By Richard Cutcher, research and development manager at Airmic, and author of Airmic’s recent report Complex Supply Chains in a Complex World.

The spread of globalisation throughout the twentieth and early twenty-first century has made businesses more international than ever before – from a giant multinational operating a complex web of suppliers and contractors across the globe, to a small regional manufacturer reliant on a multitude of ‘just-in-time’ parts arriving on a weekly basis.

The UK’s departure from the European Union will provide the ultimate real-life stress test to the supply chain resilience of thousands of businesses on both sides of the English Channel. Any interruption could cause an array of problems – from loss of revenue and reputational damage, to breach of contract, loss of market share and damage to stock price.

Cost, timing and resilience

Whether Britain leaves with or without a deal, Brexit is likely to test supply chains from three angles. The first is cost: supply chains will almost certainly be impacted by changing tariffs, taxes and exchange rates, as well as costs related to contingency measures such as stockpiling.

The second is timing: customs bottlenecks and extra bureaucracy means businesses will need to factor in longer lead times and potential shortages of key parts. This will have a particular impact on businesses with a just-in-time supply model.

The third is supplier resilience: the CBI has warned that many small and medium-sized businesses (SMEs) are not sufficiently prepared for Brexit disruption. Many large businesses are reliant on SMEs within their supply chain and could be indirectly impacted if there is a spike in Brexit-related insolvencies.

Complex supply chains, complex world

Globalisation and an increasing emphasis on cost optimisation have resulted in more complex supply chains with larger footprints. Meanwhile, the inter-dependency of multiple suppliers adds a further layer of complexity.

According to Toyota Motor Company, one passenger car contains approximately 30,000 parts. These are provided by a multitude of suppliers, who may in turn rely on common elements. Steel, for example, is present in many of the parts that make up a passenger car. The UK is a significant exporter of steel (see Fig 1) and a disruption to supply has the potential to disrupt certain locations of engine production or motor vehicle body production, depending on global trade flows and procurement patterns.

Businesses trying to unpick how Brexit may affect their supply chain will have to have a thorough understanding of a complex web of supply networks. The role of the risk and insurance professional should be to work closely with business continuity, procurement and supply chain managers to evaluate and manage the risks inherent in the supply chain. Their skills and knowledge in risk management and financing will be vital to ensure the supply chain remains resilient, and the organisation is fully informed of the risks it is exposed to, as well as the contingencies in place should something go wrong.

Examples: automotive and steel sectors

As an example of potential disruption, Figure 1 shows the top importers of steel from the UK. Being part of the European Union’s single market system, the steel produced in the UK is mainly exported to the other EU member states, namely Germany, France, Ireland, Spain and Italy.

When the UK leaves the EU, tariffs may be imposed on steel trade with the UK; this could potentially drive up manufacturing costs across industries because steel is integrated across several different value chains. The potential shift in trade patterns could signify a change in exposure footprint for certain suppliers or new vulnerabilities emerging for an insured or insurer’s portfolio.

Figure 1: Top importers of steel from the UK.

Disruption to the UK automotive supply chain as a result of Brexit is expected to be complex. As with steel, more than half of car exports go to the EU but supply to manufacturers is exposed as well. On a single day, there are 1,100 lorries originating from the EU that deliver UK car and engine plants, and components worth £35m delivered just in time.

Figure 2: A single day in the UK automotive industry

Source: The Society of Motor Manufacturers and Traders (SMMT)

Once produced, the industry’s supply to its customers has the potential to be disrupted by sudden tariffs. A +10% tariff on exports is expected to cost the sector £1.8 billion in costs, while a +10% tariff on imports will add £2.7bn in costs. Delays at the border will also slow down deliveries and stifle production.

Toyota announced in August 2019 that it had already brought forward “a couple of days extra inventory” in preparation for a 31 October Brexit and said it plans to halt production on Friday, 1 November to minimise disruption before restarting on the following Monday and Tuesday.

Be prepared, proactive and creative

Preparation will be key, and evidence from the Airmic community suggests that businesses have been proactive and creative in the measures taken to inject resilience into their supply chains ahead of Brexit.

However, there are a vast number of unknowns, especially if Britain exits without a deal, and businesses should be continually reviewing their supply chain resilience and business continuity measures in light of Brexit developments. The following check list, taken from Airmic’s recent report, Complex Supply Chains in a Complex World, suggests key factors to consider:

• How important is your business to your suppliers’ business?
• Are they your only supplier of that product?
• What contingency plans does the business have should there be an interruption to existing supply in raw material, transportation and logistics etc
• Have you integrated risk management processes into your supply chain management approaches?
• What is the impact to your revenue should the supplier / supply chain be interrupted – impact on customers, reputation, revenue?
• Have you fully mapped your critical supply chains upstream to the raw material level and downstream to the customer level?
• Have you integrated risk management processes into your supply chain management approaches?
• Do you have routine, timely systems for measuring the financial stability of critical suppliers?
• Do you understand your Tier 1 production facilities and logistic hub exposures to Brexit-related disruption?
• Is supply chain risk management integrated into your enterprise risk management approach?
• Do you record the details of supply chain incidents and the actions you have put in place to avoid future incidents?
• Do your Tier 1 suppliers have business continuity plans that have been tested in terms of their viability?
• Have you provided risk training to your supply chain management team?
• Is risk on the agenda at performance meetings with your strategic suppliers?

Source: Sedgwick International UK

This article is part of the FERMA/AIRMIC joint Brexit Newsletter which is designed to give risk professionals unique insight into Brexit related risks and mitigation strategies. 

Related articles from the FERMA-Airmic Brexit newsletter:

Opinion: Uncertainty declines but Brexit continues to hurt UK and EU economies

Brexit: An Interview with Coca-Cola European Partners

Preparing for Brexit: EIOPA’s approach

Access all the other articles from the FERMA-AIRMIC Brexit Newsletter