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Brexit

North American procurement under pressure from Brexit

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With the US presidential election well underway, decision-makers in the US may be forgiven for missing much of the run-up to the referendum on the UK’s European Union membership. But as the country’s withdrawal from the block became a distinct possibility and then a reality, coverage and discussion ratcheted up sharply.


The initial shock of the result of the 23 June vote has started to subside and, thanks to relatively modest spend in the UK by most organisations, there has been a collective sigh of relief and a realisation that they will probably weather the storm. Take one leading tobacco firm, for example.

 

“We are a domestic company,” says Craig Demarest, senior director, strategic innovations group
at RJ Reynolds. The company simply has limited exposure to sterling. “As for all the other turmoil in the world, we monitor these situations,” he says, adding that the company has contingency plans and also goes through a very formal supplier-risk process to mitigate such possibilities.


The Institute for Supply Management (ISM) recently framed the post-Brexit US procurement zeitgeist through the results of a survey of both manufacturing and non-manufacturing procurement executives conducted towards the end of June.


Around one-third of those surveyed thought their firm would be negatively or slightly impacted and 10% – presumably those able to take advantage of the decline of sterling – saw a potentially positive impact from Brexit. Some of those with negative views, according to the ISM poll, saw a wider threat to global demand, presumably due to economic disruption or a downturn. There were
also concerns that the strength of the dollar could hurt sales outside the US, as well as the general uncertainty expected to consume financial markets. However, supply management executives
asserted that their organisations would not be reducing headcounts, an indication perhaps that the apparent lack of concern over Brexit is genuine.


But corporate leaders have not necessarily gone back to business as usual. Because so few had contemplated the UK’s exit from the EU as a serious possibility, there is now a great deal of second-guessing and re-examination going on across the C-suite, including the procurement function, regarding the need to examine all fundamental assumptions and start to consider the previously unthinkable.


Significant geopolitical risks with issues such as outsourcing or purchasing continue to exist, says Steve Hall, partner at Information Services Group (ISG), a Connecticut-based technology insights and advisory services firm. On his list of worries are the recent attempted military coup in Turkey, which “highlights the many risks in mature economies”, as well as a range of substantial problems facing Latin American nations such as Colombia, Brazil and Argentina. “Russia continues to flex its muscles, which raises concerns with Ukraine and other eastern Europe outsourcing destinations,” he adds – although Hall suggests the tensions in the South China Sea are more likely to affect shipping routes rather than procurement, per se.


Rolling with the punches


Ken Goldstein, an economist at the New York-based The Conference Board describes Brexit as a jab rather than a knockout punch for the economy. But it is one of many jabs at the moment, including the concerns listed by Hall but, above all, the zero-interest regime in many leading economies.


That, in particular, is part of a risk picture that could lead to price reductions, he believes, putting companies in potential difficulty.

 

“No one knows where this is ultimately headed or if it will end up leading to similar actions elsewhere in Europe – or significant restructuring of the UK economy”.

“At the moment, the US talent supply is thinning out thanks to improving levels of employment,” says Goldstein, which implies labour will become more expensive, while almost everything else faces downward price pressures, complicating procurement activities in particular and business in general.


According to former CPO, Uldis Sipols, functions that feel they are behind the curve relative to Brexit were, most likely, not planning far enough ahead. He says the role of supply and procurement is getting more strategic at US companies, meaning Brexit and similar challenges are more momentous from a number of perspectives. Specifically, Sipols says, there is a much wider spectrum of potential actions available to procurement professionals because of their increasing
involvement in leadership and strategy. “The profession is no longer just about driving down costs, but also considering issues such as demand management and risk,” he says.

 

Likewise, where there is risk there is also opportunity. With the strong dollar it is easier to source products from countries with relatively weak currencies, such as the UK. “You can further leverage that to work with the finance function and find out where your company is long or short on different currencies; or if you have supply chain flexibility, perhaps you can work with research and development and engineering to open up new, less expensive lines of supply,” he says. Focusing primarily on the sell side, Rob Latham, founder and CEO of UK-based LIST Company, says he has been taking steps to Brexit-proof his business.


As an online retailer, Latham gets most of his sales through Amazon and was one of the first US sellers to participate in Amazon’s seller-fulfilled Prime programme. “We are currently dealing with the fallout of the Brexit vote in numerous ways. We export directly to the UK and we sell direct to consumers in the UK as well as to consumers in France, Germany, Italy and Spain,” he says. Due to
the potential impact of Brexit, he says his company is now working with Amazon on a new pan-European programme, which will move products from its existing UK warehouse to facilities in EU member states.


The UK’s withdrawal from the EU may have more serious effects for those who are focused on specific sectors.


ISG’s Hall, for instance, says North American procurement professionals should ensure they are tapped into the UK’s technology capabilities, especially related to areas such as financial technology
growth. “The growth of digital capabilities and technology firms in and around London is likely to be impacted based on reduced investment within the UK,” he says. If more financial technology firms move from the UK, procurement professionals will need to update their location strategies to ensure
they have access to the best solutions and resources in that field, he adds.


On the periphery


There will be peripheral matters to consider, too. For instance, there will be a number of data privacy and data transmission issues for North American companies to consider. Similarly, there is a large amount of outsourcing to Ireland by US clients servicing the EU, especially in the software and call centre sectors that may be impacted as the UK’s ‘divorce’ from the EU unfolds. These firms “will need to understand the tax, data privacy and movement of resources impacted by the services provided in the UK,” Hall says.


Finally, says Sipols, the “territory” of Brexit remains an unknown. “No one knows where this is ultimately headed or if it will end up leading to similar actions elsewhere in Europe – or a significant restructuring of the UK economy,” he points out. Whatever happens may now require businesses to invest and participate in both the UK and the EU.


The bottom line is that, “wherever you are doing business, it needs to be profitable,” Sipols says.

 

This article is a piece of independent writing by a member of Procurement Leaders’ content team.

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