With a referendum on Britain’s EU membership due as early as June this year, many firms are concerned what effect a ‘Brexit’ could have on profit margins, investment and supply chain integrity.
Such concerns are widely mirrored in the press; UK newspaper, the Financial Times’ annual survey revealed that over two thirds of economists believe an EU exit would worsen the UK’s economic outlook. However, in the present climate, uncertainty is the real enemy.
Procurement chiefs must act now to increase supply chain agility and spread risk in order to ride out any political or legislative changes.
The potential implications of a Brexit are numerous. Exclusion of the UK from the EU free trade agreement could see tariffs imposed serving to increase the cost of sourcing raw materials, components and other imports from mainland Europe. Similarly, these tariffs would reduce the competitiveness of British exports, and there are fears that depleted business confidence could prompt multinational businesses to reduce their levels of inward investment into the UK economy.
A recent report by Open Europe suggests that 35% of UK goods exports could be subject to high tariffs in the eventuality of a ‘Brexit’, in sectors such as food, chemicals and the automotive industry. These areas, as well as the highly-regulated financial services arena are identified as those exposed to the highest threat of disruption and business leaders should move to take mitigating action now.
While a Brexit is a very real possibility, businesses can reduce exposure to risk, and the potential depletion of their bottom line, by increasing supply chain agility. Dual-sourcing strategies should be implemented to ensure that, where practical, key supplies are not purchased exclusively from Europe, with businesses seeking out additional suppliers in other regions such Asia or the Americas, which offer stable and established trade agreements, (in this case the UK would need to negotiate separate agreements with these countries or regions in the absence of the EU umbrella trade deals).
Firms must ensure that they are able to react quickly to any cost-changes within the supply chain and this relies upon understanding the capacity that non-EU suppliers have to increase output if required.
Alternatively, businesses that rely on goods that are produced in Europe, such as industrial chemicals or automotive components should work with existing suppliers to devise cost-saving strategies and seek efficiencies elsewhere in the supply chain or production process, including waste reduction and improved stock management.
Contingency planning for a Brexit should begin immediately, with businesses communicating with vendors to establish what effect this change would have on trading activity, allowing them to work together to devise possible solutions.
In reality, any commercial disadvantages which could occur as the result of a Brexit are likely to be manageable, if the correct preparations are made. In the event of an exit, the formation of an alternative trade agreement between the UK and EU seems inevitable.
In addition, it is probable that if a regime of tariffs does weaken the pound, this would at least partially negate the effects of taxes and tariffs imposed on exports.
While the cost of imports would increase in the short-term, the selection of viable alternatives and an agile supply chain strategy is vital in ensuring firms’ products remain competitively priced.
Roy Williams is managing director at supply chain consultancy Vendigital.
This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.