Is Your Supply Chain Ready for Brexit?
February 16, 2017
For more than 40 years, companies operating in Europe have been designing their supply chains for a trade regime of minimal paperwork and zero tariffs. Brexit could turn this low cost, low friction system on its head. Or maybe it won’t. Uncertainty about the ﬁnal outcome, how long negotiations will take and a possible transition period creates a huge dilemma for leadership teams.
A hard Brexit poses substantial risk to the proﬁtability of companies operating in the UK. Disruptions to supply chains, for example, could reduce net proﬁts of ﬁve key UK manufacturing industries alone by as much as 30%, or £3 billion, with automotive and technology industries among the hardest hit, Bain analysis shows. But preparing now for a hard Brexit scenario could backﬁre. It may take two years or longer for the UK to agree on the terms of exiting the EU, once the UK government invokes Article 50 of the Lisbon Treaty. If it opts for a soft version of Brexit – or none at all – companies that move manufacturing or sourcing out of the UK risk incurring a higher cost base unnecessarily.
That double peril has left many leadership teams feeling anxious and reluctant to act. But waiting for a clearer sense of the future is the riskiest option. Successful companies thrive in uncertainty by incorporating change into the process of making strategy.
A strategy for Brexit uncertainty
Companies that develop a strategy for uncertainty will be able to pivot faster than the competition when Brexit details become clear, minimizing supply chain risk. Timing is key, no matter which scenario unfolds. While planning rational actions for each possible outcome, leaders pair each action with a signpost that triggers it.
No-regret moves. Some actions will increase a company’s competitive edge no matter what scenario plays out. They include improving cost management or operational effectiveness. One UK retailer decided it would be better off setting up a global warehouse hub outside the UK to position itself both for the possibility of a medium or hard Brexit and for geographical advantage.
Options and hedges. Leadership teams that develop strategic options and hedges for a variety of future scenarios navigate better when new developments unfold. Companies manufacturing in the UK can hedge against a hard Brexit by investing in a range of smaller-scale pilot plants in the EU that can be ramped up or scaled down quickly. Other options include joint ventures that provide lower-cost market entry or manufacturing changes that provide additional ﬂexibility at low cost.
Big bets. The most challenging balancing act involves large-scale investments that have different payoffs depending how future uncertainties play out. Examples include doubling down on UK production capacity, shifting production to new foreign markets and switching suppliers from foreign- to UK-based companies.
Automaker Nissan’s decision to manufacture new models in the UK is a big bet that the UK will negotiate a zero-for-zero arrangement with the EU, meaning neither will impose tariffs on ﬁnished cars and components. Toyota, by contrast, is waiting for a clearer signal on the future of UK-EU tariff regime for autos.
On the other hand, companies with brands that are closely tied to the national identity may weigh ﬁnancial considerations and still ﬁnd strong brand-based arguments to stay in the UK since Brexit already has increased the allure of British-made products.