Brexit has built a full head of steam as the country enters more unchartered territory. In the last week there’s been complete chaos in government, a harder line from the EU27, and more than a million taking to the streets of London. Despite all the fuming and arguing, all the political wrangling and eleventh-hour negotiations, business is still no clearer about Britain’s terms of withdrawal. All we know is that Brexit will be delayed, and from past experience we know this situation may change again.
UK manufacturers have been extremely concerned throughout Brexit, and now the impact of a delay raises further issues for the supply of electronics and materials into their production schedules. Many UK companies did not respond early enough to the possibility of component shortages caused by Brexit. The extension of the withdrawal process provides more time for UK manufacturing to prepare. However, until we have full clarification the advice remains the same: Prepare for Brexit and make full use of any delays to mitigate possible disruptions.
Mitigate risk through the supply chain
The most important step is for manufacturers to continue giving their supply-chain partners visibility beyond 2019. Not just their component suppliers, but subcontractors and their COTS (commercial off-the-shelf) equipment providers as well. It’s important for them to health check their BOM (bill of materials) to ensure they have multiple, approved vendors for critical parts, especially within mature systems. If a part is approaching last time buy (LTB), they must not wait until the last minute: try to secure the product as far ahead as possible. They need to engage with their supply chains and have an open dialogue.
Always think ‘safe supply’ in a volatile marketplace
Market uncertainty has been worsened by Brexit. In a challenging marketplace the supply chain is vulnerable to opportunistic attacks in the form of counterfeit and fraudulent electronic components. Such attacks can be devastating to end-users, especially if the application is safety and reliability dependant. Often the internet may show the buyer that there is product “available” somewhere, but the source of the these components may not be clear. When a $1 chip is holding up a $50,000 piece of equipment, the chances of “rogue” buying can increase.
A quality-driven supply chain partner will never be more valuable than in today’s challenging times. This applies to authorized distribution networks as well as non-traceable, catalogue, vendor reduction partners, subcontractors and any other key elements down the supply chain. A distributor whose operations are run in accordance within the AS6081 quality processes will mitigate the risks of purchasing and supplying fraudulent/counterfeit electronic parts. It’s important that manufacturers remember – help is always available.
Continue to increase buffer stock
Whether Britain leaves the EU or not, whatever the basis of our departure, it remains important to mitigate against manufacturing risks. Those of increased costs and extended delivery terms are the biggest concern. One of the easiest ways for manufacturers to mitigate risks is by ensuring their supply chain has landed UK stock and hold that in reserve.
Recently, media quoted the chief economist at ADS (Aerospace, Defense, Security & Space) Group, Jeegar Kakkad, who said: “When you’re selling an aircraft you can’t have any parts missing. One part stops the whole process.” Of course, this is true of all manufacturing! Many manufacturing companies, especially within aerospace and defense, are building up stocks of materials and finished goods to protect against delays in deliveries to customers. Airbus previously said it would have to stockpile €1bn (£875m) worth of parts.
Distributors can help customers to anticipate how much extra product they might need and in some cases to hold buffer stock in excess of normal levels.
Expect Sterling volatility – hedge or forward contract
A short delay of weeks or even a couple of months is unlikely to make a difference in itself, however a worsening pound Sterling does have immediate consequences. Sterling has been volatile since the referendum result and that volatility is expected to continue. UK manufacturers naturally want to remove as much risk as possible from their imports.
Customers are typically interested in ways to hedge against unexpected changes and in setting up forward contracts that are fixed to exchange rates, but they also want to know about regional price variances. Astute has been working in the global components markets for many years, with real-time access to the latest listings and prices, and has cultivated very close supplier partnerships that enables us to spot price disparities.
Demand is expected to remain strong – act now
In the last 18 months we’ve seen UK manufacturers not only attempting to secure more stock but accelerating some of their existing projects. Distributors and contract manufacturers are also holding more stock than they typically would. There were supply issues within electronic components, especially passives and memory, even before Brexit; this hunger to “Beat Brexit” is of course adding further pressures. A vortex of demand is occuring, as customers make more frequent reviews of their forecasts and call on more stock. Astute Electronics sees no end to this in the foreseeable future, particularly while there is uncertainty over a leave date. We can only recommend that customers try to anticipate the extra demand by acting now.
Make regular communication part of your risk mitigation
Ongoing, regular supplier communication is the way to identify potential issues. As a franchised distributor, we are privileged to have continuous contact with our component lines and traceable supply partners, enabling us to better understand the risks and timelines connected. Communication must continue between suppliers and manufacturers throughout the entirety of Brexit – whatever the period of delay.
Look toward the future and any positive outcomes
We are sure there will be eventual benefits, whatever the scenario, but in the short term the dominating feature of discussion continues to be about how to avoid disruption. To this end, we are advising all customers to plan ahead and make provisions now. Our trading history shows a strong willingness to offer flexibility and this period in our history will be met with the same commitment, timely communication and high service levels.
In the event of the UK leaving without a deal, we are already considering what this change could do for the price of parts and components. Identifying custom clarifications, checking the World Trade Organization (WTO) tariffs and potential EU import tariffs can give an idea of what is to come. In a no-deal Brexit, the UK will eventually be able to move away from EU regulations, creating the potential to reduce and change them. UK-based suppliers may be more competitive due to a weak pound and they can enter into trade agreements with new international markets, but this will need to be balanced against potential restrictions on the free movement of capital and personnel. European manufacturers are reliant on tariff-free, frictionless trade.
Mark Shanley is marketing director of Astute Electronics. Headquartered in Stevenage, UK, Astute has offices in Australia, China, Germany, India, Israel, Mexico, Turkey and the USA.