Hard Brexit impact on Logistics.
We are approaching the business end of BREXIT. It is due on 29th March 2019 or sometime after this if a delay is negotiated. Serious supply chain management effort is being deployed to minimise the likely impact on business. Even those companies who have been waiting for clarity on what the future trading world will look like have had to accept that the complexity and ambiguity will likely remain until shortly before the final exit from the EU is made.
The obvious place to start is with a Brexit Risk Assessment. Like any major transformation, assessing the likely risk areas, likelihood and magnitude of negative impacts and the effectiveness of mitigation actions. However, unlike a planned supply chain change the future post-Brexit state is still unclear. So, which scenarios do you consider? Ultimately the worst has to be the first answer, which must be a hard-unplanned Brexit. To date, this still remains a possibility. Next, explore the risks associated with this worst-case scenario that is most likely in your judgement to affect your business.
The risk assessment needs to be done not just at high-level, as a corporate risk/finance function but deep down in the business as well. It’s important to look not just at your own supply chain operations but those of your suppliers. Then from this point, your Brexit Action and Contingency Plans can be formulated.
This may now be very late in the day for those companies who have not done a full Brexit Risk Assessment. However, some useful actions can still be taken and maybe with potential delays, you may have more time than you think.
Hard Brexit: Likely Risk Areas for Logistics.
We at Bisham Consulting have created a ‘Top 6 of Hard Brexit: Concern for Logistics’. This takes a general view of supply chain risks areas to provide some guidance to where action and planning are required.
- MATERIAL FLOW: HOW HARD BREXIT WILL AFFECT LOGISTICS
Restrictions on material flow due to pinch points at ports are widely forecast. Mitigation actions should include considering alternative routes into the EU and avoiding ports at near capacity such as Dover. Consider mode switches from accompanied RORO freight to short sea container routes into Belgium and Holland.
As a mitigant to the potential bottlenecks and the threat they pose to service level, many companies have built up safety stock levels and secured additional warehousing if required. This applies to packaging and consumables, as well as your own component or product ranges. The UK manufacturer’s organisation (Make UK) shows this overproduction to build up stocks in its latest quarterly survey. Longer term solutions could involve changing stock deployment permanently in the supply chain with EU-based businesses holding stock within the UK and UK-based businesses doing the same in Europe. Consideration, again in the longer term, should be given to on-shoring critical supply or re-locating your own-manufacturing within key markets.
- CUSTOMS PROCESSES
There will be a new requirement to make customs declarations and implement new customs processes such as inbound processing relief for transactions with the EU. If this capability does not exist already you will either need to build it internally or buy-in externally from a customs agent or a larger freight-forwarding company, who will also offer this service.
An immediate need, if you ship into the EU will be to obtain an EORI, (Economic Operator, Registration and Identification) number, in order to make customs declarations on-line and communicate to customs authorities.
For RORO traffic the government will implement TSP, (Transitional Simplified Processes) for imports from the EU. This will allow port clearance without the immediate need to pay all duties/VAT in full, as these will be deferred by a month. Application for this is essential if you have EU imports using RORO routes.
Many companies have also considered AEO, (Authorised Economic Operator) registration, which should provide even greater advantages in a post-Brexit world. Registration involves a lot of internal work and potentially external support over many months. However, achieving prioritised clearance, simplified administrative processes and improved security will give AEO registered exporters a clear advantage. Although this is not a short-term solution, at least try to ensure that your transport companies have AEO accreditation already.
It is not just the introductions of trade tariffs for trade to and from the EU, where previously there was none, but also changes to the preferential trading terms we previously enjoyed through our EU membership, which will now lapse. In the immediate future who will bear the commercial liability for these changes and in the longer term what effect will it have on the market?
For VAT the government will try and keep procedures as close as possible to the existing situation. However, it is inevitable that administrative complexity and costs will rise and for exporters into the EU. VAT registration will be potentially be required in every country to which you supply. Whilst goods may still be zero-rated for export, import VAT is likely to apply and although this may be recoverable a cashflow issue may result (It depends on the individual Country rules).
- ACCESS TO SUITABLE LABOUR
Labour and skills shortages in logistics, is already a feature of the logistics industry in the UK. Since the Brexit referendum, it is reported by the CIPD that there has been a 95% fall in EU workers joining the UK labour market. Whilst it is stated that existing EU nationals will be allowed to stay, with a depressed exchange rate, they may not actually want to. There is also the proposed Post-Brexit Immigration scheme for new EU workers requiring a minimum £30k salary. At this level of salary, well above average UK logistics wages; the scheme will be of no help in bridging labour gaps.
General trends in the industry for dealing with labour risk are process automation and robotics. However, this is a longer term and a capital-hungry solution, which could take years to fully realise. Short-term actions to secure labour will need to be based on local wage agreements, incentives and sponsorship schemes.
- REGULATORY CHANGES
One of the consequences of Brexit will be some form of regulatory divergence with the EU. This may generally be more a longer-term impact, however, there are immediate sector-specific risks. Life Science, for example, requires product approval by EU-based agencies for traded products into the EU. Hence, UK based agencies approvals will no longer be valid for EU trade. Whilst some UK agencies such as the BSI are establishing EU registered companies, you may need to source such services in the EU directly. Note products sold within the EU will have to meet EU regulations where they exist.
Regulatory changes also will affect the UK road haulage industry. Hard Brexit means drivers will need ECMT permits and an IDP (international driving permit) to drive within the EU. This has the potential to be very disruptive to the industry.
- CURRENCY RISK
Major changes in the sterling exchange rate are expected in the event of a hard-unmanaged Brexit. Reductions in the €/£ exchange to parity have been forecast i.e. a reduction of nearly 15%. Changes of this magnitude will create major inflationary pressures in the supply chain. This could be from fuel, dollar-priced air/sea freight, general imports, supplies and capital equipment
Hard Brexit and the impact on Logistics: Is it real?
Ultimately, of course, Brexit may not add up to much at all. With a deal in place and a 21-month transition period to help implement any changes how bad can it be? If this is the case a lot of energy and thought, will have been for nothing. It could potentially represent a sort of ‘Millennium Bug Project’ re-visited. But as with all risk-assessment, it’s always about planning for the worse-case scenario.
In any event, you will need to stay up to date with government advice by signing up to regular alerts and visiting the You Gov website regularly https://www.gov.uk As a business you will need to be agile and reactive to deal with any potential changes.
Click here to speak to one of the Bisham Consultants and learn how we can help your business.