By Chris Laws, Head of Product & Strategy at commercial data and analytics firm, Dun & Bradstreet
Even in a world before coronavirus, four years of speculation about the effects of Brexit have culminated in intensified uncertainty for supply chain management. The UK’s departure from the European Union has led to a lack of clarity about the impact of Brexit on supply chains – with many companies reviewing current supplier relationships and taking steps to identify and mitigate potential risks.
While some UK companies have shifted operations abroad, others have retracted to British soil or are looking to diversify their supply chains. The UK government’s recent announcement of a new tariff regime from January 2021 provided some welcome details on the simplification of arrangements; but if a free trade deal is not finalised by the end of the transition period the cost of some imports could increase significantly and there is likely to be more pressure on supply chain management.
Supply chain experts from Cranfield School of Management analysed anonymous data supplied by Dun & Bradstreet to investigate the level of supply chain risk exposure since the Brexit vote (June 2016) at three-month intervals. Over 1.3 million transactions of supplier base data from a limited number of UK and EU companies was reviewed across the construction, manufacturing, finance and services sectors to identify how Brexit has affected supplier risk appetite.
The subsequent report focused on four key metrics; supplier criticality, supplier financial risk global sourcing risk and foreign exchange risk to assess overall supply chain risk in the UK and combined this with analysis of transactional data between buyers and suppliers across the EU.
The analysis focused on three key areas of third-party risk management:
Impact of Brexit on supply chain risk thresholds
Referendum day, Article 50 and three rounds of deadlines have all piqued conversations around the outcome of Brexit.
Unsurprisingly, the appetite for risk across three of the four metrics analysed in the report have reduced throughout this period, with companies seeking to protect their supply chain and business operations.
However, we can see a direct link between the timing of Article 50 being invoked and a rise in supplier criticality – the proportion of buyer-supplier transactions considered critical to a business. Supplier criticality surged from 49% to 62% following the signing of Article 50 in 2017. Since then, it has decreased slightly, but remains at a stable 58%. What this suggests is that buyers now see more risk of being dependent on their suppliers and are seeking to diversify and reduce dependencies on individual relationships. This is likely to be fuelled by the unknown future operating conditions posed by Brexit.
In all the other areas of supply chain risk there was less significant change. Financial risk and global sourcing risk remained unchanged, while financial exchange risk decreased slightly by 3%. This suggests UK buying companies may be sticking to GBP more in order to safeguard themselves.
UK buyers shifting to UK-based suppliers
When investigating whether the proportion of UK businesses using EU-based suppliers had declined since the referendum, Dun & Bradstreet’s data shows that the proportion of EU-based suppliers has dropped from 18% to 15%. The figures for businesses using UK-based suppliers correlates, with data showing an increase from 64% to 67% over the same period.
The correlation between this decline in EU-based suppliers and increase in UK-based suppliers suggests that companies based in the UK have been shifting their supplier base from the EU to the UK – possibly to avoid potential trade barriers arising from Brexit.
EU buyers sourcing from EU rather than UK
The analysis did not suggest that EU buyers are moving away from sourcing from within the UK due to Brexit. This is positive news but is likely to be due to these buyers only using a low proportion of UK-based suppliers even before Brexit- an average of just 4.6% – with 80% of supplies coming from EU businesses outside of the UK.
A changing landscape brings opportunities
Although analysis of the data indicates that the appetite for supplier risk has reduced since the Brexit referendum, uncertainty over what the future holds has also prompted businesses to enter survival mode, which can create potential opportunities. The increase in UK buyers using suppliers closer to home could signal a future trend that would be a welcome boost for UK suppliers, especially in a post-coronavirus landscape.
To minimise risk, it is advisable for supply chain decisions to be grounded in analysis of data to avoid risks being either overlooked or accepted due to critical dependencies and the time pressure of the impending end of the transition period in December 2020. Businesses need to ensure they conduct a comprehensive review of any potential new suppliers – even if they’re in the UK –to ensure a full risk assessment is completed in order to make an informed decision and to protect the business.
Our data set represents 1,304,842 transactions reported by UK and EU companies of various sizes within the construction, manufacturing, finance and services sectors between June 2016 and early 2020.