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08.12.2017Back to Blog

“Brexit”: what leaving the Single Market means for European supply chains

Pierre Liguori, Director of the supply chain consultancy firm, Tokema International, explains in a series of articles how Brexit could harm trade between the UK and continental Europe, create major supply chain disruptions but also opportunities, and impact the logistics industry in the short and long term.

The EU single market is probably one of the most ambitious part of the European project. One of the original core objectives of the European Economic Community (before it became the EU) was the development of a single market ensuring free movement of goods, services, capital and people – apart from eliminating tariffs, quotas or taxes on trade. Known as the “4 Freedoms” and defined by the Single European Act, the common market was launched on January 1st, 1993 giving access to a market of 500 million consumers at reduced cost and limited administrative burdens.

Theresa May confirmed months ago the UK will leave the EU’s single market as she laid out her Brexit’s vision in January 2017: she made clear the Brexit she is pursuing “cannot mean membership of the single market”.

What does it mean in practical terms for supply chains? Exiting the single market would mean losing free and frictionless trade opportunities both for EU and UK businesses: more administrative constraints, customs border implementation, extra paperwork for import and export declarations, no further VAT and customs duty integration – a few examples – will have a direct impact on revenue, cash flow, profit and end to end lead times.

Many companies have started to assess how it may affect their current and future supply chain set-up starting with adjustments to their procurement and sourcing strategy: a recent research of the Chartered Institute Procurement and Supply (CIPS) shows that 63% of EU businesses who work with UK suppliers expect to move some of their supply chains outside the UK, a significant increase compared to May’s survey (44%). The survey of 1,118 supply chain managers in the UK and Europe also shows that 40% of UK businesses with EU suppliers have started to look for domestic suppliers in the UK.

US exporters, who are currently working with UK and EU customers, will have to reassess their current pan-european distribution strategy in the light of these 2 separate markets implementation. Depending on the industry, strategies may vary: global manufacturers with lucrative UK markets will have the ability to absorb additional new tariff costs. In industries with long product cycles like automotive it will be certainly hard to replace current approved, hard-to-find and specialised suppliers who shall be asked to compensate financially part of the Brexit impact or offer new logistics alternatives in the UK at a lower cost. Logistics costs could be also eased with government’s incentives. And some industries like fashion could relocate part of their operations back in the UK.

Another main topic under review is the supply chain hubs strategy: businesses trading across the EU today experience simplicity and have pan-european supply chain operations with manufacturing, stock locations and warehouses designed to optimise cost and working capital and offer consistent and increased service levels. As from March 2019 the UK and the EU will become two separate markets, adding new complexity to businesses planning.

Does it mean the UK must be served from a European hub? Or that stock needs to be held in the UK and in the EU to serve both markets quickly? Or customise stock in the UK when the main inventory is located in the EU? What will be the impact on costs and transit times? Working through these questions and redesigning supply chains would allow companies to build contingency plans but also take a major advantage to their competitors. For example if a new warehouse needs to be implemented in the UK, a good and early planning could avoid a lack of infrastructure availability resulting in higher logistics costs.

Uncertainty – despite today’s Brexit talks’ breakthrough and the expected discussion on the future relationship – creates additional complexity to take the right supply chain strategic decisions.

However uncertainty can also be seen as an opportunity: according to the CIPS survey, 26% of the UK businesses with EU suppliers “are investing more time to strengthen their relationship with valuable suppliers on the Continent”!

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