Brexit: Creating opportunity out of uncertainty
In the past few weeks we have seen a wholesale food distributor face double digit price increases from its EU-based meat supplier.
The EU referendum vote, now over a month ago, has caused ripples of instability across the global markets. As politicians and business leaders struggle to come to terms with the implications of the vote and the resulting currency devaluation, the future is unclear.
Writing in the FT, Alex Barker offers four possible scenarios for how the Brexit might play out – “Nasty, neutral or friendly . . . or it might not happen at all” none of which are particularly helpful for those trying to run a business.
In the past few weeks we have seen a wholesale food distributor face double digit price increases from its EU-based meat supplier. When this is coupled with the realisation that all the company’s stock is delivered using trucks from an EU-based manufacturer which may also suddenly increase in price, the distributor is faced with logistical as well as supply chain issues and no clear way of resolving them. So what can be done to provide some certainty?
The clearest way to understand how the changes will impact business in future is to get a detailed understanding of the supply chain, and identify future risks ahead of time.
One of the biggest threats to business productivity is the paralysis that is often the product of facing an uncertain future. Decisions are delayed, plans are put on hold and strategy stagnates while we wait with bated breath for the outcome of Article 50 which could take years to finalise.
Understand your supply chain
It is clear that there will be change, the vote has been cast and the decision has been made, while the final outcome is unclear it is obvious that there will be changes ahead. For all companies the underlying import and export market is already changing rapidly and the relationships, prices and contracts with suppliers will be under review. The clearest way to understand how that will impact business in future is to get a detailed understanding of their supply chain, and identify future risks ahead of time. This is where the CPO can provide valuable insight for the CFO.
Modern supply chains are far from simple, and are often a web of tier one suppliers contracting to tier two suppliers who in turn rely on imports for their own product. By putting in place a comprehensive plan to map and track these relationships, the CPO can provide the CFO with a categorised risk profile across the whole business which can be reviewed as we move through the Brexit process. Each category can be checked on a quarterly basis, with the risk profile being updated as new legislation is put in place. It is also possible to overlay this with a monitoring and alert service put in place to proactively notify the business when a specific risk is identified.
Mitigating currency risk
Mitigating currency risk is crucial to a post Brexit strategy. Since 2008, Germany has topped the list of world trading partners importing into the UK, indeed 7 of the top 10 are EU nations. With the collapse in the GBP:Euro exchange rate, European suppliers suddenly find themselves 16% more expensive for the UK importers than six months ago. With a clear view of their supply chain in place and visibility of where their main costs are coming from, UK companies now have a chance to review their existing contracts, consider sourcing from domestic markets and undertake a benchmarking exercise to check pricing against the rest of the market. Far from paralysis, Brexit should be exactly the prompt they need to review their existing arrangements.
Rising people costs
The second biggest cost to a business is people. If migration does slow, as predicted, companies that source European labour will see inflation through rising workforce costs. For low wage industries such as agriculture and hospitality this could have a huge knock on effect across their cost base. With UK unemployment currently at 4.9%, the lowest rate since 2005, a significant drop in migrant workers whether skilled or not will eventually increase people costs across all industry sectors as demand outstrips supply.
For the brave...this could be the perfect opportunity to negotiate longer term deals, locking in prices for three to five years.
A buyers' market
Finally, for businesses planning large investments global uncertainty will clearly impact plans, delaying large scale decisions and contracting. For the brave, however, this could be the perfect opportunity to negotiate longer term deals, locking in prices for three to five years. It is a buyers’ market for sure and a good time look around for suppliers eager to make a deal.
As the dust settles on the EU referendum vote and big changes loom on the horizon, CPOs should embrace the catalyst that is Brexit to gain clear visibility of their supply chain. Only by identifying the risks and costs in the current business, and the impact new legislation, trade tariffs and restrictions will have on their business model, will they be able to move forward confidently. Knowledge is indeed power, by waiting for someone else to make a plan business leaders will find themselves paralysed by a Brexit timetable which hasn’t even been written yet.