Out-Law Analysis 4 min. read

How to manage Brexit supply chain risks

ANALYSIS: Businesses with integrated EU and UK supply chains or 'just-in-time' delivery models will be particularly affected by a no-deal Brexit, according to an expert at Pinsent Masons, the law firm behind Out-Law.com.

According to Brexit specialist Guy Lougher of Pinsent Masons those businesses face considerable risks because World Trade Organisation (WTO) tariffs would apply in a no deal scenario, and because of potential delays to the transportation of goods at the border due to regulatory and customs checks.

"If a supply chain collapses it can cause disastrous losses," Lougher said. "Businesses with critical supply chains have developed them to be highly efficient and resilient within the EU, but they may soon be subject to stresses that they were not designed to withstand."

"Customer propositions may need to change to take account of new supply chain requirements. For example, a next day delivery service that works at the moment could very possibly become unsustainable with customs clearances and rules of origin applied. In today’s world of global supply chains, even sourcing from a tier one supplier in the UK may not be sufficient to protect against currency movements, a new tariff regime and untried customs systems," he said.

Lougher explained that the supply chain issues could arise in particular on the island of Ireland, where businesses often rely on suppliers on either side of the border between Ireland and Northern Ireland.

Agri-foods businesses in Northern Ireland risk being particularly affected by Brexit because their integrated supply chains mean that raw ingredients or components can criss-cross the border several times before becoming a final product, he said.

Former Europe and trade minister Douglas Alexander, who is an adviser to Pinsent Masons, said that a Brexit deal hinges on resolution of issues with the border in Ireland.

"Northern Ireland has proved to be a central element of the Brexit negotiations with both the UK and the EU united in wanting to prevent the potential problems of a 'hard border'. But they so far remain divided on how this could best be avoided," Alexander said.

"Despite the UK and the EU having both signed up to a 'backstop' in December last year, which would apply to the Irish border, and act as a safety net should it not be possible to secure a deal that would allow for trade to be as frictionless as possible, the amendments on the Customs Bill, which passed through parliament in July makes this more challenging: One of the amendments, 'New Clause 37', that was passed by the House of Commons contradicts the EU's legal draft of the Irish backstop; which suggested Northern Ireland should be treated as part of the EU's customs territory," he said.

According to Alexander, a 'no deal' scenario would raise the prospect of tariffs on certain products, such as food and drink, which would "impact on both consumers and businesses". He called on businesses to "give consideration to contingency planning and take 'no-regret' business planning decisions while the outcome of the negotiations remains unclear".

It is incumbent on businesses to map, understand and work with their wider supply chains to identify, understand and mitigate their risks. Guy Lougher of Pinsent Masons outlined specific steps businesses can take to address their supply chain risks: 

  • Review sales activity on a periodic basis – Check if the mix of sales has changed, such as across channels, categories or geographies. Put in place mechanisms for continuing to track this so that you can identify trends and then make any necessary changes to the customer proposition and/or the supply chain.
  • Consider both opportunities and risks, and use them to inform business decisions. We recommend categorising these as either short term or long term. For example, a short term opportunity and risk could be that a weaker pound permits more exports but that imported goods such as clothing become more expensive. In relation to long term, an example could be that lower economic growth may support businesses at the value end of the market, whereas discretionary items may be negatively impacted.
  • You can then adapt your customer proposition and plan a strategy that makes the most of short term benefits but does not overly rely on them. This will also help the business to adapt over time.
  • Across each business division, map and understand the supply chain model and cost drivers, particularly in respect of supplies which are sourced from outside of the selling territory, including tier 1 suppliers and below.
  • Undertake a stress test on the current operating model in order to identify opportunities and risks. This should involve assessing sole supply arrangements, and opportunities to broaden supply arrangements and reduce dependencies, as well as the possibility to change operations to mitigate relevant impact. Businesses should also explore whether near-shoring opportunities are realistic or practical for some aspects of the supply chain and how quickly they could be implemented, investigate whether competitors may be more or less affected and if this present challenges or opportunities, and further review what operational changes need to be put in place to reduce any delay in the supply chain that may be caused by customs clearance.
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