Analysis - what impact will Brexit have on supply chain operations?
Brexit is a great uncertainty for businesses operating cross-border. Therefore, it is crucial for companies operating complex supply chains to consider the implications of Brexit on their businesses.
A PESTLE is an analysis tool that provides an understanding of the factors and external changes to the business, which may impact their ability to operate and thrive.
In this article, Nicholas Hallam considers the elements of Brexit that are out of the control and influence of businesses, but which they should still be planning for, as well as the proactive steps they can take to guide strategic decision making.
Brexit has been an intensely political issue – from the original promise of the In/Out referendum (made by David Cameron to prevent a haemorrhaging of Tory support to UKIP) right through to the political and legal disputes about the triggering of Article 50 and the ongoing controversy about the trade-off between free movement and the single market. The debate - which cuts across traditional political alignments – pits sovereignty against efficiency, and the citizens of definite somewhere against free-flowing globalists.
Now that the we are within the 2-year transition period during which the negotiations have begun to take place, thoughts are turning to the free trade agreements that will need to put in place if the UK is to compensate for the likely loss of trade in the event of leaving the single market. Yet businesses themselves can't control these deals; they are deals that only the UK government and EU and non-EU trading partner officials can strike.
To complicate matters still further, the UK’s major political parties are completely divided about the type of Brexit that ought to be negotiated. Neither the Conservative or Labour parties are clear about whether boosting prosperity or restricting immigration ought to be the priority; and, in this confusion, they probably reflect the country’s general state of mind.
The UK runs a constant trade deficit with the EU. While the UK's biggest individual export trade partner is the US, over 62% of all exports went to the 27 EU Member States during Q1 2017, totalling £33.1 billion. And during this time-period the UK's top import partner was also an EU Member State, Germany (£17.6 billion worth of goods).
Within the EU, the UK exports most of its goods and services to just a handful of countries – Germany, France, Ireland and the Netherlands. This is partly because:
- France and Germany are large economies and geographically close to the UK
- Germany is an EU manufacturing hub that uses UK components
- There are historical trade links with Ireland, and a common language
- The Netherlands is a global gateway, via the port of Rotterdam, that acts as an intermediate destination for trade between the UK and other countries. It’s also an important financial and business services trading centre.
However, trade prices continue to be affected by sterling movement and the currency market does not favour uncertainty. This may lead to changes in the existing patterns of business we are seeing.
Essentially, the UK's economy is very dependent on its relationship with the EU, and depending on what trade agreements are put in place during the divorce proceedings, British businesses will be hugely impacted by the UK's decision to leave the EU. A lot of questions hang in the balance, awaiting the fall out of the inconclusive May 2017 election result. Will the UK government fight to stay in the single market? Will they want to stay part of the EEA? No one is sure on what the answer will be but the longer it remains uncertain, the greater the risk and worry for businesses.
While Brexit essentially means untangling the links that the UK has with the EU, there are many ways in which we will stay connected irreversibly. Some of the biggest technological advances in recent years - such as smart phones and social media - have been made to connect people no matter their location, language or economic status. So, while the government may have a protectionist ethos, it may be increasingly impractical to implement to live up to most people's expectations and habits.
There is also increasing pressure for the government to protect the rights of EU nationals to remain in the UK post-Brexit (the EU have already indicated that the UK’s first offer is not up to the standard they expect), for the EU to agree to the same for UK nationals living abroad, and to ensure that the jobs market (public sector jobs particularly) don’t suffer because of the restrictions to freedom of movement.
When considering technology in relationship to businesses and supply chains, one of the newest and most controversial updates in recent years is VAT MOSS, which made changes to the place of supply and the collection of VAT for suppliers of B2C telecoms, broadcasting and electronic services.
These types of businesses are now not required to have multiple VAT registrations, but rather have a single VAT registration in the Member State of establishment through which they collect VAT at the applicable rate of each country and declare via MOSS online. A single payment is also made through the system and this is then remitted to the relevant Member States.
Many of the businesses using this system are based in the UK and hence other EU Member States are enjoying tax revenues on the back of HMRC collecting it for them. If this comes to a stop after Brexit it won’t just be an inconvenience for businesses who will need to change declaration measures but also other tax authorities who will lose use of a system already delivering effective and efficient tax collection.
The increasing importance of Blockchain also creates an interesting context for businesses post-Brexit. Essentially, blockchain allows transactions to take place without the need for a third-party intermediary to become involved, by allowing secure peer-to-peer validation. The most well-known example of a blockchain is Bitcoin – a digital currency that is transacted securely and without the need for a bank.
First, when considering blockchain transactions, there is a need to determine whether these types of transactions are liable to VAT. The EU decided, with regard to Bitcoin, that, as a currency, Bitcoin is exempt from VAT, but it is the process rather than the decision that highlights the issues with blockchain. Technology development is fast paced and unforecastable. Member States, and the EU itself, will not be able to foresee the developments until they are already in use by people and businesses, by which point they must catch up and decide how these transactions should individually be treated.
When the UK leaves the EU, they will have the ability to decide for itself how to treat blockchain transactions, which may put them at odds with the treatment that the EU has determined, leading to a distortion of competition between UK businesses and EU companies.
Moreover, the introduction of blockchain could infinitely change the way that businesses transact and manage their supply chains, as well as the way that tax authorities monitor businesses and collect tax in the future. The possibilities are endless.
While many business owners and directors are waiting for the facts to emerge from the negotiations, believing that in reality Brexit is still a long way off (the Institute of Export's recent survey found that only 30% of respondents have any strategy for avoiding the risks involved with customs compliance), if you're in the business of planning a supply chain, decisions need to be made now.
Currently the UK has the lowest examination rate at its ports of any EU country, but in the wake of Brexit businesses will have to start proving everything and will not be able to take anything for granted. The regulatory burden on businesses will rise, compliance checks will increase, applying for the correct documentation/licenses will take longer (and the need to coordinate these with your shipments) and the rules of origin will have to be considered.
Therefore, high frequency importers and exporters will be most affected, but all businesses can run some basic checks to make sure their freight forwarder or hauler is prepared for Brexit. Do they have plans in place for after Brexit? Will they be offering duty deferment after Brexit or will they instead be asking for payments up front?
In an ideal world, the customs clearance process would look the same as now but this is not guaranteed. The Guardian recently reported that we can expect a "five-fold rise in customs checks" at UK ports after Brexit and that HMRC estimates that the number of customs declarations at Dover and elsewhere could rise from 60m a year to 300m a year.
This increased compliance will stretch facilities at ports, such as Dover, because more vehicles will have to be stopped (currently only about 3% are subject to checks for paperwork because the lorries are from outside the EU). Yet there is no room for the Port of Dover to expand due to it being sandwiched between land marked as an Area of Outstanding Beauty and a motorway.
There have been suggestions that these customs checks may take place in land, after going through the port, but a location or system to ensure that lorries maintain compliance has yet to be suggested or determined.
The Road Haulage Association (RHA) states that approximately 30% of all food consumed in the UK come from the EU, transported in trucks. The extra time to be processed and cleared through customs will have to be factored in, especially when considering the short lifespan of food, to ensure that the goods are able to get to market in time.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”