By Martin Noble, partner and supply chain specialist at law firm Shakespeare Martineau.
As the UK draws closer to the exit date of March 2019, a key concern for businesses is likely to be the loss of zero-tariff trading after Brexit. As well as having the potential to cause customs delays, threatening the UK's reputation as a place to do business, the introduction of World Trade Organisation (WTO) tariffs would result in significant cost increases for firms trading with the EU.
A recent survey of 500 UK business leaders by Shakespeare Martineau has shown that supply chain worries are very much top of mind as the negotiations rumble on. Only 18 per cent of respondents believed that a trade deal will be agreed with the EU, despite 79 per cent stating that this was highly important to them. Even now it seems that the uncertain trading landscape is starting to bite, as 15 per cent are planning to pull overseas projects or have already done so.
It is inevitable that Brexit will cause some cost increases for businesses, however bolstering supply chains and introducing flexibility wherever possible can prove an effective mitigation strategy, helping UK businesses to remain competitive whatever trade deal is reached.
If a trade deal fails to materialise, leaving the single market and Customs Union will effectively create a new customs frontier, requiring businesses to pay customs duties when moving goods in and out of the EU. Potential delays and increased administration could also result in supply chain disruption. In order to ensure they can maintain healthy margins and remain competitive after Brexit, organisations should begin by conducting a thorough audit of their sensitivity to potential cost hikes. This should involve not only evaluating which EU suppliers they are using but also whether they are focused on importing or exporting and the timescales they are working to.
Gaining information about a supplier's cost base and margins will also help businesses to identify opportunities for negotiating stronger deals and reducing prices. Additionally, by holding talks with procurement partners early, organisations may be able to secure a prior agreement to share increased costs. An alternative arrangement could be to split excess costs three ways, between the buyer, vendor and end consumer, by way of higher end prices. However, it is important to be aware that forcing vendors to absorb cost increases could damage key supplier relationships, potentially risking supply chain vulnerability.
When forming new supplier relationships or renewing contracts, taking steps to introduce flexibility can boost supply chain agility, helping businesses to respond quickly to increased costs and other risk factors before they able to impact on product delivery. For example, locking clients and suppliers into long-term contracts may seem like a sensible action for organisations looking to protect their business. However, over time, such fixed costs in addition to post-Brexit trading tariffs could have a significant impact on an organisation's bottom line. In the prevailing environment of economic and geopolitical uncertainty, negotiating short-term contracts can help firms to maintain cash flow whilst allowing them the flexibility to respond to any changes in the business landscape.
Where a business' supply chain audit reveals a high level of sensitivity to post-Brexit cost increases, it may be worth establishing an EU hub or distribution point. Helping to avoid unwanted customs delays, such a facility could play a key role in mitigating the impact of trading tariffs for organisations exporting goods to the EU. As well as considering aspects such as location, the scale of operations and how the facility should be organised, it is important to establish how a distribution hub would be financed. For example, businesses should decide whether the costs involved will be absorbed by suppliers or passed onto customers.
For many decision makers, it may be tempting to delay large scale investments until further information is available about the UK's trading position post-Brexit. However, depending on the results of supply chain stress testing and the business' price sensitivity, restructuring the organisation's operational footprint may prove the most cost-effective option in the long run.
For businesses across a range of industries, the UK's withdrawal from the single market will have inevitable cost implications. However, by taking steps to reinforce and introduce flexibility into supply chains wherever possible, and protect key supplier relationships, businesses can safeguard their margins and remain competitive whatever the post-Brexit future brings.