Andrew Underwood and Olivier Sorgniard 17 Jul 2017 02:08pm

Brexit and the supply chain: why it pays to be proactive

Andrew Underwood and Olivier Sorgniard explore the potential impact of our post-Brexit trading model on supply chain operations

Caption: For many the current supply chain is at critical risk; for others, however, Brexit presents an opportunity for positive change.

The impact of Brexit on the UK’s ability to trade with both the EU and the wider world has been the subject of much discussion and press coverage since the referendum. Once a rather niche area, the subject of tariffs, duties and non-tariff barriers has become substantially more mainstream.

Currently, the UK is part of the EU single market and the customs union, which means there are no tariffs, quotas or non-tariff barriers on trade with the rest of the EU. For goods coming into the EU, a common tariff is applied, which means that these goods can then pass freely between member states.

Upon exit from the EU, the UK government has said that the UK will leave the single market and the customs union and will seek a free trade agreement (FTA) and a customs agreement with the EU. In their recent publication, the House of Commons Library sets out details of three possible models for this: trade under World Trade Organization (WTO) rules, an FTA, or membership of the European Economic Area (EEA). For trade with other countries, the UK will be legally allowed to agree new FTAs with key business partners such as the USA, China, Australia, and India, which may represent a good opportunity for UK manufacturers to be more competitive than EU competitors.

Yet, free trade is about more than just the tariff which may be applied to a product. For some sectors the tax cost will be important as tariffs are potentially prohibitively high (for example in agriculture). In general however, average tariffs have been reducing over time and therefore it is the non-tariff barriers which present the greater headache for business when assessing the impact of Brexit on their operating models.

But what is meant by non-tariff barriers? The definition is broad and covers any barrier to the smooth flow of trade across a border. It includes logistical barriers to the physical transfer of goods such as delays in transit due to the inspection of goods or the need for specific paperwork to be completed. It also includes access to markets – for example, country-specific regulations or technical specifications on the underlying product, or the requirement for locally-tailored labelling or packaging.

For our clients, it is these points which are proving to be the ones of greatest focus as they are critical to a company’s ability to reach the end consumer in a timely manner. For many the current supply chain is at critical risk; for others, however, Brexit presents an opportunity for positive change. Organisations are asking themselves:

- Will the supply base need to change? Could local suppliers save time and costs?

- Should we apply for the Authorised Economic Operator status to minimise inevitable delays at the border, and if so when? (The process for obtaining AEO may take up to 15 months.)

- Does the current production line rely on unfinished products crossing borders, and will this still be economically viable?

- Will the organisation need to change its warehousing capacity for raw materials and stock/finished goods to continue to meet existing customer service levels?

- What will the impact be on working capital?

- Will the business be able to adapt its IT systems and processes in time?

- Would it be preferable and viable for UK businesses servicing existing Irish customers to establish a UK Customs/bonded warehouse or does an Irish distribution centre make more commercial sense?

There is no doubt that there are currently more questions than answers when it comes to understanding the impact of post-Brexit trading arrangements on business operations.

With non-executive directors increasingly playing their part in helping to plan for the unknown, forward thinking organisations are establishing “Brexit Taskforce” teams. These taskforces draw on every part of the business from finance, tax, IT, operations, HR and sales to assess the impact, establish where the pressure points are and scenario plan for each eventuality.

These organisations understand that there is a lead time to effect changes to the supply chain and production facilities, investment in warehousing, and the supporting IT infrastructure. And for certain industry sectors, ongoing regulatory compliance will be key if the company wishes to continue to trade post-Brexit.

Whilst these teams are focusing on Brexit challenges, there may also be opportunities - could Brexit be a catalyst for companies to really identify true customer/product profitability levels through a “cost to serve” model that provides the opportunity to renegotiate or exit unprofitable products or customers? Perhaps the Brexit cloud may yet have a silver lining or two.

Andrew Underwood, partner, leads KPMG’s UK supply chain operations team. Olivier Sorgniard, senior manager, is a senior member of KPMG UK’s customs duty team.