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Strategy rethink: Strengthening your Brexit supply chain

Strategy rethink: Strengthening the Brexit supply chain

Precisely because it could load on extra costs, Brexit can be the catalyst to put your supply chains on a firmer footing says Iain Prince.

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Supply Chain Director

KPMG in the UK

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Strategy rethink strengthening your Brexit supply chain - image of a chain with services in the links

Could the disruption brought by Brexit provide a catalyst to reset your supply chain?

That might sound odd to anyone contemplating a potentially complex and costly reorganisation, but ultimately it might be. That’s because Brexit is shattering the supply chain status quo. Costs had been reasonably steady for a decade, but now they are all in flux, swinging by 10%, 20%, even 50%. For example …

  • Sterling has slid 14% against the euro since the EU referendum.
  • Tariffs could soar if the UK moves to trade with the EU under the WTO’s Most Favoured Nation terms. For example the tariff on cars would be 10% and dairy 35% (House of Commons library, 2017), and that’s before accounting for border bureaucracy, delays and potentially longer land and sea journeys to avoid tariff barriers.
  • Wage inflation in some sectors is up and could move higher if many of the 2.4 million EU workers in the UK, decide to return home as our KPMG report suggests they might.
  • The cost of warehousing is rising. Industrial rents have risen by around 15% since 2013 according to JLL as e-commerce drives up demand for space around London and other big cities. Brexit will only add to that demand.
  • The need for working capital will increase due to the need for higher stock levels and other demands on cash, as Anthony Mayes and Mike Mills explain in this Brexit Navigator.
  • Fuel prices have halved since their peaks in 2014

These mostly-higher prices are delivering a double whammy to business cases: hitting both the P&L account and balance sheet. Activities or contracts that were once marginal, might tip firmly into the red.

That’s why firms need to analyse their current and possible future cost to serve. With the hard data that gleans, they can have those tough conversations – whether they be with suppliers, customers or within the business. And it can only do that (as Andrew Underwood and Brian Connell suggest) by first mapping out its network and understanding how that would need to change in the absence of a trade deal and a reversion to WTO tariff barriers.

Even before Brexit, it’s a useful exercise that can reveal an unexpected picture. For example, one company we’ve been working with positions itself as a ‘large order organisation’ to clients across the world. However, analysis from our Cost to Serve Tool showed that over 70% of their customer deliveries were, in fact, less than a pallet in size. That may prove unsustainable in a hard border scenario, post-Brexit. Now, armed with that data, the company has the muscle to have an honest, fact-driven conversation with customers about a sustainable arrangement for the future, whether that be higher prices, reduced drops, larger minimum orders or revised service levels.

This is an exercise that at any time could transform the work of Finance and Supply Chain. But it is perhaps only on the cusp of something as big as Brexit that organisations have the mandate to have these conversations. Though Brexit is an issue that firms need to manage and mitigate at a tactical level, they should not forget the strategic opportunity it also presents.

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