Addressing supply chain challenges in the UK market

Garrett Cronin, Advisory Consulting Partner, PwC, highlights how the UK leaving the EU could bring both opportunities and challenges to Irish-based supply chains.

Sourcing

While initial drops in the value of sterling have created sudden opportunities for procuring goods and services from the UK, the longer term could see an overall reduction in this activity as organisations limit their exposure to any future tariffs on UK imports.

In addition, organisations in other EU countries may reassess their UK sourcing, ensuring supplies that could attract high tariffs (eg agricultural products) are avoided, potentially sourcing them from Ireland instead.

Services may also be affected, with UK-based service centres and supply-chain hubs becoming unviable (eg if all procurement is done in the UK for EU production). This could be an opportunity for firms to manage their end-to-end supply chain from Ireland using centralised hubs.

UK contracts referring to EU law, or the requirement for EU access, may require re-negotiation or amendment. Trade credit insurance should also be considered.

Local or dual-sourcing operations could increase, as organisations try to limit their exposure or try to take advantage of increased ‘going-local’ consumer sentiment.

Production

With so much global uncertainty, demand volatility is likely to be a major factor in the near future. While this will impact demand and supply planning at global levels, it could provide motivation for organisations to centralise this function in Ireland.

Organisations using production activities in the UK to supply the UK market may be sheltered from any direct impact. But where UK production exists for EU markets, there may be an incentive to relocate production (or at least the process of finishing goods) to an EU location.

Also, UK labour costs (eg operator costs) could increase as a result of inflation – due to sterling volatility and a reduction in available labour if immigration is reduced.

With 80% of Ireland’s product energy imported from the UK, production costs in Ireland could be adversely or favourably impacted, largely depending on the outcome of the political negotiations.

Product development, certification, quality control and intellectual property may also see changes and new legislation.

Logistics networks

Opportunities now exist for redesigning and consolidating supply-chain networks into Ireland. This would be more likely for those who transit goods destined for the EU through the UK or if warehouses based in the UK were eventually to see throughput movements being treated as imports and exports.

Distribution may see volume shifts in orders from the UK instead going to the EU, US or new markets, potentially impacting freight rates based on volume discounts for specific routes. 

This may have a greater impact on Irish-owned companies than on foreign-owned companies based in Ireland, because foreign owned companies rely far less on the UK as an export destination.

Alternatively, online sales from the UK could increase due to fluctuating exchange rates, and, should any related global economic downturn occur, global freight rates could change based on the effect on overall capacity.

Lead times may need to be assessed as a result of longer processing times associated with export regulations and transportation to new, more geographically distant markets. This would be likely to have a larger impact on ad-hoc or time-sensitive orders.

Aftermarket, repair and reverse logistics operations may also become unviable in the UK for EU consumers and vice-versa for UK customers using centres in the EU.

Value chain and back office

The UK may see an increase in regulatory, legal and customs requirements, creating a need for local  export control teams or for back-office outsourcing of this activity to specialists (at a cost).

Any new requirements could also increase supply-chain administration costs, with the respective systems (eg ERP) also potentially needing updating or upgrading to support this.

Working capital requirements may increase to support the need for immediate or postponed customs and duty payments, should they become applicable. While the actual costs on imports to Ireland or exports to the UK may not increase, any initial outlay of cash required could impact cash flow.

There is likely to be delayed decision making, impacting expansion, production opportunities, footprint/landscape changes, or M&A activity – which could affect investment in both the UK and Ireland.

The cost of business travel to and from the UK could increase should new charges or visa requirements be introduced.

What can organisations do?

•     Immediate actions: Focus on the initial consequences (eg changing sourcing approaches to benefit from exchange rates fluctuation)

•     Medium Term: Scenario plan, based on ‘what if’ or on statements coming from negotiations (eg consider initiating network reviews).

•     Longer term: Act on the basis of what emerges from negotiations (eg changing supply chain strategies or implementing network changes).