Effects of Brexit on Procurement Processes

2552 words (10 pages) Business Assignment

26th Feb 2020 Business Assignment Reference this

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Introduction

Procurement process is a complicated process. It requires data from all the areas of the organisation i.e. different departments. To carry out this process the organisation has to setup a strategic procurement team. It is this team responsibility to set direction for the procurement keeping the business strategy in mind. The team then use the data from the process collect through different departments to create and implement a strategic procurement plan. This paper discusses about the effects of Brexit on procurement process of Reflex limited. What is Brexit? Bexit in easy terms means British Exit, it refers to the UK’s decision to leave EU (European Union) on 23rd June, 2016. The reasons after people wanting Brexit were Sovereignty and Immigration. On the referendum day the polling team questioned people who voted and about 49% people said that Decision about UK should be taken in UK and One third of them said it’s the best chance for UK to gain control over immigration and its borders. Due to which there are multiple threats to procurement process of this Irish company which manufactures medical devices for EU, USA and Far East. Being a global supply chain gives them an access to multiple suppliers overseas. Leading to 90% of component required for manufacturing devices comes through imports, out of which 60% is from UK. With majority of its imports coming from UK and UK leaving the EU will have some serious impact on the company. This has become a threat for the company’s supply chain.

Identification of Threats

Now, it’s the responsibilility of Supply Chain Manager to identify the threats to the supply chain, which can be done by performing the followings steps:
  • SWOT: SWOT is one of the most used toolkit for any manager which helps them analyse the Strengths, Weakness, Opportunities and Threats to the company from within and outside. It gives them the outlook of the scenerios that they have infront and helps them make decision upon the strategy they might follow in the future. In this case it can turn out to be an essential tool for the manager. There are 3 basic steps to perform it, first, Identiying and asssessing the internal strengths and weaknesses. Second, Identifying and assessing the external opportunities and threats. Thirdly, the SWOT Matrix has be created.
  • PESTEL: Pestel is another useful tool which a manager could use for more indepth analysis as it accompanes SWOT analysis in making strategic decisions. It helps analyse the macro-environment factors such as Political, Environmental, Social, Technological, Environmental and Legal which could impact the company. Thus helps identifies the weaknesses and threats in SWOT analysis.
  • Identifiying Valuable Suppliers: The manager will have to identify the suppliers which could have the most impact on the company. He will have to look into important contracts will high financial values but at the same time will have to consider small contracts with whom the company have good relationship. The suppliers with high contract value are highly important to company which are important for the company to stay profitable and on the other good relations can be helpful in the longterm.
  • Look for contract Dates: In this manager has to look for contracts those which goes beyond 29th March, 2019 and those which goes beyond 31st December, 2020. As commitments are included in a contract, short term contracts are unpredictable but leaves you with more choices whereas long term contracts leaves you with limited choices.

Five Main Threats Identified

There are multiple threats which can be identified to the supply chain by following the above steps, but there are 5 main threats in my eye which I believe could have a negative impact on the supply chain. They are as follows:
  • Border Concerns: The EU commission has raised a need to secure supply chains for the goods entering and leaving the EU. However, increase in custom checks may lead to delays in crossing in UK/EU border for the consignments and thus leading to longer shipping times. If there is to be a Brexit, it is more likely to have short term and long term delays. This will affect the flow of the company’s supply chain which will means the company won’t be able to meet its deadlines which will affect the reputation and might end up losing money too.
  • Tariffs and Customs Regulations: As it is known that the UK import/export controls are decided by EU. The Post-Brexit scenario might change this trend as UK will set their own set of import/export controls. It is more likely that the Irish company will have to pay tariffs to meet UK requirements. Tariffs will be introduced. Tariff is a custom document which consists of commodity codes, duties, licences, taxes and other measures to arrange all goods and items for import and export. This means company will have to register itself with new norms of UK and this could take a lot of time to get through.
  • Increased Cost: Introduction of Tariffs means expense. The manager will have to decide how to allocate the import and export duties between the parties. Another cost that will also increase is the Cross Border Logistics Cost. It is often said in businesses, Time is Money. Longer it takes to move goods higher the cost will be. Thirdly, VAT being a EU tax, it is unclear how it will work. Being an Irish firm, our firm will have to bear all these costs and will also to consider the possible changes to the VAT regulations.
  • Currency Implication: Since the referendum results were declared the Pounds Sterling exchange rate with Dollar, Euro and other currencies has been unpredictable. And it is expected to remain the same for quite a while. This growing risk of Brexit isweakening Pounds Sterling. If Brexit is abandoned, it may suddenly strengthen the value of Pounds Sterling.
  • Providing Services: Due to the restriction on movement of people, providing technical services like installation, servicing, etc will become more difficult especially on the site services. For example, seeking visas everytime one travels will be a problem as it may be difficult for the UK firms to comply with EU regulations or meeting immigration requirements. As the firm might need services for the component imported from the firms in UK and in some cases even installation might be required.
All the threats listed above are essentially leading to increase in cost which inturn increases the prices of our products.

