SOURCE: Bain & Company Inc

Bain & Company

February 07, 2017 05:00 ET

Waiting Is the Hardest (and Riskiest) Part: Failure to Make Supply Chains 'Brexit Ready' Could Cut Net Profits by an Average of 30 Percent Across Key Industries

A new study from Bain & Company finds that a supply chain strategy designed for uncertainty can help companies decrease future risks

LONDON, UNITED KINGDOM--(Marketwired - February 07, 2017) - The speculation around Brexit's impact on supply chains is creating a huge dilemma for U.K.-based leadership teams. While some companies are making plans to move production out of the country, others are preparing to increase investment in Britain. But one thing is for certain: waiting for a clearer sense of the future under Brexit is the riskiest option. Bain & Company's latest study, Is Your Supply Chain Ready for Brexit?, finds that the leadership teams best equipped to limit any negative consequences from Brexit take a different approach to strategy -- one that anticipates a range of future scenarios.

"Uncertainty around Brexit has left many executives feeling anxious and reluctant to act, but inaction is actually the worst path to take," said Thomas Kwasniok, a supply chain expert in Bain's London office and lead author of the research. "Based on our extensive work with clients in the U.K. and across Europe, we've seen that the most successful companies plan for change by incorporating it into their strategy process. This will enable them to pivot faster than the competition once Brexit details become clear, minimizing the risk to their supply chains."

Currently, the aim is a "clean" or "hard" Brexit, which would include a clear split from EU's single market and customs union.

This scenario poses the greatest risk to the profitability of companies operating in the U.K. Disruptions to supply chains could reduce net profits of key U.K. industries by as much as 30 percent. This would be the impact of a shift to standard WTO tariffs (2-10 percent) on all exports and imports, a 10 percent increase in the cost of U.K. labor and 20 percent depreciation in the British pound.

According to Bain's analysis, the greatest negative impact under this scenario would fall on the retail, automotive and technology industries. Food retailers, for example, could see profits fall by £6-20 billion, though most would offset at least part of that decline with price increases. Automotive and technology could suffer 20-35 percent declines in profits.

On the other hand, net exporters in low WTO-tariff industries such as aerospace or pharma -- an industry characterised by a global production footprint and sales mix and zero tariffs -- could potentially benefit from a "clean" Brexit due to pound depreciation and lower U.K. tax rates.

"Brexit implications would depend on the individual setup of a company's supply chain and might vary even between players even in the same industry sector," said Kwasniok. "Take for example two large sugar manufacturers in Britain: one relies on sugar beet imports from EU countries and hence fears a cost increase if tariffs get imposed. The other one processes sugar cane from Brazil, for which tariffs would be lower under WTO standards than what they currently are into the EU."

While now a lesser possibility, the U.K. could still opt for a "soft" Brexit with minimal or no tariffs on trade with the EU. However, in this case, companies that start moving manufacturing or sourcing out of the U.K. risk incurring a higher cost base unnecessarily.

Ultimately, the final deal must be put to a vote in both houses of Parliament -- the outcome of which could add even further uncertainty around Brexit if, for example, it gets voted down.

According to Bain, four guidelines can help leadership teams understand how Brexit could play out for them:

1) Define the uncertainties
2) Formulate a set of probable scenarios
3) Devise a specific set of strategic options, and
4) Identify a clear set of signposts for action

"Leading companies use this approach to balance commitment to a long-term supply chain strategy with investments, and to position themselves to seize the post-Brexit future as it unfolds," said Peter Guarraia, head of Bain's Supply Chain Practice. "This flexibility allows them to focus on projects that make sense now, while assessing their payoffs under different future scenarios."

While planning rational actions for each possible outcome, the most successful leaders pair each action with a signpost that triggers it:

No-regret moves. Some actions will increase a company's competitive edge no matter what scenario plays out. They include improving cost management or operational effectiveness.

Options and hedges. Leadership teams that develop strategic options and hedges for a variety of future scenarios navigate better when new developments unfold. Other options include joint ventures that provide lower-cost market entry or manufacturing changes that provide additional flexibility at low cost. Some companies exposed to a devaluation of the pound may use financial hedging instruments or choose to denominate contracts in different currencies.

Big bets. The most challenging balancing act involves large-scale investments that have different payoffs depending how future uncertainties play out.

"Whatever form U.K. participation in the EU will take, Brexit will have quite significant implications on supply chain choice -- what you buy, from whom and from where," said Michael Garstka, who leads Bain's U.K. practice. "For the last 40 years, U.K., European and global companies have been making sourcing decisions based on one set of rules. If and when those rules change, strategies and supply chain choices will need to adapt."

Editor's Note: To request an interview with Mr. Kwasniok, Mr. Guarraia, or Mr. Garstka, please contact:

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