Post-Brexit stockpiling hangover?

05 Feb 2019

Engineering capacity news posted by Andy Sandford

Contingency planning is one thing, but could your stockpiling add up to a post-Brexit hangover? Mark Waterman of Vendigital asks the questions.

UK manufacturers have stepped up their stockpiling activity recently, leading to a welcome, if unexpected, upturn in manufacturing output, according to the latest statistics. Could this increased focus on contingency planning mean some suppliers are heading for a significant post-Brexit hangover?

A monthly survey by IHS Markit and the Chartered Institute of Procurement and Supply (CIPS) has revealed a sharp increase in factory output in December, and a further small increase in January, as businesses stepped up their stockpiling activity by storing more raw materials and finished goods. In many ways, this is a natural response to supply chain pressures ahead of Brexit, but concerns are growing that some businesses could be increasing their risk exposure significantly.

With just under two months to go until the Brexit deadline, most manufacturers supplying customers in the EU and those reliant on goods from EU suppliers, already have contingency plans in place and implementation is well underway. Those reliant on supplies of goods from Europe or those with established European distribution channels are among those most likely to have considered stockpiling goods and raw materials in a bid to minimise the impact of potential customs delays and tariffs, which might accompany a no-deal Brexit on 29th March 2019.

Facing downward pressure from key customers in the aerospace, automotive and pharmaceutical sectors, some UK-based suppliers have been unable to reach agreement to stockpile materials and components on a shared-cost basis. Instead, they have been forced to assimilate the costs associated with increasing inventory and storing it onsite or nearby.

Depending on the level of stockpiling deemed necessary to keep supplies moving in the event of a no-deal Brexit, unwinding contingency plans could take weeks or even months, particularly if orders dip at the same time. For businesses that have invested in stockpiling strategies, this could leave them with surplus inventory that is difficult to run down and continuing to incur overheads.

To minimise the risk of being left in this situation, some automotive manufacturers have chosen to adopt a strategy of temporary shutdowns to ease pressure on production and avoid breaks in supply. Just ahead of the Brexit deadline, these manufacturers are likely to bring forward deliveries as far as possible and then use the ensuing shutdown to implement planned turnaround programmes, upgrading capital-intensive process equipment, and implementing training initiatives. The idea is that planning these improvements now could leave them in a stronger and more competitive position once normal production resumes.

While most manufacturers are likely to have considered stockpiling strategies, by no means all have chosen to adopt them and for those that have the levels will vary from days to months. For some, the idea of planning ahead based on unpredictable or unforeseeable demand is a risk too far in any case and with the prospect of crashing out increasing (as the Brexit deadline nears), stockpiling strategies carry even more risk.

Stockpiling may also not be the most sensible or practical solution for manufacturers seeking to maintain a supply of spares for capital-intensive production equipment. For example, component manufacturers operating in high-value industries, such as the aerospace and transportation sectors, may be operating equipment acquired from Germany or other another part of continental Europe. If this equipment fails, spare parts are normally ordered for immediate despatch. In this scenario, stockpiling every component to insure against disruption due to breaks in supply is simply not viable and it is impossible to know which part is most likely to fail. In these instances, businesses will need to stay close to supply partners and seek alternative channels of delivery or consider other structural solutions.

Recognising that stockpiling is not the right solution for all businesses with trading relationships in Europe, manufacturers should avoid the temptation to do nothing. Even those with a higher-than-average Brexit risk exposure will be able to implement some contingency plans to alleviate pressure on their business model. The key thing is knowing what action is worth taking for your business and what isn’t.

Mark Waterman is a senior consultant at management consultancy, Vendigital. He specialises in advising businesses on their preparations for Brexit.