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December 17, 2017
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Modeling the impact of Brexit on the supply chain

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Companies are facing a lot of uncertainty as they wait to see how the U.K.'s vote to exit the European Union will affect trade agreements. Scenario planning, however, can help them better prepare for all possibilities.

The United Kingdom's (U.K.'s) vote to exit the European Union (EU), popularly known as "Brexit," will have wide-ranging political and business implications. If and when Article 50 of the Lisbon Treaty (which sets the process for exiting the EU) is triggered, many companies will need to re-examine their operating models and how they do business in a post-Brexit world.

Accomplishing this, however, will not be easy, as no one is certain what the U.K.'s trade and mobility policies will look like in the future. Following a U.K. exit from the EU, trading terms for imports and exports may need to be revised. These changes could come in many forms, including: a value-added tax (VAT), trade tariffs, customs processes, and more. Products that used to be simply loaded on a truck and transported throughout the EU could be subject to filing declarations at each border, increasing compliance costs and delaying shipments.

With so many moving parts, supply chain executives are faced with a range of questions:

  • Where is the best place to locate a central logistics hub?
  • What are the costs, risks, and implications related to the location of supply chain assets?
  • How will customs and compliance costs be affected?
  • What is the potential impact on warehouse locations and investments?
  • What could be the effect on workers and their human resources strategy?
  • How would new regulations affect products and services?

While there are no definitive answers at this stage, forward-thinking organizations are already taking steps to prepare for some of the short- and longer-term impacts and opportunities that Brexit might create. This includes looking at their exposure to currency fluctuations, what their organizational structures should be, and where they should locate their people.

As companies work on their strategic plans for the year ahead, they must undertake scenario planning for the impact Brexit will have on their supply chains, regulations of goods and services, financial exposure, and more. Scenario planning on the impact of Brexit can be complicated, as many supply chains are designed with tax efficiencies in mind. With potential changes to trade agreements, companies may have to re-examine where they are placing their assets and performing certain operations in order to minimize their tax exposure. A data-analytics modeling platform should be developed that processes available duty and trade data on the current cross-border movement of goods into and out of the U.K. The platform should then apply this data to a number of likely post-Brexit trading models to demonstrate the trade outcomes and impacts of the various models. For example, Norway and Switzerland are prosperous countries with thriving trade agreements that could provide a model for the U.K. Another option is Singapore's free-trade policy, which some believe the U.K. should follow while also using the World Trade Organization's agreements for guidance.

The modelling platform should display the potential trade agreement scenarios within one centralized dashboard, incorporating trade flows; trade partner countries; and import, export, duty, and compliance changes. This would deliver a clear, visual output that reveals where any potential risks are and highlights where to focus priorities.

By using such an analysis, companies can develop a plan to improve their supply chains. They will be able to determine how the operational impact of Brexit could lead to alternative business models around sourcing, as well as identify which trading countries could be more strategic than others.

While there are many uncertainties, one thing is clear: Disruption in the supply chain is here to stay, and Brexit is only its latest form. To get ahead of potential challenges, multinational companies have to come to terms with the laws and regulations in each country. The winners will be those that plan ahead and have a firm grasp of each element of their supply chain. Is your company ready?

Author's note: The views expressed are those of the author and do not necessarily represent the views of EY.

Glenn Steinberg (glenn.steinberg@ey.com) is a principal in the Advisory Services practice of Ernst & Young LLP, where he serves as the EY Americas Supply Chain & Operations Co-leader.

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