8 ways to strengthen your Brexit supply chain | KPMG | UK

8 ways to strengthen your Brexit supply chain

8 ways to strengthen your Brexit supply chain

Supply chain planners can’t know what post-Brexit trade looks like, but have to plan for it anyway. Andrew Underwood and Brian Connell outline the eight things they should consider.

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Partner and Brexit Supply Chain & Procurement Lead

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8 ways to strengthen your brexit supply chain - links of a chain with services in it

By Andrew Underwood and Brian Connell

Brexit threatens to rip up the rules on how supply chains operate across Europe. Tailbacks at border posts are only the most visible example of how global logistics networks linking farms and factories to customers might have to change after the UK leaves the European Union in 15 months’ time.

But your response doesn’t have to be just about mitigation. A minority of firms – and I would put the proportion as low as 10% - recognise Brexit as a strategic opportunity to challenge their supply chain status quo and do things differently: to exit unprofitable lines or to make them profitable again.

Whether you have ambitious aims or are simply in mitigation mode, you should already have well developed plans and be ready to activate them. The key question is when. That’s ultimately a political judgement based on how likely a future trade agreement or transition deal is. But given what has to be done by March 2019, it’s becoming increasingly difficult for corporate leaders to sit on their hands and hope. An increasing number I speak with are poised to make their move as soon as the first quarter of 2018.

This edition of the KPMG Brexit Navigator is designed to help you address some of the most urgent issues from managing a squeeze on working capital, to avoiding customs chaos and how to exploit that strategic opportunity.

In addition, here are eight issues we’ve been discussing with clients, which should also be on your radar.

  1. Brexit-checking your network can help solve bigger questions
    Brexit poses fundamental questions about what it will cost to serve customers and, by extension, how you strategically approach those particular markets, product lines and customers after Brexit.
    An analysis of one global packaged goods company using our Cost to Serve Tool showed that 10% of its customer accounts and 14% of its products were loss-making. And that’s before Brexit. What might that analysis look like with Brexit costs overlaid? Yet, as Iain Prince points out, having this hard data might also provide companies with the muscle they need to have difficult discussions with customers (about commercial pricing or delivery frequency) or to settle debates internally about what the business does and doesn’t do.
    To gain that clarity, firms first need to become network aware. For some companies, that will be simple. They might be vertically integrated or have a relatively domestic supply chain. Traceability is easy. By contrast, players in a sector like e-commerce will probably know little about the logistics network used to get products to customers, since they tend to act as intermediaries.
    Wherever your business is on this spectrum, only with a detailed understanding of your current supply chain network can you analyse what the post-Brexit environment might cost.
  2. Ensure you can still meet your obligations
    The key early task is to grasp where your organisation’s liabilities lie at a contractual level and then to test whether your network can still meet those commitments if trade barriers are raised. Take an engineering company, for example. It might service turbines at UK power stations but the blades for those turbines sit in Germany. The firm risks penalty clauses in their SLA if they can’t get the blades to the site within, say, 24 hours. This will be a situation faced by hundreds of thousands of companies across the economy given how stockless our supply chains have become.
  3. Establish where you are most sensitive to delays
    It goes without saying that some products are more vulnerable to border delays than others. Even in refrigerated lorries, most dairy products aren’t going to improve with age. Nor are sensitive medical products like vaccines or nuclear isotopes which are transported from French, Belgian and Dutch reactors every day. They have a half-life measured in hours.
    By contrast, many other products are not inherently time sensitive – we’ve just made them that way in our quest to reduce working capital costs. Honda has said it relies on 350 lorries a day arriving from the Continent and keeps just an hour’s worth of parts on the production line. Companies may decide to continue a just-in-time approach to supply chains, but they may have little choice but to pre-position those components closer to where they will be used, whether that’s in the UK or within the EU27. Despite the impact on working capital, the race to source extra warehouse capacity is hotting up.
  4. If you’re Brexit resilient, shout about it
    Europe’s supply chains are already fragmenting – threatening old partnerships but also new ones. According to the Chartered Institute of Procurement & Supply, 63% of EU businesses working with UK suppliers expect to move some of their supply chain out of the UK. And 40% of UK businesses with EU suppliers have begun the search for domestic alternatives.
    To avoid a loss of business in Europe, the solution is not merely to build in Brexit resilience (for example by pre-positioning product on the other side of the Channel), it is to advertise that fact too. Reassure your EU customers that you can still hit their SLAs, or at the very least, make clear you are committed to continuing to serve them and working to find a solution.
  5. The ‘Ireland issue’ isn’t just about the land border
    Debate over the fate of the UK’s land border with the EU is a contentious point in the divorce negotiations. But it is also overshadowing another vital question: how will the sea route between the UK mainland and the Republic of Ireland function post-Brexit? While the port of Dover has been receiving plenty of attention, the risk of a choke point between Holyhead in North Wales and Dublin has not. This is an issue for businesses on both sides of the Irish Sea. Ireland is an important and attractive market for many UK companies, while the UK mainland represents Ireland’s ‘bridge’ to the Continent: it takes a lorry roughly 10.5 hours to get to Calais via the UK, versus a 20 hour voyage to Cherbourg in France, or 38 hours by ship to Zeebrugge in Belgium. The sea route between the UK and Ireland will remain important so consider what extra infrastructure nodes you need here, not just those required close to the Channel.
  6. Think beyond Dover
    Operation Stack - which sees thousands of lorries park on the M20 outside Dover – deals with a hold-up of outbound traffic from the UK. However, in the event of significant border delays, the bigger issue is likely to involve goods travelling in the other direction (the UK is a net importer of goods, after all). So in addition to identifying your ‘Dover solution’ you will also need one for Calais, Cherbourg, Zeebrugge or Le Havre. Make sure you or your third party logistics provider assess the likely response by those different ports. Anecdotally, we are hearing of ports on the other side of the Channel competing hard for a greater slice of the cross-Channel haulage business. A robust plan to deal with Brexit, not just cost, is an important criteria against which they should be judged.
  7. Different tariff rates might alter what you do, where
    Countries different tax levels such as corporate tax have come to play an increasingly significant role in the way supply chains are designed – even outweighing considerations of time or logistics costs. And we may soon see the same principle applied to tariffs. This is not a simple question of whether a company produces a product in country A or country B due to a single tariff rate, but what production happens where because of multiple tariff rates.
    For example, the tariff on the compounds used to make a drug are likely to be lower than for that drug in pill form. Put that pill in a blister pack and box and the tariff is likely to be higher still. Tariffs therefore might not lead you to open or close sites, but they could impact what you do where.
  8. Keep looking for unexpected upsides. They’re out there
    Plenty of businesses will seize opportunities from Brexit. In its simplest form, the lower pound since the EU referendum has made exporters’ goods and services more competitive internationally. Other, less obvious, opportunities exist for those who think creatively however.
    I know of one company which is considering the future of its Irish operation. Before Brexit, the default solution would have been to shut the plant and use UK plant to supply Ireland. However with the possibility of border costs and delays, that plant can and should position itself as the Brexit-proof solution for existing customers and prospective customers too. The additional business it should win as a result could bring down costs created by an over-capacity issue.
    There are plenty of UK firms that could apply the same logic: investigate where a European customer or potential customer has a Brexit-induced vulnerability and present themselves as the solution.



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