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“There are decades where nothing happens; and there are weeks where decades happen.”
Vladimir Lenin, the 20th century Russian revolutionary, may not have foreseen recent events, but his words are as pertinent today as they were at the beginning of the last century when Europe was gripped by geopolitical uncertainty and the First World War.
Since the result of the UK’s European Union referendum was announced, in which the public decided by 51.9% to 48.1% to leave the EU, volatility has struck the financial markets while the political landscape in the country has been shaken to its core.
On 24 June, the day after the referendum, sterling fell to its lowest level against the dollar since 1985. Prime Minister David Cameron announced that he would resign his premiership once a new leader had been chosen by the Conservative party. It is expected that that decision will not be made until early September. In announcing his decision to stand down, Cameron said that the new prime minister would be required to trigger Article 50 of the Lisbon Treaty – the mechanism by which members of the EU being the process of leaving.
Cameron has met with other EU leaders, who have said that the UK should invoke Article 50 as soon as possible in order to keep the uncertainty that has resulted from the decision to a minimum.
Meanwhile, the opposition Labour party, has been in disarray as MPs try to oust leader Jeremy Corbyn. At the time of writing, rebel MPs have been unsuccessful in ousting their party leader but Corbyn could yet either be forced out or face a leadership challenge.
For both businesses and procurement functions operating within the EU and the UK, this volatility and uncertainty is cause for concern – simply because its effects are unknown and will remain unknown for some time.
While nothing has changed – yet – in terms of the relationship between the UK and EU, once a new prime minister is in place the vision that they have for this relationship is likely to be laid out and things will become clearer.
As it stands, though, uncertainty remains. Businesses hate uncertainty and procurement, in particular, hates uncertainty.
The question that many procurement chiefs will be having to answer from the boardroom is ‘what are we doing to protect ourselves and our supply chains from these risks?’
It is a question that, at the moment, will be difficult to answer, but it will need to be answered. Quickly.
Because nothing has actually changed, many CPOs have decided to ‘wait and see’ what happens.
Indeed, speaking to Procurement Leaders the day after the result of the referendum was announced, Simon Leigh, the former CPO at Tarmac, who is currently working at insurance firm LV=, said: “At the moment it is a bit of a watching brief and it is whether and how long it takes markets to re-balance that is key.
“The immediate volatility in the financial markets concerns me most.”
While it is certainly understandable in the early phases to take a watching brief, if, as is expected that uncertainty lingers, it will become increasingly important to make a plan and determine how the different scenarios that could play out will impact operations and the supply chain.
The biggest changes that could occur are around terms of trade and regulations. Currently, businesses based in the EU can trade freely with companies elsewhere. There are no tariffs and there is one set of regulations. There are also no barriers to the movement of labour. If the UK does exit completely then this will change, with the potential for tariffs to be introduced. The process of hiring people from other countries could be more complicated and organisations may have to contend with multiple sets of regulations.
An understanding of current terms and conditions within supplier contracts will be a first step that many will take so will finding out in more detail where suppliers are located and, in turn, where their suppliers are located. Only then will it be possible be able to build up a solid picture of where exposures lie and what the potential legal ramifications of changes might be.
Opening up lines of communication with suppliers is also essential. They will be nervous and require reassurance. Honesty will also be important for long term planning. If you ignore suppliers now then uncertainty will increase and relationships will only suffer in the long term.
One procurement chief suggested that the main element of mitigating risk over this issue was to remain as flexible as possible.
"The key is to know your spend, know your strategies and ensure they are as flexible as possible to deal with uncertainty….recourse to applicable law in contracts may add some complexity but I’d probably suggest these are handled on a case by case basis," they said.
“Much uncertainty obviously remains but the fundamentals of good procurement are still the same and it is important to remain committed to understanding your own businesses strategy and maintain an understanding of the markets you are in.”
Keeping a close eye on developments, keeping flexible and keeping lines of communication open with suppliers are essential at this stage and will form the platform from which you will be able to answer your board about how the function is staying on top of the issue.
This article is a piece of independent writing by a member of Procurement Leaders’ content team.