Executive Briefings

After Brexit: How European Supply Chains Will Be Transformed

It's been more than two months since the United Kingdom voted to withdraw from the European Union, but the shock waves aren't close to subsiding - especially with regard to the impact on global supply chains.

After Brexit: How European Supply Chains Will Be Transformed

The Brexit vote raised a flurry of questions, answers to which will be long in coming. Still at issue is how the U.K.'s economy will function as a completely separate entity from that of the E.U. Will the loss of free-trade privileges make it a figurative island as well as a literal one? Will manufacturers and distributors flee England, Wales, Scotland and Northern Ireland for cheaper and more accessible sites on the Continent? Will Brexit rekindle the flames of Scottish independence, leading to the ultimate dismantling of the U.K.?

All are questions of sweeping scope, but others promise to have a more direct and intimate impact on business. Of particular concern is how companies should alter their supply chains to reflect the severing of economic and trade ties between the U.K. and the E.U.

Some actions need be taken immediately. Chief among them is a hard look at one’s universe of suppliers, including those further up the supply stream. Many companies lack visibility of Tier 2 and 3 vendors, relying on Tier 1s to manage those relationships. In light of the uncertainties triggered by Brexit, that lapse could prove costly. The time for correcting it is now.

Rose Kelly-Falls, senior vice president of supplier risk management with Rapid Ratings International, says companies need to prioritize their essential suppliers within Europe, then ask the following questions:

-- Will your U.K.-based suppliers remain there, or relocate?

-- What processes will your suppliers need to adopt, in order to make a successful transition?

-- Do your suppliers have the financial means to make the necessary transition?

-- Are you aware of your suppliers’ financial health and viability?

-- How long will it take them to make the transition? Months, or potentially years?

-- What will the transition cost, in terms of additional taxes, tariffs and imports?

Of course, the answers aren’t likely to be immediately evident. They depend in large part on the actions of governments, especially those of the U.K. and its E.U. counterparts. But companies can at least make a start on figuring out the impact of Brexit, by assessing the nature of their own supply bases.

How the European economy will settle is anyone’s guess at this point. One likely outcome is an uptick in the continental real-estate market, as U.K.-based suppliers and manufacturers search for alternative locations closer to buyers and end markets. In addition, there could be a wide-scale relocation of staffs and physical resources.

There are multiple places where they could go. The Republic of Ireland, which remains in the E.U., is an obvious choice, given its immediate proximity to Britain. The Benelux countries – Belgium, the Netherlands and Luxembourg – have a long history of serving as a distribution nexus for much of Europe. And the nations of Eastern Europe offer the lure of relatively low labor and land prices. In any case, Kelly-Falls believes, companies are likely to open up additional distribution facilities to offset any logistical disadvantages arising from the U.K.’s newfound solitary status.

There could even be something of a return to country-specific distribution, as unlikely as that might seem in a “unified” Europe. In the age of e-commerce, with Amazon.com Inc. putting up a series of regional fulfillment centers all over the world, the development doesn’t seem so farfetched.

All of this assumes that other E.U. members don’t copy the U.K.’s example and withdraw from an increasingly shaky partnership. There are nascent political movements within several countries to do just that, although they aren’t strong enough to force such action yet. What’s likely is that they’ll be closely watching the impact of Brexit on the U.K., and using any bad news as fuel for their own nationalistic campaigns.

They could be frustrated by the relative health of the U.K., whose economy is currently stronger than France, Germany, and the Eurozone average, according to Rapid Ratings’ Financial Health Rating. Shortly after the Brexit vote, public and private companies in the U.K. were ranked highest on the 0-100 scale. Whether that rosy state of affairs continues in the months and years ahead remains to be seen.

Businesses should move quickly beyond this initial baseline assessment of their supply chains to gain an understanding of how vendors intend to respond. Suppliers should be required to have a plan in place within six months, Kelly-Falls says. Buyers should check in after three months, then move toward finalizing a plan of action. “Within six months, those with any Brexit exposure should be able to discuss how, if at all, the pending exit will impact your relationship, and what changes in strategy will be implemented,” she says.

In some cases, companies might need to provide financial support to less-stable suppliers that are struggling to make the transition. Original equipment manufacturers, meanwhile, will need to requalify many parts for import, and in some cases redesign entire supplier chains.

Regardless of how the future shapes up, Brexit is a reality. Complacency and inaction are an unacceptable option. As Kelly-Falls puts it: “Don’t assume your suppliers are going to proactively manage this. To wait is to be too late.”

