The past few years have had their fair share of global disruptions and unexpected events – for example, the US presidential elections in 2016, the “gilets jaune” protests in France, and of course the vote by the British people to leave the European Union. Three years ago, the people of England voted to leave the European Union, setting a deadline of March 29, 2019. However, after three years of non-stop failed negotiations, Britain still does not have a plan and faces the danger of a “hard Brexit.” The current administration of Theresa May has gone to great lengths to try to establish an agreement on what Brexit will look like, even offering her resignation once an agreement is finalized. However, not even this desperate move has yielded the results wanted.
This has led to uncertainty among many British and European citizens and raised questions as to how this changing relationship between world powers will affect the lives of all involved. And for the supply chain – a great connector of businesses and trade across global boundaries – the various Brexit scenarios have already begun to paint a picture of a difficult path ahead.
The European Union was started post World War II, in large part to secure peace on a continent that suffered two global wars. By creating a unified market, the belief was peace and prosperity via a common market would trump any temptations of military aggression. To a large degree, the European Union achieved these goals. However, the openness of the union also created some misplaced fears and misgivings. A growing fear related to the free movement of people across borders and a swing back to nationalism as individual countries felt they gave up greater fiscal and monetary freedoms by being in the union. These points can be debated at length, but for many the benefits outweighed the negatives. But the perceived fear of a wave of refugees pouring over open borders, the belief that Brussels was exerting too much influence in domestic policies within the UK, and a political gamble by then Prime Minister David Cameron, led to the infamous referendum on June 23rd, 2016.
The slim margin for Brexit – 51.9 percent voting in favor versus 48.1 percent against led to announcement the UK would leave the EU by March 2019. What has transpired since that vote has sent shock waves throughout the global community. While the ultimate outcome remains a mystery, Brexit is already having a major impact on supply chains.
What Happens to the Flow of Inventory?
One of the primary benefits of being part of the EU was the removal of borders from the map. Goods could flow freely between member states. While there were still delays at places such as Calais, they were due in large part to the physical constraints of those ports. Much of the red tape associated with tariffs, customs and border inspections had been removed.
But, what will happen post-Brexit? Goods entering and exiting the UK will most likely be subject to greater controls and inspections. They will have to ensure they meet EU rules and therefore must be under more scrutiny than before. A simple detail such as the pallets needed to move the inventory is in question. However, the UK does not even have enough of the right types of pallets to move goods into the EU. Therefore, this lack of logistical material could create major disruptions in such areas as the food supply chain, where 3 million pallets move between the UK and the EU per month. This ultimately has the potential of creating food shortages post-Brexit.
This issue goes well beyond simply having enough French camembert cheese, Italian olive oil or German sauerkraut for the weeks that come post Brexit. Rather, firms will have to ensure they have enough inventory on hand to keep the store shelves replenished, medicine cabinets stocked, spare parts available for infrastructure – the list goes on and on.
Supply chains will need to plan for worst case scenarios. Ensure enough safety stock to support their UK operations, while also ensuring enough inventory from the UK destined to the EU is in the right locations on the continent. These same supply chains need to also plan for what happens if Brexit goes smoothly and the flow of inventory is not disrupted, but now there is a glut of inventory in different locations. Do you discount? Write off inventory? This has the potential to be planning headache for those responsible for the flow of inventory.
Can Manufacturers Adapt?
Without a doubt, manufacturing will have to undergo changes and adjustments. With open borders and one unified market, companies ranging from Nissan to Airbus have established manufacturing facilities in the UK. With open borders, these firms could look to use the distribution hubs in the UK to get anywhere in Europe, allowing for timeliness in delivery and manufacturing. However, now these firms are forced to rethink these plans. A study found that the investment in UK automotive manufacturing dropped 46.5 percent in 2018 as compare dto the year prior. Nissan has now decided to pull out of Sunderland, due to the referendum, while Airbus has expressed concerns about its desire to stay in the UK if there is a “bad” Brexit.
Manufacturing in the UK has been thrust under a cloud of uncertainty, and until the final decision is made, they will have to hedge on how much they continue to invest in the UK. They also need to consider the increased safety stock in vital raw materials – no one is certain there will not be weeks of delay with the flow of raw materials post Brexit. Additionally, these manufacturers must consider their long-term strategy with regards to servicing the EU and the UK markets. Do they need to consider moving more manufacturing to mainland Europe? And if so, how do they manage their manufacturing needs to serve two distinct markets?
What Does This Mean for the Future Workforce?
While there will likely be some new rules with regards to the movement of finished goods and raw materials, there is also the question of movement of people. One of the benefits of the open borders in the EU was the lack of working papers and visas needed to work in member nations. By some estimations there are 3 million European nationals working in the UK, while there are 1.3 million UK citizens working in the EU. What will happen to this labor when Brexit takes place?
Industries such as healthcare are already seeing the effects of Brexit – 10,000 nurses quit the year after the referendum while the number of nurses from Europe registered in Britain has dropped by 90 percent. It remains to be seen how this impacts supply chains. As the labor numbers across the board continue to drop, the impact will be felt across all industries and through supply chains.
The question for companies and their supply chains – how will they make up for this shortage? One area of supply chains that are already feeling the impact of labor shortage is with the trucking industry – in the UK there is currently a 35,000-driver shortage. Couple this with a more challenging labor market as well as other EU nations competing for available talent, and you can imagine a serious labor issue in the future for UK based trucking.
Brexit has proven to be a major headache for businesses and their supply chains. The fact that the UK wants to leave the EU is not necessarily the most troublesome factor, but rather it is all the unknowns that come along with it. Will it be a “soft” or a “hard” Brexit? What will the relationship look like between the UK and the EU? Will Scotland look to leave the UK?
Any student of politics and history will realize that eventually the system will find a new normal. Businesses and supply chains will figure out how to function in this norm – some will even take advantage of it and reap the benefits. But the main dilemma today is the lack of clarity coming from London. It is the unknowns that will drive supply chains crazy. Until this fog of uncertainty is removed, see supply chain professionals will continue to struggle to determine the best course of action for their businesses.