What will your Supply Chain look like after BREXIT?

What will your Supply Chain look like after BREXIT?

 

The first quarter GDP figure for the UK stood at 0.3% growth. This compares to 0.7% growth in the last quarter of 2016. The Bank of England had expected the figure to be 0.6% so the fall is significant. In France growth also stood at 0.3% while Spain stood at 0.8% both above forecast, whereas the US came in below forecast at 0.7%. It is likely that there are stormy waters ahead according to most economic forecasts. Disruption is a reality for modern business in the normal course of operating. However, the UK has added to its own uncertainties and increased risk following the BREXIT vote in June 2016. Here I outline some of the factors that will add to uncertainty in the months ahead and identify some likely supply chain winners and losers.

Higher inflation is expected at 3% or above by the end of 2017 (Bank of England forecast 2% for 2017), the volatility of UK currency and the decline in consumer purchasing will all have an impact on the British Economy in the months ahead. The period of instability is likely to last for the medium term as the trade terms of BREXIT are negotiated between the current EU members, the rest of the world and the United Kingdom. Nevertheless, some sectors are doing better than others so the picture is not necessarily negative. In manufacturing, textiles, machinery, transport, wood and pulp as well as electronics and other manufacturing the UK is doing relatively well. Food and drink shows a very small decline while other categories including rubber and plastics, electrical equipment and metals show larger falls. The biggest fall is in pharmaceuticals approaching -8%. The key for longer term prosperity will be how the mix and balance of exports and imports change the make-up of UK GDP. Sectors selling more than 30% of their output in export markets have seen a 2.6% increase in growth in the first quarter of 2017. These sectors include transport and machinery. This is not all due to a weakening pound since BREXIT. It is also due to an increase in world-wide market activity in the first quarter of 2017.

Between January 2017 and February 2017, export prices decreased by 0.5% and import prices decreased by 0.9%, with the value of sterling increasing by 0.8% in February 2017 compared with the January 2017 average. However, it remains 10.4% lower when compared with February 2016. (Source: ONS data).

In 2015, the UK recorded the largest current account deficit among the G7 economies at 5.4% of GDP. UK exports grew faster than world exports in 2015, for the first time since 2006. Within this the UK has seen increased trade activity in goods with non-EU countries, with their share exceeding that of EU countries in the last four years. Trade with non-EU countries continues to grow as a proportion of the total. The recent fall in the pound has seen some export categories increase trade while import costs have risen. There has been a slight rally in the pound against the dollar and the Euro since the announcement of a General Election on 8th June 2017. Most commentators opine this is due to the removal of some uncertainty regarding BREXIT. Although, the initial meeting between Prime Minister May and EU Commission President Jean-Claude Juncker at Downing Street did not go smoothly according to reports. It is unlikely to be plain sailing. It will be interesting to see what happens if there is a hung Parliament with no overall majority for any single party. Most people think this unlikely but who knows, opinion polls do not have a good track record when it comes to predicting the British electorate and choices they make. Opinion polls for BREXIT were not a good indicator for what actually happened. More indecision by any Government would increase uncertainty and risk for the British economy.

Table 1 shows the monthly change in volumes by category for imports and exports for both EU and Non EU countries. It shows that most export categories moved upwards apart from semi-manufactures and food to the EU. Consumer goods other than cars as well as chemicals were major exports to the rest of the worlds. Basic material imports with the EU fell while they increased by  23.4% with the rest of the world. It is possible that firms are already increasing forward purchasing to offset currency volatility but the data set is too limited to be sure. Other consumer goods from the rest of the world fell by 11.1%. Car imports rose by 14.4% from the rest of the world and by 2.2% with the EU.

