Late last night, in the UK, the news came out that the English populous had voted to leave the European Union. The finally tally was 48.1% to remain and 51.9% to leave – the impacts on the financial markets were immediate and as expected quite negative as the Pound Sterling dropped to its lowest levels versus the US Dollar since 1985, the stock markets across the global rapidly shed value and the impacts on British companies also suffered drastic losses on the market. Bell weather British retailers such as Marks & Spencer, Sports Direct and Tesco have suffered double digit percentage losses on the open markets. The repercussions are only beginning to be felt throughout the global economy. Let’s take a quick look at some areas that will feel the impact.
- Disruptions to our supply chains come in many forms: One common thread with supply chains, is the fear and dislike of disruptions and unknowns. Often times we focus on such disruptions such as raw material cost fluctuating, demand being fickle or transportation costs to name a few, but Brexit reminds us that one large disrupting force are geo-politically driven. The severing of ties to the open market will impact supply chains when it comes to tariffs, trade agreements, freedom of labor movements, access to capital to name a few. How supply chains react to such disruptors comes down to how nimble and how flexible the supply chain network has been built. No supply chain can prepare for every possible disruptor, but how quickly the supply chain can lean on its digital mirror to react faster will separate which supply chains that simply survive and which thrive in moments of chaos. Supply chains must be nimble enough to be able to react to such changes – which markets will become more profitable, where may new costs impact profits, what about labor costs – these are but a few questions that supply chains must be able to address in order to survive and thrive in this environment.
- Impacts on the United Kingdom: As mentioned above, UK based firms as well as the currency is already feeling the impact. And this is simply the beginning of these changes. When it comes to such supply chains as retail, there will be issues around access to labor as well as the open markets. According to The Wall Street Journal, retail, which is Britain’s largest private sector, has leaned on labor coming from the European Union to bolster their needs. The labor tends to be more economically than locally hired assets. One of those countries, Poland, has by some reports close to 1m workers in England. Many of whom are in the retail sector. What will happen now with this labor pool? In addition, this labor pool sends back close to 1b pounds home annually, helping that local economy with discretionary spending. Retail will be impacted both in the UK and Poland in this example. The leave vote has also stoked some fires for North Ireland and Scotland to reconsider their stance within the United Kingdom, as both voted heavily to remain in the EU. If these nations break off what does that do for UK based nations and their supply chains? Will there be a move of services, financial and even manufacturing to these geographically close markets?
- Wake up call for the EU: The European Union has just seen the second largest economy and one of the major players of its Union turn their back on the club. The statement coming from across the English Channel was, we are better off not being part of the one of the largest global markets and rather go it alone. The shift within the EU will tilt even more towards Germany. As the lean manufacturing powerhouse of the EU, it will continue to see its influence and power growing now that the UK can no longer wield the influence it had when it was part of the EU. What remains to be seen is which EU nations step up to try and counter balance Germany? France? Italy? None of the above? The silver lining in this vote is the possible kick in the pants this gives the EU to address issues from debt to immigration to trade. There are two clear paths the EU can follow – a slow and painful break down or a reawakening and resurgence as a stronger entity.
What all this reminds us, is that our supply chains are under constant pressure from disruptors. They can can come from natural events such as earthquakes in Japan, Tsunamis in the Indian Ocean or volcanic explosions in Iceland. Disruptors can pop up because of misinterpretations of demand signals, poor communications between suppliers, errors in forecasting and the list goes on. Finally we have witnessed, once again, a major supply chain disruptor that comes from geopolitical events. The standard operating procedure should be to expect these to continue to be part of our supply chains.
At a fundamental level, the turmoil that Brexit has unleashed, casts a light on the importance of having a much more robust and clear view of the extend supply chain network. How well does your supply chain have a clear and understanding of the digital mirror of your physical supply chain? The more industrial grade digital supply chain you have to mirror your physical supply chain the greater flexibility your supply chains will have to react to these occurrences. For example, if a UK based grocer depends on supplies from French vineyards for wine, Italian distributors for olives and Spanish farmers for pork, with the new geopolitical shifts how fast can this grocer find new sources of product? How rapidly can they determine the potential cost impacts new tariffs etc may have on their cost to fulfill? Without greater transparency and understanding of the network they might be operating with old data or even no data. A challenge in a market that demands rapid and wise reactions to these disruptions.
End of the day we don’t know what the long term and even short term effects will be. This is unprecedented and will be the first time Article 50 of the Treaty of Lisbon will be enacted. The reality is that there is no “status quo” we are in a world that is constantly changing and demands that our supply chains do the same. How well prepared is your supply chain to deal with such disruptions?
As the famous English saying goes – Stay Calm and check your supply chain.