If no deal is agreed, businesses which trade with the EU will need a solid Plan B – aka a shadow supply chain strategy, says Paul Martin, KPMG’s UK Head of Retail.
Headlines swirled like leaves in an autumn storm after Transport Secretary Chris Grayling recently urged Britain to produce more home grown food to avoid post-Brexit price hikes. But beyond the quips about Spam fritters and Keep Calm and Carry on Digging Your Allotment, his comments highlighted an urgent business concern. How do we keep the shelves full and our customers happy if frictionless trade with the EU disappears?
The food and clothing sectors would be particularly hard hit in this scenario. We recently demonstrated the impact of World Trade Organization tariffs on the price of the Great British Breakfast. And a two minute delay in customs processing at Dover would cause 17 mile tailbacks: up that to eight minutes and they would stretch all the way back to Essex. Not great if you need fast fulfilment of that dress your customer saw today and plans to wear tomorrow.
What can businesses do to avoid this double whammy of higher costs and compromised delivery times? Speeding up border crossings by achieving trusted trader status would help. So too would understanding and managing customer expectations. But given that some 70 percent of the UK’s food and drink imports come from the EU, the fundamental question is: ‘does my supply chain have the capacity to cope with the disruption Brexit may bring?’ If the answer is no, consider developing a shadow procurement and supply chain strategy to cover all your bases.
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Knowing your business inside out
Step one: fully understand how your supply chain works at every stage – where every last ingredient or component comes from. Assess where any Brexit vulnerabilities lie in terms of delays, costs and availabilities, up to and including your key suppliers (and their suppliers). And be clear on how your products get from A to B - do you move the products or is it your suppliers or third party logistics providers?
Then comes the shadow part. It’s about building valuable new relationships: holding concrete preliminary talks with that potential new fruit supplier in a country with which you haven’t previously had links. Or tracking down a garment factory further afield that may be able to match the short turn-around you’ve come to expect from your suppliers across the Channel.
You don’t have to sign on the dotted line immediately. But scoping out initial agreements is vital – as is honesty about when you might act and how. Some suppliers might require a level of reassurance to seal the deal: a retainer perhaps – or a guarantee that you will purchase a pre-defined percentage of products. All worthwhile investment to seize the competitive advantage.
In an industry where margins come finely shaved, that extra penny in the pound you’ve saved on olive oil from an EU producer, rather than buying a slightly more expensive version from a non-EU source, would be totally wiped out if 50 percent tariffs suddenly applied. Better perhaps to move now and have your supplier safely bedded in?
Let’s also not forget the burgeoning role of domestic suppliers – the ultimate tariff-free source. The UK might not be your first port of call for olive oil, but increasingly for other products which we now unthinkingly source from across the Channel. Farmers could decide to increase maize planting, for example, to replace the approximately 1.2 million tonnes we currently import from the EU.
Likewise, don’t be surprised if we see a surge in locally-manufactured fashion: in some cases, part of a wave of manufacturers ‘Brelocating’ to beat the tariffs and border delays —and meet their customers’ taste for instant gratification.
Walk into a supermarket a few years from now and the offering on the shelf could be subtly different – reflecting a new, more local, merchandising mix. I’m also told that home-grown rabbit is making a return to restaurant menus as an alternative to chicken, an increasing share of which is now imported. A nice example of businesses putting a Plan B into action, while still sating their customers’ appetite. I’ll raise a glass of South Downs’ finest sparkling white to that.
Brexit: A catalyst for businesses to reset their futures.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders