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Impact of Brexit on Procurement teams
Author: Ankit Kohli
Image courtesy: pixabay
The impending Brexit referendum in June 2016 has become an event of not only national importance, but is now taking shape of an international event that can jolt the economies worldwide. The jury is out and divided on whether Brexit – exit of the U.K. from the European Union – will eventually happen or not, but this question will be conclusively answered only after June 23, 2016.
The impact on larger economy and trade relations of the U.K. with EU and rest of the world continues to be debated, and campaigners from both sides are likely to intensify this debate in the days to come. Of course, in the case of a Brexit, the extent of the impact will depend on the exit terms that would be decided in post referendum discussions between the U.K. and Brussels (EU Headquarters).
It is essential to understand the impact of Brexit on Procurement teams …
In this article, we try to discuss, the possible impact of Brexit on procurement organizations in the United Kingdom. It is certain that different sectors will be impacted in different ways. Therefore, we try to analyze the impact of this decision on sectors that are likely to be impacted more, and how procurement teams at organisations in these sectors can prepare to successfully navigate the upcoming period of uncertainty.
- Supply chain of U.K. manufacturers might get disrupted due to stretched trade relations with EU nations. The supply chains of U.K. manufacturers are deeply integrated with EU suppliers, facilitated by easy and favourable trade terms for EU members under the EU customs union. If a Brexit does indeed take place, the U.K. will most likely move out of the EU customs union, which would mean that 1) U.K. will introduce some tariffs for goods and services coming into the country; and 2) EU will introduce some tariffs for U.K. businesses who want to sell in EU markets. Both the above outcomes will strain the established trade relations between businesses in Britain and the EU, and might force some of these businesses to re-look at their existing supply chains and search for new suppliers.
- Brexit will result in pro-longed and unfavourable trade renegotiation with non-EU countries. As a member of the EU, the U.K. gets access to preferential trading agreements with ~50 non-EU countries. The EU has been able to negotiate these agreements because of the large trade volume it has to offer. However, if the U.K. choses to exit the EU, it will move out of these agreements and will have to renegotiate trade terms with various non-EU countries. The process of renegotiation will be time consuming – taking about six years for every country on average. Also, given a significantly reduced trade volume at U.K.’s disposal (as compared to the EU), the terms of new trade agreements are unlikely to be as favourable as they are right now. This will again put pressure on U.K. businesses who have established trade relations with non-EU countries.
- Weaknesses in the Sterling Pound will hit EU- and international- suppliers hard. Leading investment banks – UBS and HSBC – fear that if Brexit goes through, the EU-GBP exchange rate could come to 1, which indicates ~30% weakness in GBP from current levels. Now, this would mean that EU-based suppliers that export goods or services to the U.K. will see a 30% reduction in their realisations. For U.K. companies who procure from such suppliers, it would create a risk of supply chain disruption as these suppliers might become financially unstable (or at least the contracts with U.K. firms will become financially unviable). Alternatively, these suppliers might decide to pass some of the forex loss to their clients, which would increase the procurement cost for U.K. businesses. Either ways, this would mean significant uncertainty and volatility for organisations who have international suppliers as critical parts of their supply chain.
- Cost of low-skill services will rise. Rampant immigration of low-skilled labour from EU countries is one of primary reason for the Brexit argument. Net migration into the U.K. has doubled to 183,000 per year since 2012. If U.K. exits the EU, it is very likely that the U.K. government will take some measures to cap or restraint free migration of low-skill labour from EU countries. Also, the status of those migrant workers who have been in the U.K. for less than four years and are ineligible for permanent residency will be uncertain. These policies will definitely have a negative impact on businesses that rely heavily on migrant employees for low paying jobs in the fields of cleaning, agriculture, food processing and retail, security, construction, etc. Such businesses will have to source local talent going forward, which will increase the wage bill.
- Business travel will become costlier. U.K. has been a part of the EU single market for a number of years and this has meant very strong business relations between U.K. and EU companies and consumers. According to travel association ABTA, 68% of business visits from the U.K. are to EU countries and 76% of business visits to the U.K. are from EU nations. This symbiotic relationship has been facilitated by unrestricted travel for EU members, which might not be possible in the post Brexit era. If both EU and U.K. enforce visa requirements, business travel will become costlier. The rise in cost, coupled with reduced trade between the U.K. and EU, would mean lower passenger volumes and will have a negative impact on the airline, hospitality and tourism sectors in both the EU and the U.K.
It is time for U.K. businesses to prepare themselves for upcoming volatility
As the referendum nears, it is in the interest of organisations to identify the impact of Brexit on procurement categories and suppliers, and take preventive action wherever required. This would allow them to mitigate any supply chain risks and also leverage any underlying opportunity that emerges during this period of uncertainty. To best prepare themselves for the upcoming period of uncertainty and transition, we recommend that procurement teams take the following steps:
- Analyse various political and economic scenarios that might emerge in case of a Brexit (or the lack of it) and their potential impact on the buying organization’s supply chain.
- Increase visibility into supply chains by identifying all parts of the supply chain that can be impacted by such scenarios (including n-tier suppliers).
- Conduct in-depth business, financial, and sustainability risk assessment of critical suppliers to gauge the impact of Brexit on these suppliers and their contracts.
- Engage with suppliers who are likely to be impacted, and work with them to ensure business continuity irrespective of the outcome of the referendum.
Procurement teams that follow the steps above and deal with the current situation in a structured and planned fashion will be able to eliminate (or reduce) uncertainty and ensure that their supply chains are well prepared for any outcome.