SM asks procurement practitioners for their supply chain survival tips – handy for many sources of uncertainty
It’s impossible to predict the future, but that doesn’t mean sitting around waiting… Look around, think creatively and act, ahead of the new EU/UK relationship.
In late February, the UK government reportedly issued guidelines to civil servants in the Foreign Office on terminology for the country’s new relationship with Europe. Out went talk of “deal”, “no deal” and “implementation periods” – even Brexit was not to be referred to “save as an historical event that took place on 31 January 2020”, according to a memo leaked to The Guardian. Whatever the veracity of this story, many businesses will see this as deeply ironic. Most would love to stop referring to the UK’s departure from the EU, but instead it looks set to dominate their strategic conversations for years to come. And from now until the end of the year, as the UK negotiates its new trading relationship, procurement professionals cannot afford to wait before weighing up its impact on their supplier relationships: they need to juggle the potential for radically different tariff regimes with the likelihood of a weakened pound and a supplier base that may be mitigating Brexit by deprioritising the UK as an export market.
“No one yet knows what the results of any negotiations will mean for UK and EU businesses and whether a hard Brexit is still on the cards,” says Duncan Brock, CIPS group director. He describes Brexit as an “ongoing soap opera” in which the process of building and unravelling stock in the face of no-deal scenarios has created a dramatic new dynamic for supply chains.
“Value networks are highly dispersed, agile and last minute,” adds Paul Connolly, independent strategist and policy adviser. “Their effectiveness relies on well lubricated trading arrangements. So Brexit could impact global supply and value chains adversely.”
The fear for all parties is that if politics gets in the way of ongoing frictionless trade, European businesses may switch to mainland European suppliers, while their UK counterparts could experience costly delays in importing components. In the public sector, meanwhile, there is concern that a relaxation of current rules governing procurement in the UK could lock some firms out of the European market.
But these challenges bring opportunities for procurement departments to demonstrate their value and – in some cases – save the day. Businesses that manage supplier relationships with fluidity and flexibility could fail where others flourish, says Brock. And Laura Hobbs, a procurement consultant in the construction sector, says: “The positive spin on Brexit is that procurement is at the forefront and challenged to provide answers to one of the biggest risks in this century.” One CPO we spoke to reported a doubling in the number of procurement staff in the last few months.
Paul Revell, head of commercial strategy at York St John University, says preparing for Brexit has elevated his personal profile as his advice has been sought out – and he’s been able to leverage this to get other projects off the ground. “We can use the new environment as a launchpad to deliver better services, but also to make senior managers acutely aware of the scale and effectiveness of what we do for them. I’ve never felt so important to my senior managers as I do right now.”
SM spoke to practitioners and experts from right across the economy to understand how they are preparing for and mitigating the effects of the year ahead – and taking advantage of the opportunity to reshape their supplier relationships and strategic approaches. Together, their advice forms a survival pack for emerging from the process fighting fit.
Supply chain mapping
It’s always a good idea to know who and where your suppliers are. In the current economic climate, it is mission critical – and that means mapping your operations well below the first tier.
“Now is the time to act,” says Tom Lewers, commercial director at Network Rail. “Truly understand your supply chain in a holistic sense, not just your prime suppliers.
“Procurement talks a good talk about customer and supplier collaborative working. Now is the opportunity to make that shine. Understand where contractual bottlenecks will appear, what new tariffs will be applied, and the implications on margins. The supply chain landscape will change overnight.”
The process is about more than just identifying and mitigating risks among existing suppliers. Undertaken holistically, it can be a way of looking at potential suppliers and thinking creatively about how to fulfil your needs – which could lead to new opportunities. “Some suppliers that were out of reach before, because they were simply too busy, will seek new clients, and some of your key partners will crumble under the new workload,” says Olivier Durand, managing director of consultancy Enabling Procurement. “Agile companies will grab the opportunities, and instead of reacting in panic to the changing situation, they will use it to strengthen their supply chain and identify new competitive advantage.”
Durand suggests using the third and fourth quarters of the financial year to plan market consultations that cast a wide net for potential suppliers. But the exact nature of the mapping you undertake will depend on your sector and the level of investment you can afford. Craig Murphy, supply chain director at international construction business Sisk, said he sought advice from consultants to shape a Brexit strategy, but also followed freely available HMRC guidance.
