Brexit may require greater warehouse capacity in the UK

Unless the government achieves the miracle of remaining in the single market without any restrictions or acceptable border controls, then the free flow of goods and services between the UK and the rest of Europe is likely to change. If we go back to full border controls then this will cause delays in movement of goods, longer lead times and possible restrictions and costs. For every business in the UK this will result in carrying higher inventory, higher costs and inflation or lower margins. It may also impact the quality of goods, particularly in the fresh foods areas of fruit and vegetable imported from abroad.

So why would border controls increase costs and stockholding and reduce the variety of goods on offer?

On the one hand, increased time in the supply chain and uncertainty leads to the need for higher safety stocks or lower availability. UK retailers will not accept lower availability as this would make them uncompetitive and lead to lost sales. Logic therefore dictates that they will have to carry more safety stock, which leads to greater cost and therefore potentially higher prices or lower margins: the cost has to be paid for from somewhere. 

However, these changes can have a significantly bigger impact on a business. If they are running close to capacity today then there may be a need for larger or more warehouses to hold the additional stock – major capital expenditure that will impact a company’s financial performance.

With regard to variety, some countries like Holland have restricted their fruit & veg offering to what is grown locally in each season. Yet in the UK we have become used to having a wide variety of produce all year round, importing non-seasonal produce from abroad. Would the UK population be content with going back to a more limited offering of locally grown produce with its seasonal limitation? It would be great news for British farmers but major changes would have to be made to be able to meet the demand from purely local production.

{EMBED(777776)}

The UK is a major market. With our population of 64 million we represent a very large market for manufacturers and suppliers. Will they change the recent trends of centralised manufacturing and start to rebuild plants in the UK or will they simply accept and pay the additional cost Brexit and borders will bring? There are arguments that borders could help UK Plc by increasing the manufacturing that we have lost over the last few decades, after all 100 years ago there was significantly less transit of goods and much more local fulfilment of demand. This may seem like a step in the right direction but the additional costs of smaller manufacturing units would far outweigh the benefits from reduced shipping and transport.

More so than ever, these questions raise the value of smart inventory management solutions to provide retailers and wholesalers with the capability to model the impact of Brexit type changes to our economy and structure. We can build ‘what if’ scenarios which would enable a retailer to understand what is the likely impact of different decisions and courses of action. They will also enable these companies to reduce their unnecessary inventory today so they would be in better shape to manage the future whatever the constraints and changes that occur.

This same modelling applies to the impact of Brexit on the falling Pound. Strong brands are going to be under pressure to increase prices to offset the value of the Pound, however, retailers do not want to be seen to be increasing prices, as competition is still fierce. Those retailers who will already have hedged against the Pound and no doubt have high levels of international currency reserves might also look at using inventory as a buffer by either increasing stockholding ahead of potential price rises or by tightening stocks if they feel the Pound is about to rebound. Either way, they should model the implications of either action to see what the impact is on inventory carrying costs and how this will impact the profitability benefits of these actions. 

The more knowledge the retailer has and the power to be able to run scenario’s to understand the impact of any changes brought about by Brexit the better. The ability to forecast accurately and plan stock into the future will ultimately enable them to safeguard their business. Modern sophisticated inventory and supply chain optimisation solutions are more than just replenishment, they can become invaluable planning tools for major wholesale and retail companies in uncertain times.