Brexit and the threat of supply chain failure

Out-Law Analysis | 22 Aug 2019 | 1:22 pm | 2 min. read

Many products and services in the UK depend fundamentally on fast, efficient supply chains. A no-deal Brexit has the potential to disrupt supply chains through border delays and escalating tariffs and costs.

You can prepare for the effects of this, though, and companies should make sure they have plans in place to protect their supply chains, particularly as companies have increasingly come to rely on fast, lean, efficient supply chains.

Impact

Brexit's main effects on supply chains are increased costs and delays.

Goods might attract tariffs or extra customs charges, increasing costs for companies. With businesses operating on low margins this extra cost can be crippling and suppliers will seek to pass these costs on to their customers and inevitably ultimately to the end consumer, resulting in price increases for day to day goods.

There could be delays and disruption at UK ports, increasing the time it takes to get goods to their ultimate destination. This can have a significant impact on those operating just-in-time manufacturing processes or those supplying goods with a short shelf-life.

Mitigating the impact

Contracts are a company's first line of defence in mitigating the Brexit impact caused by supplier issues. Many organisations have updated their templates or reviewed their existing contracts to shift the balance of risk under the contract for both costs and delays to the counter party.

Lidl has been working with its suppliers to warn them of the risks and costs a no-deal Brexit may pose. It said it considers that risk solely to be on its suppliers by including delivery clauses linked to the 'Delivery Duty Paid' Incoterm. Incoterms are pre-defined commercial terms published by the International Chamber of Commerce. This effectively means the supplier is fully responsible for delivering the goods to Lidl, including the payment of any additional costs and dealing with all additional customs clearances paperwork and managing any increased lead time or delays.

Supply chain failure

Whilst Lidl's actions provide it with good protection from a pure legal perspective it will need to work closely with supply chain partners to monitor the supply chain on an ongoing basis. This is particularly true where those suppliers are operating on low margins and the extra cost, time and compliance regime could be critical.

Throughout the UK businesses have migrated to efficient and lean supply chains over recent years. When economic and trading conditions are good this has led to increased efficiency. However in more challenging trading conditions the exposure to a failure of a major supplier is increased. The whole supply chain is effectively exposed to the weakest link and if that entity cannot withstand the increased financial burden and becomes insolvent the whole chain could come crashing down.

There are typically a number of early warning signs that a supply chain is in financial difficulty. Businesses should ensure they have processes and procedures in place to spot these early on and act on them. Some of the largest supply chain failures in history have resulted as the early warning signs were not aggregated through a businesses processes and therefore no action was taken.

Businesses should be vigilant for:

  • requests from the supply chain for deposits, up-front pre-payments or reduced retentions;
  • supply chain members not delivering in accordance with agreed schedules;
  • complaints from other members of the supply chain;
  • attempts to inflate payment applications or to change payment terms;
  • unexpected price rises or attempts to renegotiate pricing or terms, repeated invocation of variations regime;
  • failure by a member of the supply chain to file statutory accounts on time;
  • silence and evasion tactics;
  • high staff turnover; and
  • rumours and market intelligence – although these should be treated with caution, they can also provide valuable information.

This information comes from a variety of sources – formal and informal – and businesses should have a way of ensuring it is collated effectively and listened to. If issues arise early action can mitigate exposure and the different between project success or project failure.

Clare Francis is a Brexit expert at Pinsent Masons, the law firm behind Out-Law