Table 1: Shows Monthly change1 in goods commodity volume, February 2017
EU countries Exports % change Imports % change Non-EU countries Exports % change Imports % change
Food, beverages and tobacco 0.9 0.0 Food, beverages and tobacco 0.9 0.9
Basic materials 1.2 -3.2 Basic materials -7.3 23.4
Semi-manufactured goods; of which -0.9 0.0 Semi-manufactured goods; of which 0.0 -2.0
   Chemicals -4.3 -3.3    Chemicals 5.0 -9.8
Finished manufactured goods; of which 1.6 4.7 Finished manufactured goods; of which 1.0 -2.8
   Cars 2.9 2.4    Cars -7.4 14.4
   Consumer goods other than cars -1.6 4.0    Consumer goods other than cars 12.0 -11.1
   Intermediate goods -0.9 5.5    Intermediate goods 5.8 0.0
   Capital goods 1.7 0.0    Capital goods 1.0 -0.9
Source: Office for National Statistics
Notes:
1. Monthly change is February 2017 compared with January 2017.

There will likely be a turbulent few years as trade terms across categories and countries change as result of the complexity of negotiations. Supply chains will need to readjust to new trade patterns, sourcing trends and shifting economics. This is no time for complacency. If you want to stay ahead of the curve your supply chain will need to be agile.

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Doing the right thing for a sustainable future – 2020 vision is the new supply chain imperitive

sustainability

Poster courtesy Penn State 

Doing the Right Thing, Doing Things Right: Sustainability and Supply Chains

Effective organization requires a focus on doing the right thing. Supply chains are at the center of global trade. Efficiency has been a key focus to improve profitability across the supply chain. This requires organizations to do things right with a focus on lowering supply chain cost. This is of paramount concern to ensure that operations are as efficient as they can be. However, it is only one side of the coin. There is a corollary to this which is that organizations have to do the right things to manage their supply chain effectively. As I say in my Supply Chain Strategies book “Organizations need policies, procedures, and systems to deliver effectively. These three factors need to be sufficiently flexible to respond to the customer if they are to be effective.”[1] It is incumbent that organizations have 20:20 vision and not myopic vision when it comes to both doing things right and doing the right thing.

Those managing end to end global supply chains have an enormous responsibility to preserve and sustain natural resources for future generations. The scientific evidence informing global warming due to human intervention is convincing.

scm-book-cover“The concept of sustainable development has been debated since publication of the Brundtland Report (1987) and the Rio Declaration (1992) following on from the Earth Summit in the same city in 1989. The Brundtland Report noted that ‘critical global environmental problems were primarily the result of the enormous poverty of the South and the non- sustainable patterns of consumption and production in the North’ thus, making the distinction between the developed and developing world. It called for a strategy that united development and the environment, which is now described by the common term sustainable development (World Commission on Environment and Development, 1987).” Hines (2014:323)

Policy Measures

The Rio Declaration (1992) and the Kyoto Protocol (1998) called for action on production patterns that showed increasing toxic waste emphasising the need for renewable energy sources, recognising a growing shortage of water and calling for more sustainable public transport systems.

The largest emissions of greenhouse gasses (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride) and two gases arising from these, hydrofuorocarbons and perfluorocarbons, come from emissions in the industrialised countries of the USA, EU, Russia, China, Japan and India.

The Stern Report (2007) noted that irreversible damage was being caused to the natural world and the ecosystem. It was estimated that there were 30,000 major dams preventing flooding of fertile land to sustain food production for an ever growing global population; in 1750 there were none of any consequence.  As indicated in my book:

 “Water usage has increased from around 1,000 km 3 per year in 1900 to nearly six times that quantity by 2000; fertilizer consumption has increased from a zero base to 300 million tonnes in the same time- period. There are now over 700 million motor vehicles where there were virtually none at the start of the twentieth century and CO 2 emissions have risen by 22 per cent between 1980 and 2000. Furthermore, since 2000 they have tripled over the average from 1990–99.” Hines (2014).

While governments can do much by setting a policy agenda the practice is part of everyone’s responsibility to do as much as we can by doing the right things. We do so in small ways in our domestic lives by recycling waste materials. However, if we manage organizations and especially large organizations we are able to do much more.