Among the steps Sisk took was to send suppliers a readiness questionnaire to clarify what contingency measures they had in place and what sort of licences and registrations they might require – such as EORI (economic operator registration and identification) – to deal with alternative customs regimes.
Sisk was pleased with the overall level of preparedness, Murphy adds, but found that suppliers currently importing from the UK were likely to be actively looking into other sources of supply. He also voices concern about the impact on the shipping capacity and transport infrastructure of Sisk’s native Ireland in the event of a no-deal Brexit.
Laura Hobbs, a procurement consultant in the construction sector, says businesses are relying on the function to help them understand and mitigate risk. “In order to do this, procurement functions are increasingly pressured to understand their supply chain. Historically, risk has been passed down the supply chain and little has been understood of tier 2 and 3 suppliers. It is no longer enough to only focus on your tier 1 suppliers, but to interrogate supply and the original manufacturers of the material element of spend.”
The likelihood is that most businesses have had more meaningful conversations with their suppliers over the past 12 months than in the previous decade. But make sure your internal stakeholders aren’t forgotten in the process.
“Work with your finance function and cost centre managers to maintain the balance between quality, service and cost,” says Lewers. “Get on the contractual front foot, engage your internal customers, finance, your supplier base, and become equipped to capitalise on the opportunities that will probably arise.”
“Use this opportunity to keep an eye on external relationships, but put significant effort into internal ones too,” adds Revell. “We need to be responsive to our colleagues who might have sudden and drastic changes in their requirements.”
Some businesses have extended their agreements with existing suppliers, adds Revell, part of a natural tendency to be risk-averse in the face of uncertainty. But while there is nothing wrong with this in principle, he cautions that organisations must be careful not to leave large chunks of business with a particular supplier without putting them through some form of competitive scrutiny. Quarterly business reviews and general category management tools, such as strong KPIs, are essential.
In construction, Hobbs says most clients are willing to discuss where the risk is best managed and with penalties for delay measured in most contracts, this has to be at the forefront of any negotiation.
Tariffs and scenario planning
Tariffs are the aspect of a post-Brexit scenario most likely to keep supply chain managers awake at night. It’s not hard to see why: while plenty of industries are lobbying optimistically for a tariff-free relationship with the EU, this is a fundamental benefit of EU membership, which makes such equanimity with non-members difficult to envisage.
But for procurement professionals prepared to think laterally, there may be another way. Durand recommends buyers read contracts and move them to DDP (delivery duty paid), which means all tariffs are borne by suppliers. “It is surprising how suppliers are happy to comply with this one, but it is not a long-term solution.”
Lewers adds this is a tactic already being deployed by some larger organisations with their smaller suppliers. It comes down to individual negotiation and the relative strength of the bargaining positions between the parties. In one sense, it is a test of whether the relationship is a true partnership or simply a transactional arrangement, but as Lewers points out, suppliers may end up terminating a contract if the impact of a tariff makes it uneconomic.
Hobbs says the construction sector is looking at ideas to mitigate the pressure of increased tariffs on the supply chain. It is pushing for innovation in the review of payment terms and in retention, which could help with cash flow and working capital.
The risks of disruption are significant. Connolly says that after Brexit, a British firm supplying a specific component or service for a German product will have minimising disruption to trading as its primary aim. “If that doesn’t happen, and new regulatory or tariff barriers appear, the market will be disrupted. The German manufacturer might find it harder, more burdensome or more expensive to use the British supplier and be tempted to use a different firm, even a marginally inferior one, located inside the Single Market.”
A no-deal Brexit is a more significant risk still. Dale Turner, a procurement and supply chain director in construction, says his business has engaged with its top 250 suppliers to understand their risks and readiness for all manner of Brexit outcomes. It also holds a ‘Brexit group’ in each operating unit that reports to the UK board to ensure it is adequately mitigating risks.
When no-deal scenarios seemed an immediate possibility, most notably in late 2018 and early 2019, much of the concern among the business community surrounded the potential for freight movement to grind to a standstill as new protocols and documentation requirements saw ports effectively seize up. But John Glen, CIPS economist and visiting fellow at Cranfield School of Management, says the UK’s infrastructure is now better prepared for the shock of Brexit.
