Supply (CIPS) revealed that one in seven European companies currently working with UK suppliers had moved all or part of its business out of Britain. The organization expects that figure to eventually rise to two-thirds of EU companies post Brexit. Within the UK, there are growing concerns of an exodus of businesses to the EU, with the Confederation of British Industry reporting that 10.0% of its member firms have already begun to shift parts of their operations overseas to protect supplies and buying markets from tariffs and border controls.  

While Europe is bearing the brunt of the disruptions, US supply chain professionals are also feeling the effects. The announcement of Brexit more than two years ago sent the pound plunging to historically low levels, where it has largely stayed. While the sharp drop initially made British imports comparatively cheaper for US buyers, continued weakness in the pound is spurring an increasing number of UK vendors to raise prices. A no-deal Brexit would crash the pound again, driving up prices further for the more than $52 billion worth of British exports to the United States. 

The Time to Act is Now 

For procurement, a wait-and-see approach is no longer tenable. US procurement professionals should be taking proactive steps to evaluate their supply chains for areas that are most vulnerable to a no-deal situation. Post Brexit, a rash of new legislation will be undertaken in the UK, changing the distribution of duties and taxes on different goods and services. New trade agreements will need to be hashed out, and the logistics of shipping goods to the region will change.  

For example, the UK is a major stopover destination for exports to European countries, with over 40.0% of shipping traffic at British terminals EU-related, according to Supply Chain Management Review. That shipping activity could slow significantly post Brexit, jeopardizing the financial health of the shipping companies that US buyers rely on.  

By making preparations now, procurement professionals can mitigate these and other potential supply chain disruptions in the event that no deal is reached. If a deal is reached, then US buyers will have already gotten a head start reforming their supply chains ahead of the 21-month transition period.  

Proactive Steps Buyers Can Take 

Implement “What-If” Costing 

“What-if” costing models the potential impact of variables, such as tariffs, on landed costs. Cost simulation software can perform cost scenarios based on different variables, thereby enabling buyers to test their supply chains in a risk-free environment. What-if costing differs from traditional manual budgeting and forecasting in that it enables procurement leaders to account for nearly every possible supply chain disruption, a task too monumental to conduct manually. The sheer volume of historical and real-time data available in today’s economy means that buyers need to be able to simulate every possible scenario to make the best purchasing choice now and in the future. Regarding Brexit, buyers can gain more clarity on the effects of different outcomes, such as a no-deal scenario where the UK falls back on WTO rules. 

Avoid Sole Sourcing 

If buyers rely on a single supplier in the UK for a critical input, they should start building relationships with other vendors either in the United States or elsewhere overseas. In doing so, buyers can protect their supply chain from disruptions like a key input being delayed at border crossings, increases in price due to tariffs and currency volatility, and potential financial instability of British suppliers. In fact, avoiding sole sourcing, or at the very least having alternative sourcing options in place, is good policy regardless of Brexit.  

Brexit Questions Will Continue 

Unfortunately, no one can predict exactly what will happen with the ongoing Brexit negotiations and votes. The best that procurement practitioners can do is be proactive and continue to monitor the situation. Certainly, the most prepared departments, ones that can modify their approach on the fly, will be in the best position to mitigate the risks and impact of Brexit on their supply chains.  

By: Sean Windle, ProcurementIQ Analyst

Image Citation: Financial Times

How ProcurementIQ Can Help

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