December 6, 2017
By Kate Vitasek, contributor
U.K.-EU supply chains are at the breaking point as the fallout from Brexit begins to take hold.
The disruption is starting to take shape in terms of actual numbers—and the numbers aren’t pretty. Almost two-thirds (63%) of European Union businesses that work with suppliers located in the United Kingdom expect to move some part of their supply chains out of the U.K. as a result of the Brexit decision last year to leave the EU, according to the results of a survey conducted by the U.K.-based Chartered Institute of Procurement & Supply (CIPS).
The CIPS survey of 1,118 supply chain managers in the U.K. and Europe also found that 40% of U.K. businesses are looking to replace their EU suppliers, and 25% of large U.K. businesses (or businesses with more than 250 employees) have spent more than £100,000/$131,943 preparing their supply chains for Brexit. Those costs come in addition to the daily impact of currency fluctuation, with 64% of U.K. businesses saying this has made their supply chains more expensive to manage. Further, slightly more than a quarter (26%) of the respondents are taking another tack and investing more time to strengthen their relationships with suppliers on the continent.
The shifts that are occurring come as the Brexit negotiations appear to be deadlocked, CIPS said, “with half of U.K. businesses saying they are becoming less confident that the U.K. and EU will secure a deal which continues to offer ‘free and frictionless trade,’ while 35% of U.K. businesses feel unable to prepare due to the lack of progress on a future trade relationship.”
This uncertainty has meant that one in five (20%) U.K. businesses with EU suppliers have found it difficult to secure contracts that continue after March 2019. And, despite the formal separation still being some time away, nearly one in ten (8%) of U.K. businesses said their organization has already lost contracts as a result of Brexit, with 14% believing part or all of their organization’s operations will no longer be viable.
Uncertainty and disruption is expected across the board
Chris Sturman, Chief Executive of the Food Storage and Distribution Federation (FSDF)—speaking at the recent Food & Drink Business Europe Conference & Exhibition U.K.—said that unless plans were made clear by the U.K. government and HM Revenue & Customs (HMRC) to guarantee frictionless trade, the U.K.’s food supply chain will face massive disruption. “Our biggest concern at the moment is the uncertainty of it all,” he said in an interview with BBC News.
“Europe has complex supply chains and at the moment, there is no clear plan from Government, and shippers will need time to adjust to a new reality,” he said, quoted in a Packaging News article. “For every hour of delay at customs, there is a £15,000 ($19,791) cost to road haulage and that is not sustainable. We also need to note that most trucks in the U.K.’s supply chain come from Europe, not the other way around so if they can’t get into Britain, they can go elsewhere.”
With 14,000 trucks crossing the channel every day, any delays to crossing could result in costly delays and disruption the U.K.’s food supply chain, Sturman noted. Currently, 28% of the U.K.’s food supply comes from the EU.
“We need to be assured that customs and non-tariff barriers are removed to facilitate movement of goods as well as a rationalization of government border controls to avoid delays and costs,” Sturman said at the conference. He added that it’s not yet clear how HMRC will scale up to manage 300 million custom declarations, although progress has been made on the issue.
“There are a lot of problems to solve and time is running out to solve them.”
The pharmaceutical sector is especially worried about the impact of Brexit on free trade. A European Federation of Pharmaceutical Industries and Associations (Efpia) survey of its members indicated that 45% of companies expected trade delays if Britain and Europe fell back onto World Trade Organization rules after Brexit. Drug manufacturers are particularly concerned they will face challenges when it comes to licensing their products, because more than 12,000 medicines will require a separate U.K. license in order for them to be prescribed.
“For life-saving and life-improving medicines, the EU and U.K. cannot afford to wait any longer to ensure that the necessary cooperation on medicines is in place from the day the U.K. leaves the EU,” said Efpia Director General Nathalie Moll.
Finding the next move
The Council of Supply Chain Management Professionals (CSCMP) reported “The CIPS survey results indicate that in the wake of all this uncertainty, business leaders are still struggling to figure out their next move.”
And Gerry Walsh, Group CEO for CIPS, said: “The Brexit negotiating teams promise that progress will be made soon, but it is already too late for scores of businesses who look like they will be deserted by their European partners.
“British businesses simply cannot put their suppliers and customers on hold while the negotiators get their act together. While the TV cameras are fixed on Brussels, the deals which will determine the future prosperity of Britain and Europe are being struck behind closed doors in businesses large and small. The lack of clarity coming from both sides is already shaping the British economy of the future—and it does not fill businesses with confidence. The clock is ticking.”
Brexit and the need to foster collaborative relationships
Shortly after the Brexit vote last year, I wrote that Brexit underscores the need for more flexible contract frameworks. When business factors change it almost always causes contract economics to shift in favor of one side or the other; there will be winners and losers if organizations are not careful to maintain fairness within the spirit of the agreement. When commercial agreements get out of economic equilibrium one of two things often happen: the parties will become opportunistic or they will work collaboratively to understand the impact and make needed shifts to keep the relationship in balance.
With only 14% of U.K. businesses with EU suppliers saying they feel like they are sufficiently prepared for Brexit, and just 26% of the CIPS respondents investing more time to strengthen their relationships with suppliers in Europe, collaboration and fostering a win-win negotiating approach appears to be taking a back seat in favor of scrambling to get the best deal while shifting risk or, in other words, CYA.
CYA is not the way forward when it comes to Brexit. It’s always true that the best way to navigate adverse times is with allies. If you treat your supplier as an ally and partner you will have the best chance of weathering the Brexit storm.
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