Brexit: Who Cares?

BrexitWell, maybe you do. In that case, no doubt you’ve been bombarded by news reports covering the gamut from outright economic Armageddon to no big deal. The question here is what does it mean for your procurement situation?

Apparently the markets continue to roil, and today (July 8) when I was writing this we saw another news item from Reuters, which in part said “Worries have only intensified since the [Brexit] vote and Fed Governor Daniel Tarullo cited the rise in uncertainty on Wednesday when he argued for holding off on rate hikes until inflation had turned decisively higher.”

Spend Matters Network June 27th article “Procurement, Supply Chain and Brexit: Obvious and Less Obvious Considerations” appeared to be a reasonable commentary on this subject, and specifically focused on procurement issues. You can find a link to this article at the end of our condensed summary of the highlights:

Among the obvious considerations are these:

  • Commodity prices could be driven in any direction. If the dollar rallies and the euro and pound fall, commodity prices will likely fall as well. The converse is also true. Procurement organizations are recommended to pay particular attention to exchange rates in order to predict commodity prices.
  • Volatility is increasing thanks to Brexit. The VIX (fear index) , which measures the implied volatility over the next 30 days of the S&P 500, recently jumped over 50%, the largest single day shift since 2oo7. For risk averse organizations, a strategy to lock in prices with suppliers, even if a premium is necessary, might be an appropriate plan.
  • Supply Base Management for organizations with U.K. based suppliers need to monitor trade agreements closely. These suppliers have been operating under European Union rules to date, and exports are thus covered by those trade agreements. Costs could rise with increasing supply risk if the total cost of British goods rises in specific regions as negotiating clout is reduced.

And then here are Spend Matters’ less obvious considerations:

  • Your total cost management may be significantly affected if you have U.K. suppliers. This would be especially true if such suppliers themselves are importing materials and if their value added component is less than 50% or so.
  • Is the U.K. the land of opportunity? As Spend Matters puts it, “Well, not exactly. But the weakness of the pound could make the U.K. more attractive for sourcing efforts for global companies. However, given the death of basic industry in the U.K., it will be essential for smart buyers to separate out base material costs from value-added components, even offering to buy raw materials and commodities on behalf of U.K. suppliers given rising import costs for U.K. companies — or off of negotiated pricing schedules and potential demand aggregation programs and rebate structures tied to an OEM agreement.

“Such a strategy could allow global buyers to take advantage of a weak pound while also shoring up their U.K. supply base from a risk management perspective. In short, look at the U.K. as a potential lower-cost source of goods if you can get clever with the raw material and commodity component of total cost”.

  • Who is next? As many news reports have suggested, Brexit could be the beginning of a significant trend. If you have suppliers elsewhere in the European Union, you may see their home countries consider, and even execute some departure plan. Brexit could be just the first of many companies to leave the EU.
  • Finally, basic industry returning to the U.K.? Exiting the EU’s stringent environmental legislation may see the production of raw and semi-finished goods returning to the U.K. This could “create greater diversification and capacity among lower-tier suppliers on a localized basis. Will steel be the first basic industry to see a revival in the U.K.?”

The Spend Matters article seems to hint at both watch-outs and potential procurement opportunity. If you have U.K. suppliers this is but one word to the wise.

Here is the link to the complete article.

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