BREXIT
Contingency plans needed to mitigate Brexit risks
Rather than hoping that the UK government will agree an “11th hour” deal with EU negotiators on transitional arrangements for trade, firms should start to analyse their food and drink supply chains now to identify the opportunities and threats to their businesses, said Professor Alan Braithwaite, a senior adviser to supply chain consultancy LCP, a subsidiary of BearingPoint.
While companies in the food industry – which is expected to be the most economically disadvantaged of all industrial sectors in the event of a hard Brexit, claimed Braithwaite – might be hoping for a trade deal to be concluded with the EU, they need to plan for the worst-case scenario, in which the UK falls back on World Trade Organisation (WTO) rules, Braithwaite warned.
‘Cost waterfalls’
“So, you probably need to chase down some of these chains; look at the value added [parts] and look at the transportation, look at the possible duty impact, do what we call drawing ‘cost waterfalls’ and that will identify margin opportunities; it will identify sourcing opportunities,” he claimed.
Cost waterfalls are a way of looking at how cost builds up with different activities through the supply chain, including aspects such as transport costs, duty and multiple handling costs. “They are really useful as you visualise what’s going on and you can then have a discussion about what the opportunities and options are,” he added.
“Then, you can start to see where there are opportunities to straighten out your supply chain, either by bringing stuff back into the UK or indeed buying elsewhere as, indeed, you can arbitrage on the cost prices elsewhere.”
Part of this process of mitigating the impact for importers would be to provide assurances about the reliability and capacity of new sources of supply, said Braithwaite. “If you are facing the possible need to change at the 11th hour, that is too late. You have got to have rehearsed it. That’s really the entire message.”
Food tariff aspects of Brexit
Braithwaite has worked with Vasileios Kotios, who has been doing a Master’s degree project at Cranfield School of Management. This involved the preparation of a detailed analysis of likely tariff impositions on the food and drink sector, based on the assumption that the UK falls back on WTO terms.
“Relatively few businesses have really rehearsed what the implications [of WTO rules] to them might be,” said Braithwaite. Even if a last minute deal was cut with the EU, this would probably involve detrimental consequences for UK food and drink firms, he warned.
“It will have unexpected economic consequences and also unexpected economic opportunities. If you have taken the trouble to understand your sourcing, your exposure; look at alternative sources, you can identify the mitigation measures.”
There could be benefits under WTO rules for UK meat producers, such as poultry, for example, where tariffs of more than 80% on imports could aid UK producers, he claimed. “With the WTO rules, you’ve got quite a lot of headroom to compete and therefore there would be a margin opportunity,” he added.
Braithwaite advised those food and drink manufacturers and retailers that hadn’t started to review their global supply chains – both imports and exports – to begin soon. “You become a hostage to fortune if you do nothing and don’t have a fall-back position,” he warned.
“It’s not a huge piece of work for a company to chase down its entire end-to-end supply chains. It shouldn’t be a huge investment. As the quote goes: proper planning prevents piss-poor performance.”