Potential Actions to Address Brexit

In such case Joan Murphy, Supply Chain Manger could take certain actions to address these threats, that are:
  • To mitigate the threat of Border Concerns, the company could build up a stock before brexit. For which they need a secure warehousing space which will help the company to cover the delay time through the border and help them meet the consignment deadlines in time. This warehousing spaces can act as an short burst covering supplies which will be really helpful for the company to meet the supply chain daily requirements too. Thus, the company reputation remains intact and doesn’t loose on money keeping the company profitable.
  • Tariffs and Customs Regulations is one of the most feared aspect of the mentioned threats as the company will have to get clearance through the new UK import/export conrols which will be put inplace and the cost of the tariffs. To keep that in check, Risk Distribution Provision needs to be put in the contract, which essentially states that UK suppliers bears the export tariffs and the import tariffs will be borne by Reflex Limited. This take off the extra legislative burden from both the parties which should lead to smoother imports and exports.
  • With so many controls in place, Cost of Tariffs, Cross Border Logistic Cost and the risk of VAT rules being uncertain. It has become a big potential threat to the supply chain and to reduce the effects of these controlling bodies, certain delivery terms needs to be setup which will cover the risks and cost of crossing the border. This wil help in clearing out, how much and who is going to bear the extra costs.
  • Currency Implication is something that the company will have to look into. Although, since the referendum the sterling has been weakening which basically will lead to more profitablity for the company. But incase brexit gets abandon, the sterling will be strengthened again and could become a burden for company for a short term. There is not much that company can do about it except putting a Price Review Clause so that all or certain parts of contract pricing can be adjusted.
  • With restriction on movement of people, providing service has become a major issue. The only way out of this is addressing the issue on the Basis of Level of Need. What it essentialy means is that to what extent will there be a need to make a site visit. If the need meets that scale of requirement only then a site visit will be provided. This could prevent the supply chain from halting, if service is not provided incase of falty tech.

Threat Mitigation

These action may be very effective but how does it affects Reflex ltd supply chain still remains the question. Let see how these actions mitigate the impact of Brexit and will assist the company to remain profitable and competitive in the market.
  • Restriction on free movement of people is something that will affect the company which they can mitigate by giring people from the EU and avoid the labour from UK. This saves the company both resources and time making the process less troublesome as no extra resources will spent except the time.
  • Government funding and subsidies can also help in mitigating the cost incurence for the cross-border trade for the emergency scenarios. This can help in reducing the risk substantially. This help the company to hold the inventory and cash in hand to smoothen the cash flow of the business.
  • The company can revise there plans and objectives regarding trade by analysing there resources. This is really essential as it will help the company assess the potential risks in the plan and reduce them in time. This will give the company a brief idea of the costs and the possible additional expenses which can be saved.
  • The company can make a provision for the costs and additional expenses which takes care of the fluctuation, covering both internal and external. This also cover the varying rates of the tariffs and duties which will help the company know the how such incidents can affect the company and what needs to be done.

Conclusion

Brexit has brought numerous up’s and down’s in possibly every business sector and procurement is no exception. The company operations were affected due to the various criterias they have to fullfil. This report covers some of the effects of brexit on Reflex Ltd. It has hindered the overall performance and structure of the company. In this risk of potential threats were identified for Reflex Ltd. Both internal and external factors were cover in the report to identify the threats. In order to safeguard from the effects of Brexit, The company made multiple changes in regards to the cash flow, policies, workings, etc. It also shows the possible actions the company would take to mitigate the identified threats. Brexit has drastically effected the companys supply chain as it made it difficult for the company to procure the materials required for the production. There are certain perimeters that needs to taken into account such as the immigration, laws, licensing, currency and many more. The company has tackled the situation in the best possible way which has helped them reduce the negative effects of brexit. Also the company’s operation were not seriously effected. The company has found multiple ways to cover all the perimeters and also brexit without facing loss.

Bibliography

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