Geopolitics and Supply Chains
This is the challenge for some Supply Chain professionals in Britain and Europe. While a supply network for an enterprise is aimed at achieving a least total cost situation, national governments can take action or reach agreements that may negatively affect an organisation’s supply chains.
Prominent examples in the media through 2018 have been the renegotiation of the North American trade agreement; increased tariffs by the US on steel and aluminium and across a range of items traded between the US and China. Currently it is the impending departure of Britain from the European Union (EU).
The exit negotiations (BREXIT) has centred on the economic issues of access to the single market in Europe, the single customs union and EU trade law, as these drive the flow of goods and services throughout the EU. As the exit agreement has not been approved by the British Parliament, it means that a ‘No Deal Brexit’ is more likely to occur on March 29, with no transition period. Britain’s trading relationship with the EU Member States then comes under the rules of the World Trade Organisation (WTO).
In today’s interconnected world, no precedent exists for a major trading country to remove itself from an established trade structure. So, for affected supply chain professionals, it appears that the ‘rubber hits the road’ to devise, develop, test, implement and make operational a company-wide supply network project in much less than 100 days .
Supply Chain scenario
The scale of supply chain decisions required is illustrated by the scenario that more than 45 percent of goods exported by Britain goes to the EU, whilst 54 per cent of imported goods came from the EU. Within that volume, about 70 percent of British exports to the EU are components used in the supply chains of customers and more than half the EU’s exports to Britain are similarly classed as ‘intermediate inputs’.
The development of global supply chains means that ‘intermediate inputs’ can cross country borders many times, as value is added. So, top of mind is not tariffs being added to the cost of intermediate items, but the cost of delays in the movement of items across borders. Examples of speed in deliveries between the EU and Britain, using road transport and sea ferries, are:
- On the Hook of Holland (Netherlands) to Harwich (UK) service, trucks currently arrive up to 15 minutes prior to departure and 4 km of trucks drive off between 30 and 45 minutes from arrival
- The Port of Dover (which handles about 17 percent of Britain’s trade in goods) has modelled that, based on current truck traffic and time through the port, a delay of only two minutes for each truck in a day would create a 27 km queue of trucks
Then there are deliveries of fresh food:
- Salad greens can be loaded to trucks in Spain on Monday morning and are on store shelves in Britain on Thursday evening
- British retailers can order fresh produce from the Netherlands early in the morning and receive the order by the end of the same day
On March 29, this scenario could finish. Then, there will be insufficient EU haulage permits available for non-EU trucks to cover the thousands of British trucks that currently make about 300,000 journeys to Europe each year (which can be up to 10,000 journeys on a busy day). The likely consequences are:
- Truck movements between the EU and Britain may have to be in EU registered trucks;
- The more than 40,000 EU domiciled drivers employed by British transport companies will likely have to be re-employed by EU transport companies;
- Truck drivers from the EU and Britain will have to carry an international driving license and a passport. Post-Brexit passport checks are expected to be stricter and therefore longer;
- Warehouse space could be scarce and cost more;
- Transport rates between the UK and EU may increase and
- Fleets of UK trucks could be for sale
Even goods from outside the EU could be affected by the Brexit decision. Changes in container shipping routing has meant that the largest container ships are calling less frequently at British ports, with UK bound containers trans-shipped or trucked from mainland Europe.
Additional time taken at borders can also be influenced by non-tariff authorities using their right to inspect and check goods at British and EU borders, with respect to:
- Compliance with trade policies and agreements
- Consumer protection laws and regulations
- Safety regulations
- Sanitary and phyto-sanitary checks to ensure that products are healthy and comply with regulations. This can occur for live animals, animal products and fresh food
But where are these inspections to take place? For 45 years, trucks have been driven, without any checks, from ‘roll-on, roll-off’ ferries at British and European ports towards their destination. Parking areas (and associated facilities) for hundreds (or thousands) of trucks were not required.
Because the Britain-EU trade has a high number of ‘intermediate inputs’ shipments of relatively lower value than finished products, technology is required to automate customs procedures for the high volume of transactions. This has yet to be implemented. Delays in the clearance of goods can also be expected as the many new employees by Customs in both jurisdictions learn their roles and procedures.
Evaluating your supply chains
While there will be a heightened urgency within the affected businesses concerning their deliberations about outcomes of Brexit, the actions required when evaluating and potentially changing supply chains are the same, no matter the timeline. Factors to consider include:
- Supply Network: Mapping the affected supply chains is crucial; identify nodes and links and the roles of logistics services providers (LSP). Identify and evaluate the new rules on supply routes, the role of supply chain hubs, potential bottlenecks, lead times and wait times at border controls
- Supply Planning: Potential impact on the business from increased lead times. On-boarding process for new suppliers and process for ending contracts with current suppliers. Build agility into the planning processes and operations – adapt quicker to issues as they emerge
- Supply Chain risk: Review customer, supplier and LSP risks associated with proposed changes. Co-ordinate proposed changes to the risk profiles of trading parties in the identified supply chains
- Contract risk: Review risks and legal implications associated with the proposed changes on current contracts with customers, suppliers and LSPs. Identify areas of contract re-negotiation and potential liability; also protections within the contracts against uncertainties
- Supply Chain finance: Model the effects of additional cross border administration, changed tariffs and tax payment liabilities on cash flow and margins
- Data capture: Preparing and implementing revised processes for data collection
- Data storage: Requirements for changed rules concerning where and for how long data must be retained
- Required appointments: Procurement and Logistics jobs required under changed operational and regulatory circumstances
- Communications: Advise senior management and parties in the organisation that ‘need to know’ of the on-going operations and implementation processes to meet the revised trading requirements and continuity of business relationships over the transition period
The effect of slowing delivery times and increasing the cost of supply across borders requires new processes, people and systems (and the working capital to support them). This could require a change to business practices, core operating models and suppliers; renegotiate contracts or move some supply chain activities to new locations. If your organisations relies on the flow of imports and exports, then in this modern world, supply chain professionals should prepare for a range of varied scenarios. So, ask yourself what scenarios should be planned?