Consultants in Logistics

Brexit Uncertainty: It's not all bad

Brexit Uncertainty: It's not all bad

Following the result of the EU referendum, changes to the management and operation of supply chains has been underway despite not knowing the outcome of the Brexit Withdrawal Agreement. Whilst the challenge has brought Westminster to a virtual standstill, businesses do not have the luxury to sit back and wait. The fall in the value of the pound, the reduced availability of migrant labour, and concerns that supply chains may face disruption have set in motion a range of adjustments aimed at maintaining service and reducing costs.

Accelerated Automation

With the pound down by 15% against the Euro, immigration to the UK for work has fallen and many migrant workers have decided to leave. This is a particular challenge at a time of record employment resulting in greater competition for staff. Incomes are up by 3.4% per annum on average versus CPI index at 1.8%. The resulting upward pressure on wages has sparked renewed interest in automation to mitigate the reduction in the supply of labour. While, for most companies, cost-effective full automation opportunities are limited there are many activities within a warehouse that lend themselves to some form of mechanisation. Whether carousels, pallet stackers, Automated Guided Vehicles for moving pallets, or conveyors to move cartons, thought is increasingly focussed on how machines can replace humans. This means the demand for low-skilled workers is likely to decline while the demand for highly qualified people will grow. Just as computerisation became a critical part of supply chain operations, mechanisation and automation is likely to proliferate even in relatively modest operations.

Increased Transport Costs

Alongside labour costs, the fall in the value of the pound has negatively impacted on transport costs. The price of diesel is up by 18% since January 2016 and, with almost all heavy commercial vehicles manufactured in Europe, the cost of replacing fleets has increased. This pressure on transport operating costs is causing companies to reconsider how their operations are organised. Transport departments are once again reviewing the benefits of dedicated vehicles vs shared-user networks to improve vehicle utilisation and productivity. These factors, as well as renewed focus on technology for better traffic management and to minimise empty running, are generating a competitive environment where only the most efficient delivery operations thrive.

Review of Stock Holding Policy

For organisations dependent upon the free movement of goods to feed production lines, or serve customers, the threat of border delays has been a serious cause for concern. Most have found that the only practical contingency has been to increase stocks. NatWest bank announced they are making an additional £2bn available to companies to support them through Brexit. An increase in working capital, in tandem with larger stockholdings, has placed considerable pressure on warehouse space. Raised demand for temporary storage is forcing companies to review their stockholding policy. Stock can be a safety blanket that covers many ills and when space is freely available it is tempting to retain high stock levels as an alternative to effective forecasting and production planning. Unutilised space also reduces pressure to address slow-moving and obsolete stock, particularly where doing so would mean a hit to the P&L account. Many businesses are now examining their stockholding, identifying product lines which benefit from increased reserves, and taking the opportunity to weed out lines overstocked as a result of ineffective analysis and decision making.

Inbound Movements

The fear of border delays at Dover and Calais highlights the crossing’s critical role in the two-way movement of goods between Europe and the UK, as well as its vulnerability to disruption and the effect on road networks around it. The growth of the tunnel for the movement of freight by truck has doubled in the last ten years. Disappointingly the use of the tunnel for rail freight, in comparison, has remained stagnant and at a very low level. In effect acting as just another ferry operator rather than part of an integrated railway system moving freight by rail across Europe. Any ferry problems in customs clearance are just as likely to affect trucks using the Channel Tunnel. It would appear that European harmonisation for the free flow of goods has yet to be adopted by European rail companies.

Several UK East Coast ports are already investing in additional terminal capacity to meet increased demand. For some companies this is a viable alternative on short sea crossings from Europe. It would be wrong to pretend that freight from Calais could be easily switched to other ports, but the option should be explored.

The Future

The effect of Brexit on supply chains may not be fully understood for some time but those companies viewing the challenge as an opportunity to drive much needed improvements are already seeing the benefits. The silver lining to a potential major economic threat is that businesses are rethinking established methods to develop new and better ways of operating. 

Whilst the short-term future may be uncertain those companies that embrace the challenge are likely to emerge stronger and fitter and ready to embrace whatever the politicians finally agree.

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