Duncan Brock discusses strategies that resource-limited SMEs can use to tackle potential disruption to their supply chains following Brexit.
This is a testing time for UK supply chain managers. Brexit and the wider trend of de-globalisation are threatening to significantly alter supply chains across the globe.
For SMEs especially, there is cause for concern, but it is important to keep a cool head. While there is uncertainty ahead, there is also opportunity and there are steps you can take to minimise the impact Brexit could have on your business and supply chains.
Understanding best practice and being aware of the possible risks ahead and building resilience will be vital in shoring up supply chains for the uncertain times ahead.
The EU referendum has shaken many business assumptions that strong European relationships and tariff-free trading will continue to be the norm. Small businesses who have come to rely upon a handful of suppliers to support their operations are suddenly unsure about the endurance of these relationships.
New tariffs may put strain on existing contracts, changing regulatory frameworks could affect products, and new border controls threaten to slow and complicate international trade. Tackling this issue is difficult enough for large corporations with hundreds of suppliers, but when every deal, however small matters, then the stakes are so much higher.
But it’s not all doom and gloom, as there is always opportunity interwoven with risks, and when assessing the future, every SME should consider the following seven factors.
Perform a supply chain audit
Despite the potential offered by onshoring, no business is an island. Even short domestic supply chains will inevitably rely upon a supplier or a client who is more affected by Brexit than others. So, it is more important than ever to drill down into your supply chains to discover any potential issues or complications with suppliers further down the line.
Do you work with a business that has a large international supply chain perhaps? These difficulties have been demonstrated in the recent Tesco price rows with suppliers. In October, the supermarket stopped selling products from Unilever because of a price row rooted in currency fluctuation.
Unilever faced higher costs with the fall in value of the pound, and attempted to increase wholesale prices to compensate. Popular products, including Marmite and Pot Noodle were removed from shelves after the pricing dispute. A similar situation recently surfaced with Heineken, which resulted in Tesco pulling 24 out of 53 Heineken-branded products they had previously stocked.
Performing an audit of the businesses further up and down your supply chain will help you understand not just the pressures your business is under, but also the pressures your customers and suppliers are under. This will help you to anticipate problems before they occur and build more robust contracts that can weather future unexpected cost pressures.
Prepare for renegotiation
Small businesses are often suppliers to larger businesses, which can be a slightly intimidating situation for those smaller players. As the impact of the weak pound makes its way through supply chains, SMEs must feel confident in making their case for their own rising costs, and hone their negotiating skills to deal with the likelihood of pricing disputes, which are already starting to emerge across the UK, post-Brexit.
One way to do this is through open-book accounting. Open-book accounting can be used as a tool to improve trust in the buyer-supplier relationship. The buyer, when asking for a supplier to share their cost breakdown, should give assurance that the reason they take this approach is that they want the supplier to make a profit too.
So, the supplier can remain in business in the long term and the partnership between buyer and seller can continue. SMEs must invest time and effort in building an open, honest and trusting relationship with their suppliers. That way, each side can work closely together to increase market shares on both sides.
A currency hedging strategy is another option that may be worth considering. This will not be the perfect option for all and can be costly, but if used correctly it can help to smooth out the impact of currency fluctuations. It is always worth agreeing baseline exchange rates in contracts with suppliers. Again, knowledge and flexibility are key.
If you are aware of the different currency exposures across your supply chain you may be in a position to re-negotiate prices during currency fluctuations and this can go a long way towards mitigating risks. Currency hedging is not a long-term solution, however. A more prudent strategy is to adopt ‘natural hedging’, which is carried out by balancing selling and purchasing in the same currency.
Adhering to standards and best practice
Closely following supply chain standards can provide greater efficiency, improve speed and ultimately deliver a higher quality of product. Building sustainability into supply chains would lead to greater stability for SME manufacturers. Using the CIPS Sustainability Index (CSI) gives organisations, including SMEs, the confidence that their suppliers are adhering to standards by benchmarking their activity.
Increasingly, SMEs, and not just corporates are under pressure to act ethically, as the alternative is damage to business and reputation. A code of ethics and strict adherence offers the competitive edge that SMEs need to respond to the challenges and opportunities that Brexit may bring, as this new world requires constant vigilance.
Adopt multiple sourcing strategies
Contingency planning for different outcomes is paramount. One way to do this is by having more than one supplier for the most important parts of your supply chain. It is impossible to predict where trade deals might occur or where currency volatility will lead, hence the need to source the right research and data for your business to make an educated guess.
Multiple sourcing spreads this risk, by ensuring you have access to more than one supplier at any one time, and will help avoid the risk that comes with industrywide disruptions. The availability of advanced technology, which helps keep track of various suppliers, means multiple sourcing is now a relatively simple process, and accessible to most SMEs.
Invest in supplier relationships
Now, more than ever, it is important to maintain healthy relationships with your suppliers. There is no doubt choppy waters are ahead and being able to talk honestly and regularly with your suppliers will make your life considerably easier. Building a strong level of transparency between yourself and suppliers will ensure that you understand each other’s concerns and can plan for the future.
In the short-term, at least, Brexit will make doing business with Europe and much of the rest of the world more complex and more expensive. As a result, many businesses have started looking for more local suppliers. This in itself presents a unique opportunity for UK SMEs.
While previously, large UK organisations may have looked abroad for suppliers, an increase in trade tariffs could encourage supply chain managers to shorten their supply chains, looking for UK SMEs to fill the supplier gap. This puts UK SMEs in a great position to work with those larger organisations that may have previously gone abroad.
Plan, don’t panic
Brexit is an intimidating prospect for all businesses with the great uncertainty it brings, but even more so for SMEs. However, by taking the steps outlined in this article, you can mitigate the turbulence of the next few years. With a robust supply chain that is under control, SMEs can look to benefit from Brexit and not just experience the inevitable challenges.