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The Brexit vote raised a flurry of questions, answers to which will be long in coming. Still at issue is how the U.K.'s economy will function as a completely separate entity from that of the E.U. Will the loss of free-trade privileges make it a figurative island as well as a literal one? Will manufacturers and distributors flee England, Wales, Scotland and Northern Ireland for cheaper and more accessible sites on the Continent? Will Brexit rekindle the flames of Scottish independence, leading to the ultimate dismantling of the U.K.?

All are questions of sweeping scope, but others promise to have a more direct and intimate impact on business. Of particular concern is how companies should alter their supply chains to reflect the severing of economic and trade ties between the U.K. and the E.U.

Some actions need be taken immediately. Chief among them is a hard look at one’s universe of suppliers, including those further up the supply stream. Many companies lack visibility of Tier 2 and 3 vendors, relying on Tier 1s to manage those relationships. In light of the uncertainties triggered by Brexit, that lapse could prove costly. The time for correcting it is now.

Rose Kelly-Falls, senior vice president of supplier risk management with Rapid Ratings International, says companies need to prioritize their essential suppliers within Europe, then ask the following questions:

-- Will your U.K.-based suppliers remain there, or relocate?

-- What processes will your suppliers need to adopt, in order to make a successful transition?

-- Do your suppliers have the financial means to make the necessary transition?

-- Are you aware of your suppliers’ financial health and viability?

-- How long will it take them to make the transition? Months, or potentially years?

-- What will the transition cost, in terms of additional taxes, tariffs and imports?

Of course, the answers aren’t likely to be immediately evident. They depend in large part on the actions of governments, especially those of the U.K. and its E.U. counterparts. But companies can at least make a start on figuring out the impact of Brexit, by assessing the nature of their own supply bases.

How the European economy will settle is anyone’s guess at this point. One likely outcome is an uptick in the continental real-estate market, as U.K.-based suppliers and manufacturers search for alternative locations closer to buyers and end markets. In addition, there could be a wide-scale relocation of staffs and physical resources.

There are multiple places where they could go. The Republic of Ireland, which remains in the E.U., is an obvious choice, given its immediate proximity to Britain. The Benelux countries – Belgium, the Netherlands and Luxembourg – have a long history of serving as a distribution nexus for much of Europe. And the nations of Eastern Europe offer the lure of relatively low labor and land prices. In any case, Kelly-Falls believes, companies are likely to open up additional distribution facilities to offset any logistical disadvantages arising from the U.K.’s newfound solitary status.

There could even be something of a return to country-specific distribution, as unlikely as that might seem in a “unified” Europe. In the age of e-commerce, with Amazon.com Inc. putting up a series of regional fulfillment centers all over the world, the development doesn’t seem so farfetched.

All of this assumes that other E.U. members don’t copy the U.K.’s example and withdraw from an increasingly shaky partnership. There are nascent political movements within several countries to do just that, although they aren’t strong enough to force such action yet. What’s likely is that they’ll be closely watching the impact of Brexit on the U.K., and using any bad news as fuel for their own nationalistic campaigns.

They could be frustrated by the relative health of the U.K., whose economy is currently stronger than France, Germany, and the Eurozone average, according to Rapid Ratings’ Financial Health Rating. Shortly after the Brexit vote, public and private companies in the U.K. were ranked highest on the 0-100 scale. Whether that rosy state of affairs continues in the months and years ahead remains to be seen.

Businesses should move quickly beyond this initial baseline assessment of their supply chains to gain an understanding of how vendors intend to respond. Suppliers should be required to have a plan in place within six months, Kelly-Falls says. Buyers should check in after three months, then move toward finalizing a plan of action. “Within six months, those with any Brexit exposure should be able to discuss how, if at all, the pending exit will impact your relationship, and what changes in strategy will be implemented,” she says.

In some cases, companies might need to provide financial support to less-stable suppliers that are struggling to make the transition. Original equipment manufacturers, meanwhile, will need to requalify many parts for import, and in some cases redesign entire supplier chains.

Regardless of how the future shapes up, Brexit is a reality. Complacency and inaction are an unacceptable option. As Kelly-Falls puts it: “Don’t assume your suppliers are going to proactively manage this. To wait is to be too late.”

Comment on This Article

After Brexit: How European Supply Chains Will Be Transformed