Published June 30, 2016
By Gene Tyndall
Executive Vice President, Tompkins International
Among the issues surfacing related to the impacts of the British vote to exit the European Union are questions regarding changes in supply chains, particularly by those owned by U.S. companies. Although the majority of immediate concerns has been driven by questions related to financial markets, as well as, of course, the political chaos occurring both in London and Brussels, business interests are also correct to be concerned. After all, the original intent of forming the EU was the creation of the “Common Market” and supply chains have evolved in response to this goal. Inasmuch as the U.K. and the U.S. are primary trading partners, let’s consider how U.S. companies supply chains will be impacted should the exit be final.
Business supply chain impacts raise questions around BUY (purchasing), MAKE (where to produce), MOVE (freight), DISTRIBUTE (get to customers), and SELL (who buys, how, and why). Our initial estimates should be considered near-term (what to expect now) and over time (what to expect as the exit plays out).
First, we should acknowledge that supply chains have many components: customers, suppliers, operations strategy, products and markets, physical, business processes, technologies, people/skills, and capital investment. They also have implications for domestic business as well as international (cross-border) business. Further, there are domestic companies or business units that operate within the U.K. and MNC’s that either sell or source within the U.K.
One of the key business concerns, especially impacting supply chains, is uncertainty and/or risk. As EU leaders debate the timing of the exit, the next 3-4 months are very likely to produce “profit warnings” due to the considerable uncertainty. This will especially be true for those companies that rely on international sourcing, or sell a high percentage to the British population, or British companies that rely heavily on EU markets. The uncertainty around the timing and necessary modifications of Trade Agreements, Customs Laws, Duties, and Tariffs, will impact sourcing, transportation, and distribution.
MNC’s that operate in the U.K. (or England) will be impacted through their supply chains with respect to any goods that are imported or exported. Moreover, those that have their European HQ in England will need to re-assess their locations.
Those that manufacture products in the U.K. – automotive, for example – will be impacted by the sourcing of components (global sourcing means importation), as well as the exporting of finished vehicles.
The selling of products (SELL) has experienced substantial growth in e-Commerce. For domestic sellers, other than the cost of goods, very little supply chain impact will be seen on online ordering. For those selling international goods, however, the costs of cross-border goods will be impacted.
Other than the costs of goods sold, we should not expect high levels of negative impacts on consumer goods and pharmaceuticals. Consumers are the key to economic growth, and the demand for competitively priced products normally results in meeting the needs, in one way or another. But, for those companies that have Euro-market Distribution Centers located in the U.K., there will be serious questions about inventory locations. Moreover, there are numerous other product categories that will be impacted, and perhaps seriously.
In the near term, we are advising client companies to begin to plan, and expand monitoring and tracking, and even start re-designing Logistics Networks. We also advise, though, to not take hasty actions about investment, or disinvestment, until more is known about the timing of the exit and its ramifications. Planning for contingencies – such as that associated with Supply Chain Risk Management – is the right action now.
With respect to overall supply chain strategy with Brexit, therefore, our advice for client companies is to think, question, and plan for when the exit changes are implemented. Capital investment or disinvestment, in the U.K., should be postponed until made necessary by the new Trade Agreements, Customs Laws, Duties, and Tariffs that impact the company’s supply chains within the country.