Preparing your Source-to-Pay (S2P) for Brexit

The brexit negotiations are becoming murkier and murkier, and what was once a distant, faraway event, is now fast becoming a near reality. As the topic of trade becomes increasingly hot, Sabine Adotevi discusses how the supply chains are dealing with this pressure and what they can do to prepare their S2P

While the trade-policy related details of Brexit are still in the process of being negotiated, it is evident that in almost any scenario, Brexit poses a massive disruptive threat to any company that imports to or exports from the United Kingdom. The most likely scenario is that the UK, will exit the Common Market as one block, comprising England, Scotland, Wales and Northern Ireland. However, there is some speculation that even in this case, there may be some reversals related to Scotland and Northern Ireland joining the Common Market within an extended “UK transition period” as independent states.

Whatever reality comes to be, there are a few important learnings from the negotiations to date.

The first is that membership in an international trade organisation or agreement is not entrenched in any national constitution and is therefore reversible. Free and efficient trade across international borders should not be taken for granted, as it appears to be under threat by the global trend favoring nationalism and identity over democracy and internationalism.

The second lesson is that once trade agreements are dissolved or changed, there are steps companies can take to limit the impact of these new barriers, while retaining sourcing and supply flexibility. While companies prepare by adjusting policies and business processes around financial controls and governance, their procurement functions of source, contract, buy, receive, invoice-reconcile, and pay also require considerable rejigging. The objective of Source-to-Pay should be to keep the supply base as stable as possible to maintain the price, cost and quality advantages achieved while not being exposed to the risk of international trade agreement changes.

Companies should first address these procurement functions by revisiting and adjusting the Total Cost of Ownership (TCO) calculations for their imported direct and indirect materials, to include new estimated costs of sourcing from the UK. The TCO figures should also consider realistic contingency plans for sourcing from other common market countries with additional expected import costs and those associated with possible delays and capacity constraints. The resulting adjustments to TCO at the commodity level ultimately should reflect the additional sourcing interruption risks inherent in today’s political environment.

As an additional consequence of these recalculations and contingency plans, companies should expect to expand their supply base and incur some additional source to pay processing costs. Staffing for key functions such as supplier risk assessment, supplier onboarding, master data management, catalog management and PO processing should be bolstered temporarily to address the business process and transaction volume increases. All categories of spend down to the scope of work must be considered and contingency plans must be communicated across the organisation to ensure operational readiness.

Companies facing the challenges of Brexit should also consider additional costs related to currency exchange risk. For many organisations that collect revenues in pounds while purchasing in Euros, not only will they have to consider general volatility and fluctuations which have the capacity to inflate or squeeze gross margins (remember the overnight Swiss Franc devaluation by 10%…), they will also have to plan for expected long term trends. The Bank of England will likely be constrained by the UK trade barriers, possibly leading to inflation and devaluation against the Euro. Buyers should account for the expected long-term trends in the Pound/Euro rate by revisiting their pricing policies and timing of purchases.

Additionally, increased volatility attracts speculative players whose participation in the market further exacerbates currency exchange volatility. Companies should consider hedging this risk through various means including timed, scaled, bundled purchases and ensuring minimal exposure by contracting in their currency of origin. Where absolutely necessary, financial instruments can be used to minimise exposure, but these instruments can come at substantial costs and these corporate finance costs should be budgeted conservatively and transparently so that impacts to net income are minimised.

The third lesson for companies facing the Brexit challenge relates to inventory. Companies with existing “Just in Time” (JIT) or Out-of-Stock (OoS) at sales point processes must consider implementing buffered safety stocks. To account for general supply chain delays, capacity constraints and disruptions, there will be a need to increase stock levels and these stocks should be held preferably outside of the UK on the soil of a country which is part of the Common Market e.g. France, Belgium, The Netherlands etc… These stocks could still be owned by the UK suppliers and should be bonded in order to pay taxes & duties at the time of supply. However, this workaround does require an increase in forecast accuracy as the stocks would typically be dedicated to individual customers.

In addition, it is always possible for the ports of Calais, Dunkerque or others to become bottlenecks and expensive unplanned warehouses in cases of consumer demand shortages or labour strikes, it is worthwhile to plan for and set aside alternative delivery routes. As it is more than likely that empty crates/containers and pallets returned to the UK from the Common Market will decrease, the cost of recycling the latter will increase exponentially for UK manufacturers. It is important to start the process of addressing inventory levels and stores locations as soon as possible because most changes will depend on third party capacity, flexibility and speed of delivery. Some examples of these third-party factors include customs administration, suppliers, 3PL and planning model configurations. Given the number of players and shifting variables, there is a need for swifter and more efficient exchange of real-time information, (data, stock, in-transit, call-off) and documentation among the various parties involved in the supply chain.

The fourth consideration for companies exporting from the UK is that domestic suppliers of goods and services might have their own 2^nd and 3^rd tier suppliers which are based in the Common Market. Those 2^nd and 3^rd tier suppliers could experience their own supply interruption which could cascade upstream to the front of the supply chain. There is a need to conduct a thorough analysis of the 2^nd and 3^rd tier suppliers in scope and require these organisations to present mitigating sourcing plans.

Companies should maintain a record and map of these second and third tier suppliers and indicate the severity of the risk to operations in this log. Companies should also maintain a contingency supply in place for these or an increase in on-shore stock to mitigate supply risk. The knowledge and information about these 2^nd and 3^rd tier suppliers should be collected and monitored closely to be able to adjust, assist or revise as needed.

The fifth recommendation for companies facing Brexit is that there might be a need for a customs agent with experience in WTO customs clearance. This agent could be integrated into the company’s eco-system that is e.g. through a portal, EDI or ideally a network, to provide for a seamless and transparent supply process. There is also of course a need to provision the payment of tax and duties and relevant documentation. It could be prescient to create an internal Brexit unit within your organisation and/or appoint a dedicated 3PL for UK imports.

Since Brexit is quite an abrupt and new process to lower-tier suppliers, it could be beneficial to direct their materials to a common 3PL to gain a better overall control of the supply chain. In addition, it would be pragmatic to retain a UK lawyer specialised in Source-to-Pay legislation in order to keep abreast of legal developments and integrate these timely in one’s contractual framework. There is a need to monitor contract clauses and to revise/adapt these rapidly as the legal framework evolves, which is to be anticipated. It is also critical to switch all UK sourcing P2P processes to purchase orders and invoice mapping/design in accordance to WTO rules.

Finally, if you want to truly mitigate this risk, it is imperative to run a “test” pilot of one’s S2P process with key suppliers using the network (e.g. Ariba Network) to which one could switch at short notice. The test should be run as if UK was a WTO country.

It is not business as usual but it is possible to limit the disruption by widening your eco-system and making adequate back-up plans. The good news is that the UK is just across the channel, there is no risk of a volcano eruption nor is there an autocratic government whose actions are unpredictable, or is there?

Sabine Adotevi

Value Realisation Director

SAP Ariba