Irish firms need to forensically examine supply chains

As the Brexit transition period comes to an end, the next few months will see some critical negotiations with EU state members and the UK as it prepares to leave the union on January 21st, 2021.

 

There are many complexities involved and while various outcomes have been discussed at length over the past few years, it is clear that Ireland will be affected, and the cost of trading will undoubtedly increase.

Indeed, Ingrid De Doncker, CEO of IDDEA, says the UK has always been a very strong trading partner for us and Brexit will have a severe impact. But while it impossible to predict exactly what will happen over the coming months and years, Irish firms should try to prepare for any eventuality.

 

Preparation is key

“If the negotiations of a future trade agreement cannot be reached before the end of 2020, it would mean that the UK would ‘fall off the cliff’ in 2021 in a hard Brexit scenario,” she says.

“And in time of disruption, thinking forward of the different scenarios is the most we can do – we know that the impact will be severe for Ireland and will not only affect trade, but the whole of society.

“Best Practice would advise that Supply Chain Leaders need to forensically examine the trail of any product or service they buy, from farm to fork, and map the links in that chain. In reality, this is not possible, but we should do this for the core products and services we buy and also engage with key suppliers for which the survival of our business depends on.”

It’s not too late to take action 

The expert says that negotiations are likely to pivot around finding the best solution to tariffs, goods crossing the border, large quotas, land bridge transit, barriers for service trade and regulatory divergence. Different sectors are going to be impacted differently as well so one size – of the best outcome in this case – might not fit all. And while detail is still scant around these and other issues, companies should not sit on their laurels.

“A lack of detail from negotiations is not an excuse for being underprepared when the potential change is so significant,” she advises. “Procurement can provide a competitive advantage by being proactive in risk identification, mitigation and cost optimization. And we expect underprepared organizations to suffer profitability consequences.

“By now, businesses should have identified and assessed the critical risks and created contingency plans where risks were not acceptable or impacting the growth or survival of the business.

“But if this hasn’t been done, there are still ways to mitigate the impact including: revisiting your business goals and reconfirming your product and services, listening to your customers, analysing data and prioritising key suppliers and materials, developing full transparency of supply chain links and identifying and assessing all risks and opportunities in your local chain and broadening your supply base.”

Be open to change 

Over the past few months, companies across every sector have been forced to slow down and while business is slowly returning to some sort of normality, De Doncker says companies should continue to use this time wisely and focus time, money and effort where it matters.

“We will shortly see the return of employees to work and the reopening of non-essential retail outlets, so you will need to develop new and innovative ways of working, both in your company and with your suppliers, that are compatible with social distancing.

“To prepare for this, make use of critical resources including:

www.prepareforbrexit.com

www.dbei.gov.ie/en/Publications/Brexit-Preparedness-Checklist.html

www.localenterprise.ie/Discover-Business-Supports/Brexit/

IBEC’s Brexit Online Toolkit 

Building resilience into your supply base

Every Irish company needs a plan to deal with the impact on supply chains once the UK withdraws from the EU.This is the advice of Mike McGrath, managing director of specialist procurement consultancy ARVO.

 

“With the advent of Brexit the UK will become a third country in terms of trade with the EU,” he explains. There is a huge level of interdependence in the supply chains between the two countries, and with no Brexit deal done yet it is difficult for businesses to plan for what it will mean. It is not like Y2K, food and mouth disease or GDPR, where we had defined problems to deal with which meant businesses could prepare. Brexit is different.”

 

Understand your Brexit exposure

While some businesses will be less exposed than others to the impact of Brexit, he argues that every company still needs to understand it. “It is certainly the case that some sectors are more exposed, whereas IT and services are less so, as they do not have products crossing borders,” he notes.

 

Increased administration post Brexit

“There will be logistics issues, there will be customs declarations, there will be VAT and possibly duties, as well as a huge amount of bureaucracy to contend with,” he adds. “Businesses are busy at selling and generating profits but will have to make time for the increased administrative burden and the costs that will entail.”

 

Analysing your Brexit risk

McGrath warns against the concept of “Brexit fatigue”, the condition which first emerged as people became tired of the slow pace of Brexit negotiations. “Companies still need to make their own strategic arrangements and contingency plans. Every business should have a Brexit plan, whether that’s one page or 100. There is good support available from Enterprise Ireland for companies wishing to analyse their risk and regardless of the size of the business or the resources available, they should have a plan which prepares them for the worst while still hoping for the best.”

 

Planning for Brexit

McGrath advises businesses to go through everything, product by product, offering by offering and component by component to establish if there is a Brexit risk associated with any of them. “For example, UK suppliers won’t necessarily have a CE mark or REACH approval for chemicals anymore. You have to understand the risks and the cost implications for everything.”

Once the risk assessment has been complete, it is time to start contingency planning. “If there is to be an increase in costs, you have to ask if customers can take a price increase. Or can you reduce costs in other areas? Many Irish companies are currently going through this process.”

 

Supply chain

In some cases, it might be possible to secure alternative sources for products, but this may not always be possible. “The UK still has considerable strengths in particular industries, and it might not be possible to find an alternative supplier. Even if the supplies are coming from other EU countries, there could still be delays. The landbridge through Britain currently takes about 20 hours. After Brexit, that might be 40 hours and that could present problems for products with a short shelf life.”

