Supply chain issues from COVID and Brexit

How are UK businesses dealing with the rising costs and lead times from a double whammy of Covid-19 and Brexit?

The Association of Manufacturers of Domestic Appliances has reported a shipping cost increase of up to 300% since 2020, while the China-Britain Business Council (CBBC) say it’s as much as 350%.   

Ongoing issues with shipping and exports and imports are replicated across the world, but AAT has heard anecdotal evidence from UK businesses who believe it’s also a Brexit issue that has been exacerbated by the pandemic. One CFO said recently that pandemic-related delays for supplies they had ordered three months previously were made worse because there was a backlog of ships waiting at docks for customs inspections.

Contributory factors include the following:

• Brexit-related changes to border customs and inspections,
• administrative errors due to businesses and suppliers adjust to new UK-EU legislation.
• pandemic-related safety measures slowed down operations and systems,
• mismatch between global lockdowns creating staffing shortages and ships being stuck in ports,
• surge in consumer demand during global lockdowns, and
• shipping container shortages.  

Here we talk to accountants and finance leaders about how they are managing the situation.

Plan for cost increases to help protect profit margins

Richard Hall, Partner, Walter Dawson & Sons

Most of our clients are talking about a five-fold increase in shipping containers, it’s absolutely mind-blowing. Brexit has played a part in pushing prices up to a certain extent, especially in the last months of 2020 when businesses were wanting to convert cash into stock before the end of the transition period. But then the pandemic added to this demand with everyone shopping online.

Things are slowly coming through with delivery time taking several weeks, sometimes months, but on the whole, businesses have planned for this and have not been caught out so much by delays. They’re ordering stock further in advance than they ordinarily would.

Next steps: Businesses need to ensure they have continuity of supply, so it’s about looking at supply chains and think about ordering in advance. Also, it’s important to take into account all associated costs when looking at pricing structures, including carriage costs and materials costs. These both have increased and are likely to erode profit margins if they’re not factored in.

Verdict: Factor in cost increases when looking at pricing structures so profit margins aren’t affected. It’s something that every business is having to do as it’s affecting everyone.

Model worst-case scenario to predict maximum outgoings

Bradley Channer, CFO, RotoVR

Shipping has become a major issue. Our shipments from China are three times more expensive than they were pre-Covid and are always delayed between two to three months.

Brexit has also played a major impact on shipments out of the country to the EU. Customs is holding up goods for prolonged periods of time and the issue of delivered duty paid (DDP) is plaguing businesses like ours. If we pay the EU customs duties, we are potentially selling at a loss. If we pass it on to the EU customer, they often get disgruntled and sometimes have even managed to get refunds through PayPal and Amazon. 

Next steps: At RotoVR, we are taking several steps to help mitigate some of these issues:

• Communicate with customers about any delays. It’s the surprise that upsets them.
• Plan an extra two months for stock to arrive.
• Consider accessing flexible finance with no penalties for early repayments.
• Plan and model. Model for delays to stock, model for increases in shipping costs and model for covering DDP charges. This at least gives you a starting point to know the maximum amount of cash you will need.

Verdict: Plan well in advance for future stock and model worst-case scenarios to provide a solid starting point.

Avoid short term quick-fix decisions – invest for the long-term

Paul Samrah, partner and Brexit impact specialist, Moore Kingston Smith

Our clients have experienced six-week delays, although these are improving. And for those who have never imported or exported outside of the EU before Brexit, suddenly they’ve got to adjust to new legislation and processes.

There aren’t huge queues at ports anymore, but there’s still a shortage of lorry drivers. Yet businesses are aware of this and are planning for these types of issues. A lot are taking stock and reviewing. We’re therefore seeing long-term Brexit mitigating measures rather than short-term fixes, where previously businesses had knee-jerk reactions and were paying high costs to couriers to sort things for them on an ad-hoc basis.

Next steps: Take the long-term approach and invest in a good plan. There are no cost-free solutions and no winning ticket, so accept investment is the way forward. Consider:

• setting up a subsidiary in the EU,
• appointing a customs broker,
• bringing customs and tax issues in-house,
• re-routing supply chain to avoid paying double duties when moving goods and supplies in and out of the UK, and
• making use of your local Chamber of Commerce, which sometimes offer customs declaration training.

Verdict: Avoid knee-jerk quick fix decisions. Instead, invest in long-term Brexit-related solutions such as setting up an EU subsidiary or appointing a customs broker.

David Nunn is a former Content Manager at AAT.