Brexit is one of the most important issues of nowadays. The situation is changing all the time, new information and situations arise constantly, it may be that at the time when I am writing this article, the situation may have changed again. At the moment, only one thing is obvious: that nothing is obvious at all. Will the UK leave the Union? Will the pause button hit for two years or maybe the UK will decide not to leave the Union at all? There are a lot of uncertainties. Therefore, if you are not near the people who make decisions, then you are one of many those who do not have a clue what is going to happen. The purpose of this article is not to moralize concerning the justice of Brexit itself. It is clear that the vast majority of people in the UK have decided to leave the EU and their views have to be heard by politicians and only the future will show whether the decision was right or not. Of course, for businesses it is not easy as this hustle and lack of determination in which direction to move is disastrous because business does not know how to behave and how to model its supply chains. During this hustle, precious time is lost which will conclude into shrinking the competitive advantage. The only good advice which can be given in this situation is to expect the best and get ready for the worst. In this article, I will try to simulate what challenges the supply chains and logistics will face and what can be done in order to minimize the consequences.
The most likely Brexit models and how they will affect supply chains
Why Brexit is making companies, which have global supply chains, to worry? Because there will be one or another custom control area and possible additional charges depending on the type of the agreement. Furthermore, trade and procurement agreements will need to change. All this will lead to lack of working experience, companies will face the lack of storage facilities and working personnel, and there is a huge chance that the need to change the trading and procurement geography will arise. For companies, which are working under LEAN and “Just in Time” models, this kind of disruption and possible queues at borders which will increase lead times is completely disastrous.
Those are the main motives and when combined together, a destructive domino effect may occur which will impact most parts of the supply chain.
I do not know which Brexit model will be chosen by Great Britain. Who knows, maybe they will find some sort of outstanding compromise, but as we can see from today’s EU perspective, there are two most realistic options: a “Norwegian” model and a “No Deal” option when the UK becomes a third country to the EU and the export and import procedures will be the same as with Russia, Belorussia and etc. Now, we will talk about each of them bellow.
The Norwegian model
This model is based on the free movement of people and cargos and there are no customs taxes for most of the commodities. There is no physical checking of trucks coming in and leaving the country, the main burden here is that transit declaration and the certificate of origin or another type of preferential certificate are needed, in some rare occasions a different type of approvals will be needed depending on the product type. The key point of this model is that there are no queues at the border. I will not say the exact time which will be lost compared with completely free movement, the extra time is needed for the certificate of origin issuing and the transit declaration issuing, but it could be somewhere around 1-3 hours. Extra time does not significantly impact forwarding company`s work which is regulated under the AETR convention. Concluding the impact of this model would not be a disaster. Of course, logistics’ costs will increase as well as the need for extra personnel and the additional costs to customs brokers will arise too. There is a chance that extra storing facilities will be needed but each company will need to check themselves how slightly increased lead time and costs will affect their supply chains.
“No Deal” model.
This model is more interesting as it would sum up into huge additional expenditures and for some operations, it would be a complete disaster. Let‘s hypothetically say that the UK will decide to distance themselves from the EU, start taking full customs control and will add up a customs tariff for the EU products and the EU will do the same thing from their side.
The customs tariff question is worth a whole book if start to analyze each commodity type separately. Theoretically, the ERGO OMNE tariffs would come into effect. Nevertheless, no one can guarantee that they would stick for long. This question alone forces companies to start sweating as they do not know for sure which tariff will apply for their goods and raw materials, and there is no clarity how to react and change supply chains accordingly. Just imagine a situation when the UK manufacturers or the EU companies hear that a six percent tariff will be summed up to their goods or raw materials meanwhile the future long term contracts are already in place. I think it would be a light shock.
The costs of transportation and declaration will be equally important. The shipping rates will surely increase, due to longer time spent in the queues at the border. Customs brokerage fees and insurances will contribute to the costs as well.
Longer lead times will require additional investment in the logistics network as supply chains will have to be changed in case companies will need to change export and import geographies. Prolongation of delivery time implies the increase of stocks of raw materials and finished goods, which will, of course, require additional storage space and sum up additional costs for money use. Logistics can be happy as earning will surely increase, but in this case, they are not happy at all as they are not prepared for such increase. In order to procure raw materials and ship products in time, companies will need to combine different delivery methods.
Moreover, let‘s not forget the negative impact on the environment which will occur due to pollution from the trucks which will stay at the border. We need to take into consideration the fact that Great Britain is an island and there are four ways to get in and out: by the ferry, through the Euro tunnel, through ports, and by plane. The possible queues at the border may have a huge impact not only on the environment itself but they may block the connecting roads to and from the UK and may cause unpredictable consequences.
The last but not less important challenge is the shortage of talents. Most of the current workforce does not remember the times when it was necessary to wait in the queues at the customs borders and did not know what the truck queues at the custom border mean. Therefore, it will be necessary to find workers who have experience dealing with the global supply chains and with the customs formalities with the third countries. The necessity to educate their personnel will arise. The problem of talent sourcing and lack of competence will be felt not only by the private companies but also by the British government as additional customs, coastal protection, lawyers, tax administrators, and other staff will be needed.
Some pieces of advice what to do.
Probably, we could find more places where changes will occur but I have mentioned the most painful ones. Bellow, I will advise a survival guide which is relevant to both possible scenarios.
The Survival Guide:
In conclusion, I would like to say that I really hope that the situation will not be as terrible as we may think. On the other hand, every obstacle should be seen as an opportunity. Companies operating in this field can get a lot of benefits from this situation. Other market players can benefit from this situation as well as companies which will be agile will gain a competitive advantage. If no above-mentioned scenarios take place, this situation will be a great stress test for your company and the experience will remain for the future disruptions.
The Supply Chain Services Bureau can help your company to develop effective supply chain strategies, evaluate your logistics network and train your team.
Your supply chain sustainable growth strategy can start with us!
Let‘s get in touch, we can help.
Tomas Ananjevas
Cell: +370 698 80 856
Email: tomas@scsbureau.com