The answer to many of these issues lies with the development of closer and better relationships with key suppliers. “We will still trade with the UK after Brexit, and if a product from the UK is unique, we will still need it. Building close relationships with suppliers and reaching formal agreements to secure future supplies is crucial.”

In cases where security of supply is an issue, there may be alternatives. “Companies need to look at their suppliers and see which are the most important and what the impact of Brexit might be on them if they can continue to supply. They might be able to find alternative suppliers elsewhere in the EU. If supplies are coming through a UK distributor, there is always the option for SMEs to come together to group buy directly from the source and bypass the Brexit risk.”

While companies may resent having to spend time on resources dealing with Brexit, McGrath contends that it is far from wasted. “Even if Brexit wasn’t happening, it is always good for a business to have the most resilient and efficient supply chain possible. Ash clouds, foot and mouth disease, Trump-inspired trade wars – these are all business risks that companies have to navigate their way through, and preparing for Brexit can only help with that.”

Mike Mc Grath has published an eBook Supplier Risks through Brexit. A copy is available here https://arvo.ie/go/ebook

 

Enterprise Ireland support

 

There are many supports available to Irish businesses, including Enterprise Ireland’s Act On Initiative which provides an independent consultant to analyse your business and develop a specific Brexit action plan.

Learn more about how Enterprise Ireland can support your business to strengthen its capabilities and best prepare for Brexit.

 

To learn more about building stability into your supplier relationships watch Mike’s webinar:  Building Resilience into your Supply Base.

Addressing supply chain challenges in the UK Market

The UK leaving the EU could bring both opportunities and challenges to Irish-based supply chains says Garrett Cronin, Advisory Consulting Partner, PwC

 

Sourcing

While initial drops in the value of sterling created sudden opportunities for procuring goods and services from the UK, the longer term could see an overall reduction in this activity as organisations limit their exposure to any future tariffs on UK imports.

In addition, organisations in other EU countries may reassess their UK sourcing, ensuring supplies that could attract high tariffs (e.g. agricultural products) are avoided, potentially sourcing them from Ireland instead.

Services may also be affected, with UK-based service centres and supply-chain hubs becoming unviable (e.g. if all procurement is done in the UK for EU production). This could be an opportunity for firms to manage their end-to-end supply chain from Ireland using centralised hubs.

UK contracts referring to EU law, or the requirement for EU access, will require re-negotiation or amendment. Trade credit insurance should also be considered.

Local or dual-sourcing operations could increase, as organisations try to limit their exposure or try to take advantage of increased ‘going-local’ consumer sentiment.

 

Production

With so much global uncertainty, demand volatility is likely to be a major factor in the near future. While this will impact demand and supply planning at global levels, it could provide motivation for organisations to centralise this function in Ireland.

Organisations using production activities in the UK to supply the UK market may be sheltered from any direct impact. But where UK production exists for EU markets, there may be an incentive to relocate production (or at least the process of finishing goods) to an EU location.

Also, UK labour costs (eg operator costs) could increase as a result of inflation – due to sterling volatility and a reduction in available labour if immigration is reduced.

With 80% of Ireland’s product energy imported from the UK, production costs in Ireland could be adversely or favourably impacted, largely depending on the outcome of the political negotiations.

Product development, certification, quality control and intellectual property will also see changes and new legislation.

 

Logistics networks

Opportunities now exist for redesigning and consolidating supply-chain networks into Ireland. This would be more likely for those who transit goods destined for the EU through the UK or if warehouses based in the UK were eventually to see throughput movements being treated as imports and exports.

Distribution may see volume shifts in orders from the UK instead going to the EU, US or new markets, potentially impacting freight rates based on volume discounts for specific routes.

This may have a greater impact on Irish-owned companies than on foreign-owned companies based in Ireland, because foreign owned companies rely far less on the UK as an export destination.

Alternatively, online sales from the UK could increase due to fluctuating exchange rates, and, should any related global economic downturn occur, global freight rates could change based on the effect on overall capacity.

Lead times may need to be assessed as a result of longer processing times associated with export regulations and transportation to new, more geographically distant markets. This would be likely to have a larger impact on ad-hoc or time-sensitive orders.

Aftermarket, repair and reverse logistics operations may also become unviable in the UK for EU consumers and vice-versa for UK customers using centres in the EU.

 

Value chain and back office

The UK will likely see an increase in regulatory, legal and customs requirements, creating a need for local export control teams or for back-office outsourcing of this activity to specialists (at a cost).

Any new requirements could also increase supply-chain administration costs, with the respective systems (eg ERP) also potentially needing updating or upgrading to support this.

Working capital requirements may increase to support the need for immediate or postponed customs and duty payments, should they become applicable. While the actual costs on imports to Ireland or exports to the UK may not increase, any initial outlay of cash required could impact cash flow.

There is likely to be delayed decision making, impacting expansion, production opportunities, footprint/landscape changes, or M&A activity – which could affect investment in both the UK and Ireland.

The cost of business travel to and from the UK could increase should new charges or visa requirements be introduced.

 

What can organisations do?

•     Immediate actions: Focus on the initial consequences (e.g. changing sourcing approaches to benefit from exchange rates fluctuation)

•     Medium Term: Scenario plan, based on ‘what if’ or on statements coming from negotiations (e.g. consider initiating network reviews).

•     Longer term: Act on the basis of what emerges from negotiations (e.g. changing supply chain strategies or implementing network changes).

 

Learn more how Enterprise Ireland can support your supply chain challenges with the Brexit: Act On Initiative.