One year ago, Britain’s ambassador to the European Union informed European Council President Donald Tusk that his country would trigger Article 50 of the Lisbon Treaty, the formal mechanism seeking Britain’s withdrawal from the EU. That action stated the clock in a rather complex window of negotiations among the 27 other EU member nations and the European Parliament leading to the actual exit.

One year from tomorrow, the UK is to leave the European Union and the realities of that action are now beginning to manifest themselves across multi-industry supply chains.

Two weeks ago, on March 19th, the UK and the EU came to agreement on the terms of a 21-month transition period starting the EU exit one-year from now. Businesses loathe uncertainty, especially when it comes to inter-continent inventory, material and finished goods flows, and 21 months or more stretches the boundaries of uncertainty.

One benchmark of activity to look to is the IHS Markit/CIPS UK Manufacturing PMI index, which in February, slipped to an eight-month low as slower output growth negated stronger new order flows. Commentary related to this report noted that rising demand for inputs was prompting supply and capacity shortages, lengthening lead-times and higher prices charged by suppliers. Other reports point to a nearly 12 percent decline in the value of the British pound against the euro since the Brexit vote as the prime catalyst to rising supply chain costs for many British businesses.

An ongoing series of surveys conducted by the Chartered Institute of Procurement & Supply (CIPS) continues to uncover a building of specific industry concerns related to the impacts and/or effects of Brexit. This survey involving upwards of 3000 supply chain managers across the EU and Britain, was initially conducted in April 2017, again in September 2017 and most-recently in February of this year.

Highlights of the September 2017 survey indicated that nearly 40 percent of UK businesses who utilized EU based suppliers were seeking British specific supply sources. A reported 63 percent of European businesses expected a bigger portion of their supply chains would be outside of the UK. Nearly 20 percent of UK businesses with suppliers across the EU indicated difficulty in securing contracts that extended beyond March of 2019.

The Wall Street Journal recently reported highlights of the latest February 2018 CIPS survey results which now indicate that among British companies, 72 percent have suppliers based in the EU, while 27 percent of EU resident businesses surveyed indicated that they rely on UK based suppliers.  Further noted is that U.K. companies are finding it harder to renew contracts or win new business since the Brexit referendum. A reported 10 percent od respondents point to losing contracts or having contracts canceled, while 25 percent indicate having difficulties in securing contracts that run beyond 2019.  CIPS indicated the following statement to the WSJ:

These numbers raise fears of an imminent collapse in the UK’s supply chains following Brexit, unless negotiators can give businesses on both sides of the channel greater clarity around what the future trading relationship between the U.K. and the EU will look like.”

The WSJ report cites CIPS survey data indicating that almost a quarter of UK companies indicating that they intend to cut the size of existing workforce. There is further specific mention of the EU and Britain’s auto industry supply chain relationship which has a high reliance on just-in-time and just-in-sequence parts deliveries to various assembly plants. Concerns related to the possibility of added customs checks, transportation and logistics cycle-time increases adding to concerns for assembly line stoppages.

Earlier this month, commercial and military aerospace manufacturer Airbus, cited as one of the UK’s largest manufacturing focused employers, warned that it may soon have to decide as to whether to stockpile component parts to protect the just-in-time execution of its production schedules, once the UK separates. Currently, wing assemblies at produced in Filton while other component manufacturing is sourced at Broughton in North Wales.

What This Means

The next twelve months leading up to Britain’s formal exit from the EU will likely force additional multi-industry supply chain related decisions to be made by individual businesses. This new era of anti-trade geo-political sentiments and political implications does not mesh well with business needs and industry supply chain needs and goals.

Manufacturers, retailers, and service businesses will have no choice but to try to minimize uncertainties with either added contingencies, interim supply agreements or permanent supply chain sourcing changes.

All supply chain participants need to be proactive in their communication of concerns, strategies and intent to foster business ongoing or changed relationships.

Two years is a rather long-time in today’s more dynamic pace of global business, a period that perhaps reflects a new wave of geopolitical and technology change. For Britain’s manufacturing and supply chain economy, the time for tough decisions, added creativity and bolder leadership is at-hand.

 

Bob Ferrari

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