Brexit may create uncertainty in an organisation’s supply chain but by taking a strategic view of their strategic relationships as whole, risk managers can offer true value to their organisation argues Suki Basi of Russell Group.

A significant period of time has elapsed since my previous article in this newsletter on the impact of Brexit on supply chains back in 2018. Yet, the level of political volatility that has occurred in British politics in the time since then is enough to last a decade. Over the course of one year, we have witnessed Article 50 being extended multiple times, a prime minister resigning and a general election.

While the United Kingdom may have formally left the European Union there is still a huge amount of uncertainty, particularly as the government tries to negotiate a free-trade deal with Europe and adjust to life outside the single market.

In 2019, the European Union was still Britain’s biggest trading partner with Britain importing £265 billion ($343 billion) and exporting £170.6 billion worth of goods to the EU in 2019. In comparison, Britain imported £236.5 billion of non-EU goods.

Government proposals causing concern

For risk managers and procurement managers, Brexit is still the biggest threat to their organisation’s supply chain. This threat was further exacerbated by the government’s recent announcement that import controls on EU goods at the UK border will be introduced after the transition period expires at the end of this year.

Under this new proposal, traders in the EU and UK will have to submit customs declarations and be liable to goods checks at the UK border. A move that is to replicated at the EU border too.

Many business associations have voiced concerns about this proposal.

Just-in-time supply chains

Import controls would introduce significant delay into many organisations’ “just-in-time” supply chains, whereby parts are delivered into the factory at the point of use. Such a proposal would have an adverse effect on some industries, such as automotive and aerospace, because the parts needed in the manufacturing process within these industries are expensive to house and keep.

For example, Airbus – which is now the largest aerospace manufacturer – employs more than 13,500 people in the UK, with 6,000 at its site in Broughton, Flintshire.  A further 110,000 supply-chain jobs depend on its operations, which have an annual turnover of £6bn.

Airbus relies on seamless border controls to allow it to import the needed parts to develop its aircraft. Imagine, if in the event of import controls, Airbus had to delay production because the required fuselage was delayed at the border because the driver forgot the correct paperwork? The reputational and financial impact because of the delay would be severe. While there is a huge amount of uncertainty for organisations in understanding their supply chain risk, however, there are things that can be done.

How to track your suppliers’ suppliers?

Our conversations with risk managers and their (re)insurers have made it clear to us that having a granular view of your supply chain – understanding your suppliers and suppliers of suppliers down to multi-tier level – is simply not feasible without an army of people constantly monitoring what, in extreme cases, can be many tens of thousands of small suppliers.

Instead, risk managers should take a more strategic and holistic view of their trading partners and concentrate on evaluating both the risks and opportunities attaching to those customers and suppliers where the most financial impact is likely to be apparent. In addition, larger companies with reservoirs of more connected data should be more transparent and easier to monitor and have their risks quantified by risk managers that have access to the right tools.

Once the connectivity is understood the contagion impacts of likely events can be more readily accounted for, quantified and modelled. From this high-level starting point, over time, this data set could then be enhanced to model peak risk accumulations that take into account more layers of the supply chain. By taking such an approach, risk managers can readily add significant value to their organisation and help protect the balance sheet from any serious losses.

For more information on managing the supply chain including specific advice about Brexit, download Complex supply chains in a complex world, an Airmic Guide to managing supply chain risk & insurance.

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. 

Read related articles from the FERMA-Airmic Brexit newsletter:

Cross border disputes post Brexit – will there be an increase in arbitrations?

Update on Solvency II since Brexit day

London Insurance Market looking to expand international trade relationships, says IUA

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