How has Brexit & Covid-19 affected the UK supply chain?
It isn’t often that two separate events have such a big impact on not only the whole country, but more specifically the supply chain of UK businesses. For years now, some UK companies have set up centralised manufacturing facilities on low-wage economies where finished goods are assembled cheaply before being shipped to higher income markets. But it looks like the Brexit and Covid-19 double header is going to force companies to reconsider the short-term benefits and long-term sustainability of this low-cost, centralised solution.
One big difference between these two events is that companies had some time to plan for Brexit. It had probably been viewed for a while that Brexit had a high probability of happening, but a global pandemic? I think it's safe to say that nobody had time to plan for this. Either way, both events had the potential to impact every aspect of the supply chain, including labour, increased distribution costs, delays at ports and a shortage of materials.
If you take a closer look at the pharmaceutical industry you can highlight the type of impact these events can have on the global supply chain. When Brexit was announced back in 2016, many multinational pharmaceutical companies adopted a worst case scenario approach to their planning, with the main assumption being that the UK would leave the EU without a deal, leaving trade to revert back to the WTO terms. By planning based on worst case scenarios, these companies didn’t see Brexit as a strategic supply chain risk, but more as an operational issue that they could manage on a day-to-day basis. This way, any other outcome than a no-deal Brexit was viewed as a positive result.
Another thing to consider is that many multinational companies were the fortunate position of having plenty of money in the bank to invest in new supply chain assets across Europe, establishing new qualified personnel and quality control checks on the continent. Aside from money, these large pharmaceutical companies were in a position to put a six week buffer of stock aside ready for the no-deal Brexit, something which has definitely helped to avoid them going out of stock throughout the Covid-19 pandemic.
On the other hand, many small and medium enterprises (SMEs) chose to adopt more of a ‘wait and see’ approach to Brexit, mainly because they didn’t have the necessary financial resources to make supply chain investments before knowing what the future trade deal would be between the UK and the EU. Even to this day, nearly four years later, SMEs are still uncertain as to what the future relationship will be and how to absorb the potential costs that may occur.
Further to this, Covid-19 has significantly amplified the supply chain uncertainty that was created by Brexit. The pandemic has led to production stoppages across the world, including India and Europe, where governments restricted exports of medicines and medical equipment to ensure that there was enough volume to support their own populations. The uncertainty of the future EU-UK trading relationship, coupled with the uncertainty of finding a vaccine for Covid-19 means UK companies now need to prioritise resilience and responsiveness over cost and efficiency.
So where do you start?
Initially, it will make sense for companies to spread risk geographically by sourcing their products and materials from a variety of countries and regions. The decision on which ones to use will largely depend on the trade deals that the UK agrees with countries after leaving the EU, but it is clear that multiple sourcing agreements will be required - especially for any critical materials and components.
Also, companies will need to map out their whole supply chain in order to create end-to-end visibility and identify any bottleneck suppliers. These bottlenecks normally emerge when only one or two suppliers are available in the market, meaning contingency plans will need to be implemented so that production can be quickly moved to other locations when a future crisis occurs.
On top of this, companies will need new key performance indicators that will measure supply chain disruptions. As part of an on-time and in-full delivery metric, companies will be able to track the percentage of delays and shortages from suppliers due to manufacturing disruptions, natural disruptions, such as natural disasters, weather and pandemics, or man-made disruptions like new regulatory regimes, war and border closures. Companies can also track their supplier’s overall time to recover, which is a measure of the time elapsed until a supplier will reach 100% production output following a disruption.
Another important factor after both these events pass will be a transition from a centralised to decentralised manufacturing model. We’ve already seen automotive and apparel companies adopt regionalised manufacturing models where production facilities are located in ‘near-shored’ countries such as Mexico, Poland or Bangladesh, with their products then shipped to larger markets such as China, Germany and the USA. Covid-19 and other disruptions such as Brexit or the US and China trade war will certainly accelerate this trend.
We can also expect to see a lot more products being made locally - closer to customers, with parallel supply chains accelerating this. For example, if we again look at the pharmaceutical industry, a parallel supply chain would mean having say 20-30% of their manufacturing in the UK, with the remaining 70-80% staying overseas using the centralised, low-cost model. This way, when a crisis occurs, production volumes would be transitioned to the UK and if a company expected it to take a few months for production to fully transition, they’d need to hold the same amount of finished goods inventory in the UK.
These parallel supply chains are particularly relevant for companies that provide life-saving products such as drugs, PPR and ventilators. These companies could begin identifying critical drugs that team the symptoms of coronavirus and locating a proportion of the manufacturing here in the UK. The model is also relevant for other industries, such as aerospace and automotive, which have long and complex supply chains.
Advanced manufacturing technologies such as additive and continuous manufacturing are required for parallel supply chains, in order to counteract the high labour costs associated with UK based manufacturing. But by having these localised supply chains, companies will have the added benefit of reducing inventory-carrying costs by shortening supply chains and improving responsiveness to demand.
Considering that multinational companies have adopted a worst-case scenario planning approach to Brexit, we’re still yet to see the same approach has yet to be seen with Covid-19. If these companies believe that another pandemic is likely to happen in the future, or we’re likely to see a second or third wave of this pandemic that will shut down global production, the logical solution would be to start assigning a percentage of the manufacturing in the UK.
The uncertainty of Brexit and Covid-19 mean that companies can no longer ‘wait and see’, and today’s uncertain world will force the hand of companies and ensure new supply chain models that prioritise resilience and responsiveness over low-cost, centralised production will happen sooner rather than later.
