Supply Chain - Brexit Trick or Treat?

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The new Halloween date for Brexit means supply chains are faced with a round of Trick or Treat in the lead up to October.

The Trick will be the long-term implications from Brexit anxiety stockpiling for businesses and the UK economy as a whole. Unlike 20 years ago - and the fears around the Y2K bug - stockpiling was actively encouraged as a sensible precaution ahead of the original March 29th date. IHS Markit/CIPS figures have confirmed there’s been stockpiling of raw materials by manufacturers at the highest rate since the 1970s.

The six-month Brexit extension now means another cycle of stockpiling - and until then, the urgent need to run down stocks. And that doesn’t just mean the obvious in terms of perishable goods like fresh foods; an electronics retailer told me recently that short product life cycles within the sector mean products like mobile phones only have a three to four months shelf life due to new product launches in the market. Even for those suppliers less affected by a best before date there’s still a lack of warehouse space - or it comes at too high a price.

Boom and bust stockpiling comes at a high cost. Research pioneered since 1958 shows kinds of massive fluctuations take a long time to stabilize in supply chains, meaning resources tied up in stocks and a limit on business growth. Just small variations in demand from a customer result in large variations in demand being transmitted up and down the supply chain. A cycle of over ordering and stockpiling leads to demand distortion and any further over-ordering contributes to the amplification. Typically, a demand increase of 12.5% will be passed to a supplier as an increase of 26%, resulting in that supplier placing an increased order for their own supplier of 55%: big oscillations in inventories and supplies that can have a knock-on effect for many years into the future.

Meanwhile the increased costs put more strain onto the smaller firms - at a time when more businesses choose larger supplier partners. As was reported in The Times, many stock rooms are full and “hundreds of companies” are telling suppliers they won’t be making any orders at all for a number of weeks. For small firms, an order book with holes can be as disruptive as one with only low levels of orders. The run up to October is also the worst time of the year for stockpiling, with the need for ramping up stocks for Christmas.

Where’s the Treat? That’s coming for customers and consumers who are going to benefit from widespread and heavy discounting as firms go about clearing stockrooms in any way possible. There’s also the Treat for the economy. It will be no surprise to see signs of manufacturing doing better than expected, impacting on signs of growth in the economy. But this could be be fake growth, just a mirage.

The instability isn’t only associated with Brexit. What we’ve seen in our research at Cranfield is an ongoing shift to the VUCA (volatile, uncertain, complex, ambiguous) world, that supply professionals need to recognise and adapt to. As a rule, our attitudes, approaches and systems for supply management were designed in 1970s and 1980s and a time of relatively idyllic stability.

So, the run-up to Halloween is going to be nervy for many. Ironically it may well be some businesses that have done absolutely nothing to prepare for Brexit, who’ve sat on their hands, that will end up doing best.

Our work in this area is critical to professionalising the supply chain profession and is one of the key themes explored within the Cranfield Supply Chain Management Programme enabling and optimising your supply chain methods to increase resilience, sustainable supply chain management and future supply chain challenges.

This blog was initially published for Supply Management in April 2019 – Brexit Trick or Treat?

Blog produced by: Professor Richard Wilding OBE, Professor of Supply Chain Strategy and Programme Director of the Supply Chain Management Programme, Cranfield School of Management.

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