Businesses should still devote time to understanding how to complete customs clearance paperwork, he adds, but should also understand all the possible outcomes and what that might mean in administrative terms: “Free trade is great, but if the worst case is WTO rules, consider what that means for your goods, tariffs and customs declarations.”
Patrick Dunne, director of group property, procurement and cost transformation at Sainsbury’s, says the delay has given his business more time to train buyers on tariffs and customs declarations and work with logistics providers to ensure they are also prepared.
As a retailer that already sources from across the globe, Sainsbury’s is well versed in handling tariffs. He says any new fees will just be added to the list of considerations that determine what products it buys and from where. “There will be tariffs that benefit us and those that won’t. I don’t think tariffs will drive sourcing activity, but they will be a major consideration.”
Dunne suggests procurement professionals use this year to scenario-plan for potential outcomes and identify where pinch points may lie. “If you have a critical commodity in your supply chain, scenario-plan different tariffs to see if it becomes uncompetitive. You can start now and do as much as you can to de-risk the change.”
Some businesses have applied for Authorised Economic Operator (AEO) certification – an internationally recognised tool to keep cargo moving by assuring your customs controls and procedures are efficient and compliant.
Switching to a more local source of supply is one way of minimising risk, and may be good for your sustainability and PR efforts too. But don’t assume this is an easy option – aside from the fact closer suppliers may be more expensive, they may struggle with increased demand – or, conversely, may have lost business from Europe which could leave them financially vulnerable.
“Most of the forces governing your supplier portfolio will still need to be reassessed in 2021, but this is also an opportunity for businesses to make a step-change in their competitiveness,” says Durand.
Increased flexibility in supply chains could help level the playing field for smaller suppliers, which ought to represent an overall economic gain. Jim Carter, commercial director, supply chain, at the Ministry of Defence, says the organisation has been working hard to become easier to engage with, and attract non-traditional suppliers. “This helps us draw in innovation, but also improves supply chain diversity and resilience. We are seeing improvement in our SME spend figures, with an increase to 19.3% for 2018/19 compared with 16.5% for the previous year.”
Carter says this has been aided by an increasing emphasis on early market engagement, greater coordination with industry at supplier events and via social media, and the support of strategic suppliers.
While stockpiling has become a dirty word in some quarters, it will always make sense to plan ahead for hard-to-source items. But this is an expensive undertaking, and in many sectors is neither practical not possible: fresh food goods cannot be stored for protracted periods of time, and the UK lacks storage capacity for large quantities of frozen goods.
There’s also the question of past precedent. When no-deal Brexit was on the cards, many businesses effectively wasted time and resources on building reserves that were never required.
But in sectors such as construction, for example, storing goods makes sense – the industry is concerned about timber, for example, as well as mechanical and electrical systems components and cladding, which is already being widely stockpiled.
Sisk’s Murphy says his firm’s specialist contractors and suppliers have been making contingency arrangements including stockpiling and hedging of raw materials and finished products, advanced delivery planning and the acceleration of importation.
Turner adds that where items are being imported, his strategy will be to avoid those ports where there is a significant proportion of perishable goods, which are likely to take precedence over other materials.
Hedging is the high-stakes poker of the procurement world, and it comes in many forms. Some businesses have taken out contracts with fulfilment centres in mainland Europe, gambling on whether they will be needed to take up additional capacity. Others pursue hedging in its more traditional form, taking out long-term contracts on big ticket items such as fuel or as a way to counter currency fluctuations.
“No-one knows what will happen: there are always a lot of variables, and Brexit is just one of them,” says Glen. “You have to decide if you want to take that insurance out or buy or sell Euros. Consider if there’s a rate at which you’d be happy to trade over the next year to 18 months. Be proactive, but realise what you’re doing: you’re trying to predict the future.”
Turner says that to prepare for inflation and exchange rate fluctuations, his business has been establishing the value of each bid that is subject to currency fluctuations, and then either ensuring the supply chain has identified and priced in this currency risk or mitigated it through a hedging mechanism.