Post 31 October 2019 we are still unclear what Brexit means and when it will impact. Current options include a hard Brexit, a soft Brexit or even no Brexit. This means businesses need to plan for both a hard Brexit and a soft Brexit.
Brexit will have an impact on most supply chains. Businesses also need to bear in mind that although Brexit has its most significant impact on trade between the UK and the rest of the EU, it will also impact non-EU international trade and UK domestic trade.
This article summarises what you should do to map your supply chain and key points you need to consider.
What should you do?
Map your supply chain to identify high-risk supply chain contracts
- Identify your important customers and suppliers and determine which ones could cause the most significant impact on you. Although the value of the contracts will be a key part of working out which are the important supply chain contracts also consider the smaller but strategic supply chain relationships which could have a big impact on your business.
- Categorise your supply chain relationships into three categories: (1) those which relate to trade across the border between the UK and the EU; (2) those which relate to trade between the UK and non-EU countries; and those which are UK domestic. The risks will likely be different for each category.
- Look at which contracts include commitments that extend beyond 2019. This is important as for long term contracts; your choices may be limited.
The highest risk supply chain contracts will be those which require trade between the UK and the EU and are long term (without a right to terminate for convenience). Lowest risk contracts will be lower value non-strategic contracts, which are domestic UK trading and are short term or include a right to terminate easily.
For your higher-risk contracts for trade between the UK and the rest of the EU consider the immediate key risks which are:
- The costs of crossing the UK/EU border. This will be not only the risk of tariffs but also the increased logistics costs which costs are likely to increase partly because crossing the UK/EU border will be more complicated but also due to the risk of delay.
- Delay in crossing the UK/EU border. If there is a hard Brexit delays in the short term and long term are likely.
- Export/import controls. Currently, UK export/import controls are set by the EU. Post-Brexit the UK may be able to set its own different export/import controls. In the short term, the UK is unlikely to pursue a different approach to the EU, but a foreign policy issue could have an impact. There are currently very few export/import controls between the UK and the EU. Post-Brexit, this may change and mean that businesses are more likely to be having to deal with export/import licence requirements.
- Exchange rate risk. Since the referendum result, the sterling exchange rate has been volatile, and it is expected that this volatility will continue for some time.
- Providing services at customer sites may become more difficult as there may be restrictions on the movement of people (e.g. visas).
- Upward pressure on increases in prices and costs.
Consider the impact the above risks will have on your higher-risk contracts:
- Your contracts may already make specific provisions for border costs and delays. For example, if you use an Incoterm (e.g. Ex-works, FCA, CIF, FOB, DAP, DDP), then these will specifically allocate those risks between the parties.
- The allocation of the risk and cost of crossing the border will depend on the details in the contract, such as the terms for delivery. For example, if you are in the UK and you are obliged to deliver products to Spain, then it is probable you are responsible for all the costs and delays up to delivery in Spain, and that will mean you take the delay/cost risk of crossing the border.
- Restrictions on immigration may make on-site services more difficult. Consider to what extent you are obliged to provide on-site services and if you are reliant on UK nationals going to non-UK EU based sites to provide services, or non-UK EU nationals coming to the UK.
- Consider what, if any impact there will be on the contract price if there is a change in the exchange rate or upward pressure on prices and whether are prices fixed or can be reviewed.
If you do have risks under your supply chain contracts, then consider what you can do to anticipate and manage the risks:
- How you will comply with export/import requirements and if you may need to invest in IT systems and expertise/consultants to prepare.
- If you can you build up stocks before Brexit, and what are the costs of doing so? However, there is now the risk that warehousing will be in short supply as other businesses also build up stocks (especially for Black Friday and Christmas).
- The potential for increased logistics costs from crossing the UK/EU border and talk to your logistics provider.
- Whether a change in tariffs will impact the price of the goods - identify now the custom classifications for the goods, check what the World Trade Organization (WTO) tariff would be for UK import/exports, and potential EU import/export tariffs.
- How will you reduce the risk of late delivery if you are subject to strict delivery time scales - e.g. build in contingency time for deliveries.
- If there are immigration restrictions between UK and EU consider the impact on services. Can you adjust your workforce to manage this risk?
- Consider if the contract includes a price review clause and how the contract price can be increased
There is little doubt that Brexit is currently the most significant issue faced by many businesses in the UK. For supply chain contracts that continue after Brexit, organisations should consider how Brexit might affect performance, or the costs of performance, of obligations under the contract. The same considerations should also be given to proposed supply chain contracts due to come into force after Brexit.