Just how disruptive will Brexit be to UK supply chains?

A report by McKinsey reveals how firms can make themselves resilient in the face of long-term uncertainty.

by Adam Gale
Last Updated: 08 May 2019

The short answer to the above question is we don’t know: it depends what Brexit actually ends up looking like. The very fact that we don’t know is what’s already got so many businesses in a muddle. Unlike risk, which can be quantified, uncertainty leaves you guessing, and guessing is expensive.

The greatest danger is to those companies that rely on stable, often-complex supply chains across national borders. Just-in-time manufacturing, for example, doesn’t really do its job when you have to pay for inventory to sit in warehouses because of customs checks. Duties could badly affect exporters (and indeed importers) which have low-margin products, while regulatory divergence could add costs to companies selling in both the UK and the EU. Again, it depends on the details of any post-Brexit trade agreement. 

What we can be relatively certain about is that the disruption of leaving the single market and/or customs union will not be a one-off. "The uncertainty will not be short-lived," say the authors of Rethinking Supply Chains in a Time of Uncertainty, a recent analysis by McKinsey, shared exclusively with Management Today. "It is likely to persist for a decade or more, and will add to the existing volatility and vulnerability in the supply chains of many industries."

The consultants point to the fact that Canada’s much-feted comprehensive trade agreement with the EU took five years to negotiate (and still hasn’t been ratified by all member states), while Switzerland’s agreement (actually about 20 different treaties) took 12 years. Given how long it’s taken the UK to fail to negotiate the terms of withdrawal from the EU, it hardly provokes confidence.

Which sectors will be most affected?

Unsurprisingly, the most affected UK industries would be the ones where trade is disproportionately conducted with the European Union, where supply chains are more inextricably interconnected and where the margins aren’t high enough to survive the likely imposition of duties.

Consumer goods manufacturers are particularly vulnerable if their products have short shelf lives, with one top executive telling McKinsey they "could easily lose £100m of business" if Brexit went badly, as delays and duties made their products uncompetitive.

The automotive and chemicals sectors are also at risk, as they do over three quarters of their trade with the EU, which applies average duties of 4.7 and 4.6 per cent on transport equipment and chemicals imports respectively, for most favoured nations (one would hope, at least, that the UK would be counted as such, but the way things are going there are no guarantees).

The other obvious threat is to the agricultural sector – in some cases duties reach 35.9 per cent for non-EU farm products.

What can businesses do?

Resilience is more than insurance. The process of adopting more adaptable strategies in the face of supply chain uncertainty brings other advantages that have already paid off for those firms that have done it successfully, according to the McKinsey report. Benefits already seen include boosting revenues on average more than 3 per cent by reducing stock-outs, and reducing the cost of goods sold between 2 to 3 per cent by cutting the overtime production that other companies have to pay for to make up for bad decisions.

The authors’ six steps to resilience are:

  • Redefining sourcing strategy – onshoring or finding local suppliers, whether in the EU or the UK.
  • Revisiting manufacturing and logistics footprints – is that investment really worth it in these conditions?
  • Reviewing inventory build-up strategy – the safe level of stock may have changed.
  • Preparing for changes in demand – either through better forecasting or more outsourcing.
  • Adjusting the product portfolio – if regulatory regimes change, then product specifications  may too, affecting R&D strategy.
  • Strengthening talent capabilities – agility means little without top people.

Image credit: Joey Kyber/Pexels

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