Much has been made of Brexit’s impact on British exports, but ‘Made in Britain’ relies heavily on our ability to import. Almost half of the UK’s £736bn imports are goods that make up part of a final product, and nearly half those so-called ‘intermediary goods’ come from the EU.
This is already having an impact on supply chains. Mckinsey interviewed 50 UK executives whose companies make everything from face creams to fenders to fettuccine, and found deep concern about the near-term uncertainty and impact of Brexit.
Food manufacturers worry that their goods will spoil while being held up at borders, and almost everyone is grappling with the uncertainty of higher tax duties if the UK leaves the EU and reverts to most-favoured nation status under WTO rules. It’s not just UK and EU products that are affected, however, many intermediary products that come to the UK are from countries that have a free trade agreement with the EU.
Too few business leaders realise that the uncertainty over the UK’s terms of trade will continue long after politicians have decided which path to take out of the EU - if Brexit happens. Canada is still waiting for countries to ratify its agreement more than a decade after it began trade negotiations with the EU.
These complications surrounding Brexit are only part of the uncertainty companies face. Even after new trade agreements are ratified, technological progress will keep causing disruption (and opportunity) for everyone.
Businesses need to use today’s headwinds to position themselves to perform at their best in an increasingly volatile future, whether that volatility comes from low growth or from continuous global macroeconomic and technological change.
How resilient is your supply chain?
Supply chain management is critical if UK companies want to successfully navigate Brexit and beyond. In some cases, it will determine their survival.
Company executives we talked to were only marginally ready for such ongoing uncertainty. Though many have prepared for the short term, most need to increase the resilience of their supply chains over the longer term.
When McKinsey analysed 1,000 companies hit by the 2008 global recession, we found that the most resilient had taken decisive action quickly before, during and after the crisis. By 2009, the earnings of the top companies in our data set had risen by 10 per cent, while their industry peers had lost nearly 15 per cent.
With each change, companies use complex data models to analyse the knock-on effect across the business. They weigh and they hedge. But no one can predict the future with 100 per cent certainty.
In the end, every decision in a supply chain is an educated bet. Do you stock up in case of border delays? Do you abandon entire product lines in case new tariffs render their parts too expensive to import? Political and regulatory uncertainty makes those sorts of decisions far more difficult.
The more rigid a supply network, the more difficult it is to make changes to it. That’s not a good place to be when we live in a world of constantly shifting supply and demand.
Optimise your operations
Businesses need to examine those networks and figure out which parts are flexible, which aren’t and why. To uncover the inflexible points, look at opportunities that have been held back by a lack of responsiveness and find out what were the underlying reasons for the rigidity.
Identifying where to use digital and analytics tools to measure what matters most will give you the ability to respond to change quickly and with more impact.
Companies we analysed that adopted these strategies managed to get their stock levels right even in uncertain times. This boosted their revenue by at least 3 per cent; reduced write-downs by as much as 45 per cent and cut capital expense by 5 per cent. When profit margins are tight, that can mean the difference between withstanding a shock and succumbing to it.
Some business leaders will counter that increasing flexibility is bound to require investment, and that now is not the time to invest. That may be true in some cases. But it is not the size of the bet that counts, it is knowing where to place it. Now is the time to figure that out.
Wim Gysegom is the head of operations practice in the UK for Mckinsey.
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