What was the countdown to Brexit like?
Some businesses were consulted by the Government but the upshot was small tweaks rather than fundamental shifts in approach. The sense was that they were being placated rather than asked for useful input on processes which would have been significantly more helpful.
Many organisations accumulated extra stock to be sure of coping with the initial stages of Brexit. This was particularly the case for medical supplies, fuel and alcohol-based products. Their challenge now is to get those levels down to what they need to be by the end of the fiscal year.
Scenario planning went on until Christmas Eve. Stuart Griffin, who was advising the Cabinet Office’s complex transaction team, said: “Before Christmas, there was absolute panic because we were looking down the barrel of a no-deal Brexit. Once the deal was agreed, that pressure and noise disappeared.”
What has been the immediate impact of Brexit?
Inevitably, companies in different sectors have been impacted and will continue to be impacted, in different ways.
As well as the initial disruption caused by new working practices, there is a sense that there will be a succession of issues raised as time goes by that are currently buried in the small print.
Some attendees felt border controls have been over-fastidious and stretched the intent of the Brexit agreement. There has been significant congestion at some ports and around some products.
It was also reported that many of the hold-ups that caused goods to be stranded at ports and airports were caused by the incorrect completion of new import and export documentation.
What is a concern is the lingering effect of all the directives and pieces of legislation that are being reformed and constituted. David Loseby said: “I’d describe them as insidious mountains of work that will be pushed into UK PLC and European PLC; this is extra activity inflicted upon businesses with very little benefit to any party.”
There have, though, been echoes of the Y2K fallacy. Just as planes did not fall out of the sky at the dawn of the millennium, trade has continued in the wake of Brexit. But there are a series of administrative nuisance factors that are causing irritation for businesses. Stuart Griffin referred to the “insane levels of administration” that are being discovered.
Some businesses are having to adjust and manage tasks very differently; for instance, having to return to cash payments to ensure freight handlers will release goods.
There is a concern that in the early weeks of Brexit some European brands have refused to sell their goods to people in the UK because of the extra costs involved.
There have been reports of the cost of transportation rising but Philip Usherwood reported: “The Baltic Dry has hardly twitched. Globally, freight rates are reasonably stable.”
What has been the impact on the fresh and grocery market places?
Philip Molnar reported that Costa had encountered no problem at all and goods were “sailing through” in the early weeks of January. However, he added, much of the product is exported to a Polish distribution centre and, because of the concern over no-deal in November and December, the company built up stock.
“We’re sat on quite a lot of excess inventory in Poland, so one of the consequences is we’ve ramped down on production of roasting coffee over here because we just don’t need the inventory overseas.”
From a grocery perspective, the shelves of supermarkets in the UK have remained well stocked. However, Howard Pearson said: “Those organisations were so well prepared over such a long period that, even with no deal, it was unlikely that product would have stopped flowing; it would just have pushed prices up.”
The biggest challenge in the early weeks has been getting products from the UK mainland into the Republic of Ireland because of delays at ports.
What will be the impact in the medium and long term?
Brexit will continue to impact procurement and supply chain over the months and years to come as new issues arise.
For instance, there is some concern in the fresh and grocery sector in April with regard to Northern Ireland. At present, there is an element of forgiveness that will expire in the Spring.
As Arnaud Lafontaine put it: “There is significant congestion at ports at the moment and it’s going to get worse. We’ve added Northern Ireland into our risk planning for April onwards and we’re not sure how that’s going to work.”
The result is that there are plenty of conversations going on within FMCG around simplification of the supply chain.
One possible solution is creating bonded facilities in Ireland where vehicles can be filled and goods distributed. It may be feasible to supply Northern Ireland from the Republic or vice versa, depending on whether there is port congestion in Belfast or Dublin.
The impact on the SME sector is likely to be profound; Brexit will be a major disruptor to cross-border online business and introduce unprecedented challenges to the consumer experience.
If extra duty is built into prices, that could hit demand. Small retail brands may decide not to target the UK market anymore as a result. The level of business may not justify the cost of a supply chain; one possible solution may be to take on a small business partner in the UK who will do the clearance for them.
Paul Cunningham said: “Many small things will accumulate over the coming months, in a gradual discovery process. Businesses will work around that – we’re used to doing that – but the cumulative effect could lead to some fundamental structural design changes to the supply chain.”
The extra stockpiling driven by the prospect of Brexit and the impact of Covid-19 may mean that inventory cannot be burned down to pre-Covid levels. This could contribute to a bullwhip effect several months down the line if that stock has to be written off, which will impact the profitability of UK PLC – and Europe PLC.
What will be the longer-term impact on P&L?
Many of the actions taken to mitigate the risks posed by Brexit have added costs to businesses – and will continue to do so as supply chain managers understand and adjust to the new realities of cross-border trade. In many instances, that extra cost does not add value that can be turned into additional revenue.
As Paul Cunningham said: “These on-costs are going to emerge through the management accounts. There’s going to be a moment of truth when you’re sitting around the boardroom table and the margins will reflect the cost of the mitigations and the additional administration and transport costs.”
As far as possible, businesses should understand that cost impact so that they can manage expectations among leadership teams and shareholders.
However, it is not always possible to anticipate extra costs. For instance, one of Dublin’s dock areas decided early in January to start charging £30 per vehicle for every hour it was in the port – even if that vehicle could not go anywhere.
Organisations have been able to reflect some of the costs they knew about in their calculations, but sudden extra operational costs like this will have an impact that might be seen only in several months’ time in end-of-year results.
As things stand, many businesses are trying to learn lessons from the early weeks of Brexit and build in extra flexibility to their supply chains. Businesses that do not take those lessons on board and don’t build tighter inventories and create core flexibility, may struggle in future.