Part 2 in the “SAP Ariba and Deloitte Brexit” series.
In this series of Brexit blogs, co-authored by SAP Ariba and Deloitte, we discuss some of the opportunities and potential challenges that will arise from Brexit – a reality which seems to be accelerating towards us at an ever-increasing rate. Here we look at how technology can support a Plan B for sourcing and contracting as organizations look to mitigate the risk of higher costs and longer lead times post-Brexit.
Understanding the risks and preparing a Plan B
Consider the example of a UK manufacturer with a substantially EU-based supply chain. Currently, products coming into the UK are not subject to customs declarations or tariffs and flow smoothly between EU countries. This may change after the UK leaves the EU (and any transition period), and there are risks of increased costs arising from tariffs, additional resources and processes required for customs clearance, more complex administrative activities, potential divergence in regulatory requirements, and currency fluctuation risks. There are concerns that port authorities, customs officials, and physical infrastructure may not have the capacity to handle potentially significantly increased volumes of customs processing requirements leading to delays at the border. This is likely to require organizations to extend lead times in the supply chain and renegotiate agreements with suppliers to account for changes in ordering timelines. This is not only an issue for planning and scheduling but the end-to-end increase in working capital in the movement of goods and potential increases in demurrage (i.e., “a charge payable to the owner of a chartered ship in respect of failure to load or discharge the ship within the time agreed”) will have implications for cash flow.
So what might manufacturers do to mitigate risk? There are a range of possible strategies, including negotiating with tier 1 suppliers to absorb the increase in tariffs and funding additional working capital to alleviate the challenges around increased lead times. This tactic may spread the risk and minimize cost increases for the customer in the short term but may cause stability issues in the overall supply chain.
Faced with this uncertainty, many sourcing professionals will need to re-examine their category strategies to consider alternative sourcing. Traditional ways of assessing categories will need to be expanded to include the impact of Brexit to identify where procurement strategies may need to be revised to include new suppliers. Early identification of critical parts and suppliers through advanced analytics and new prioritization models will help businesses review their category strategies – including finding alternative sources of supply, such as moving to UK or non-EU alternatives.
Organizations are likely to be under pressure to consider alternative sourcing strategies; however, most organizations are not equipped to deal with large-scale and rapid sourcing events both from the perspective of their procurement operating model or the technology and systems that support it.
Digital supplier networks can assist here by signposting to new sources from millions of preregistered suppliers. The digitalization of supplier relationships enables the sharing of detailed information about capabilities and prices, the automation of transactions and collaboration on risk mitigation and performance metrics. This enables organizations to collaborate more closely throughout the supply chain while also leveraging automation capabilities for increased efficiencies.
Currently, most manufacturing companies do not have best-in-class source-to-contract technologies; however, the automation benefits of e-sourcing can enable organizations to rapidly scale procurement capacity and capability at a time when they will be required to handle a lot of change in a short period of time. For instance, supplier managers and procurement teams can benefit from using libraries of sourcing content to create their requests for information, proposals, quotes, and bids (all encompassed with the term “RFx”), automate discovery of suppliers, establish side-by-side visibility of supplier capabilities for quick and easy comparisons, and automate scoring and scenario analysis for decision support. Technology can support not only rapid deployments of source-to-contract solutions and seamless integration to other business processes, but can also support defining new category strategies, running sourcing events, and constructing new supply contracts.
This type of large-scale resourcing activity could have a profound effect on marketplaces and catalyze innovation by increasing visibility and choice, encouraging data sharing and collaboration.
Organizations need to act quickly, though. There is a limited window of opportunity to look at alternative sourcing strategies. The UK will leave the EU on 29 March 2019 and with the transition period not yet guaranteed, a “wait and see” approach in terms of sourcing could result in organizations needing to take rapid ”emergency” action to mitigate day one risks, which is unlikely to result in the most effective strategies being deployed.
Coping with changing regulatory environments
Regulatory environments could diverge once the UK leaves the EU. Organizations that continue to trade with the EU will almost certainly have to adhere to existing and future EU regulations, as well as UK regulations that may over time diverge, with compliance with two sets of regulatory regimes increasing costs for businesses. There is an opportunity to explore commercial and technical levers to adjust product specifications, identify substitutes, or change demand patterns to lessen costs and increase flexibility. Once again, new technologies can assist procurement and commercial teams to take a broader view of their supply base or, via risk management solutions, provide visibility into potential disruption.
Brexit is coming and with foresight, procurement professionals can be prepared. There will be challenges, but many of these can be managed proactively to mitigate continuity of supply risks or potential cost increases. Conversely, there will also be opportunities for savvy procurement teams to reenergize, renew, or reinvigorate their value chains to take cost out, design new products, and create a platform for the future through the intelligent use of technology.
Join our Webinar, “Integrating Supplier Risk Management into Your Procurement Processes” on Wednesday, October 31, 2018, at 10:00 a.m. GMT / 11:00 a.m. CET.