Practice

Interventions at every stage of the supply chain can contribute to a better world, one that is sustainable in the sense it is defined in this paper. Establishing and maintaining governance throughout each of the supply chains managed is the starting point. This ensures that partners in the network have a responsibility to be compliant in order to maintain their place in the organization supply chain. This has a dual function to educate and to raise supply chain standards that will achieve a sustainable future. The critical role of first tier suppliers has been identified as an agent of change to achieve this.[2] This may be limited by the resource availability of the lead organization, their abilities and commitment to the ‘triple bottom line’, the power they have to exert on the lower level suppliers and their alignment of the procurement and purchasing activities with sustainability.   Some have argued that it needs to go further than compliance to commitment. [3]

Sourcing strategies need to balance the twin aim of being efficient by lowering cost to ensure profitability but not at the expense of sacrificing sustainable futures if it requires doing the wrong thing. In our changing world customers and consumers are becoming more aware of the need to manage end to end supply chains effectively to be clean, green and sustainable.

Recent research has identified a supply chain position paradox [4]which effectively means that those organizations further down the supply chain that is those closer to the consumer are more likely to invest in supply chain sustainability. One important reason for this is that these organizations are more visible to consumers and are more likely to receive a backlash from them.

Sourcing and procurement strategies have a central role to play in establishing criteria for sustainability. These strategies are closely linked to ethical trading arrangements. If supplies are to be procured from countries where their governments are less concerned with environmental standards and working conditions it cannot be right for global firms to exploit this situation in pursuit of profit alone.  There is a moral obligation to do the right thing. A point made over 250 years ago by Adam Smith. [5]

  1. Hines, T., Supply Chain Strategies: Demand Driven and Customer Focused2014, New York: Routledge.
  2. Wilhelm, M.M., et al., Sustainability in multi-tier supply chains: Understanding the double agency role of the first tier supplier. Journal of Operations Management, 2016. 41: p. 42-60.
  3. Foerstl, K., et al., Drivers of supplier sustainability: Moving beyond compliance to commitment. Journal of Supply Chain Management, 2015. 51(1): p. 67-92.
  4. Schmidt, C., G., K. Foerstl, and B. Schaltenbrand, The supply chain position paradox: green practices and firm performance. Journal of Supply Chain Management, 2017. 53(1): p. 3-25.
  5. Smith, A., The theory of moral sentiments2007 [1759], New York: Cosimo.

 

20161018_141640

UK Inflation rises rapidly as the Consumer Price Index published today shows. CPI moved upward to 1% year on year from the August year on year figure of 0.6%. There are two main reasons underlying the upward trend. First, clothing prices have increased significantly after a period of flat-lining or decline. Second, transport costs are moving up owing to a decline in the GB pound against the US dollar impacting oil prices. Transport is the more worrying trend as this feeds into all consumer goods. Suppliers and retailers will want to pass on these costs to maintain their own profit margins.

Inflationary pressure

These inflationary pressures are likely to remain as the UK economy enters 2017. There is likely to be a call for increases in wage rates particularly by those in sectors where wages have been stagnant since the financial crash in 2008. Christmas may be more expensive for consumers this year. It might be time to reach for those personal flotation devices like the money you keep under the mattress to get those presents this year.

outerwear
Photograph by Joe Parks

Women’s outerwear contributed price rises of 6.0% between August and September 2016, compared with a rise of just 3.3% a year ago. This is much higher than usual and it is not known how much is directly attributable to Brexit and the depreciation of sterling. What is clearer is that the depreciation in sterling is likely to increase the cost of importing goods. It is also now more expensive than a year ago to outsource production which may have a positive effect on UK manufacturing.

Figure 1 Year on Year Change in Consumer price Index by Category

figure-1-contributions-to-the-cpi-12-month-rate-september-2015-and-september-2016

Source: CSO

Conclusions

It will be interesting to observe the interplay between inflation and exchange rates in the coming months. This will determine the impact on industry cost structures in the year ahead. The balancing act of how these changes impact on the economy as a whole will become clearer. Claims that the lower exchange rate will help exports have to be balanced against claims that input costs rise as imported goods become more expensive. A critical marker will be the impact on consumer spending. If consumer confidence declines then so too will economic growth fueled by that spending. Higher inflation will influence delayed expenditure on higher priced goods and less disposable income for discretionary goods such as restaurants, hotels, recreation and culture as well as some clothing categories.