The EU Referendum – Supply Chain Trade at Stake?

Jun 20 2016, 8:57 AM5 min read

No matter where you are in the world, you’ll have heard about Thursday’s referendum in the UK about its EU membership. Have both sides overlooked a critical point in the debate?

This article was written for Procurious by Chris Cliffe.

Procurious is a global platform, but wherever you are, you’ll have heard about this week’s referendum in the UK. Will the UK #RemainIn or #brexit the EU this week?

Far from being specific to the EU, I think it’s a global issue. And one I find myself thinking about sitting on a train…

Referendum & the Supply Chain

No one can agree on the exact figure (£350m-£380m per day), but the UK is a ‘net contributor’ to the EU. In fact, the UK is one of the biggest net contributors along with France and Germany. But what about taking this issue in (very) simple supply chain terms?

Customers pay suppliers for products. Suppliers make profit from product sales. Therefore we can view customers as ‘net contributors’ to suppliers, much like the UK to the EU. What would happen if a supplier were to lose one of its biggest customers?

The loss of that customer’s revenue needs to be mitigated. Replacing that customer with new business of equivalent size will be difficult, or at least take a long time. Whilst costs may have gone down through no longer servicing that customer, cost reduction is not proportionate to the lost business, leaving an increased cost to be recovered from remaining customers.

What are the options? The supplier can: take the hit; make efficiency savings; increase prices for other customers; or pass on the cost to the supply chain.

So, if the EU loses a large net contribution, other member states will either see a reduction in EU funding, as there is less money to share out, or they will have to renegotiate their contributions to the EU to make up for the shortfall.

Contributions are proportionate, so all member states will either see their contribution increase, or their share of the funding reduced. France and Germany would likely be most affected.

Shifting Issues

The UK might view this as the EU’s problem. However, all that will have happened is the ‘problem’ has just changed.

Assuming France and Germany – two of the UK’s largest trading partners – did pay more into the EU to cover the loss of the UK’s contribution, how will they take the hit? More austerity? Or will they pass on the cost to their customers – particularly if the customer caused their cost increase!

The UK will want to continue to trade with the EU member states. That will be possible, and the member states will want to trade. However, having left and caused those very same member states to see higher costs as a result, I’m struggling to see why we aren’t more concerned about potential ‘tariffs’ which may be applied.

The risk is that the EU will want to recover the ‘cost’ it suffers from a Brexit. Furthermore, the EU will debate and agree their stance on this. And guess what – the UK won’t be at that table.

Supplier Perspective

From a supplier perspective, losing a large customer simply to find that customer still wants your product, but just didn’t want to pay for it is frustrating enough. But what example would you set to your other customers if you actually agreed?

Of course, suppliers will be happy to supply those products, and even though the commercials of the deal might change, you’ll inevitably be charged the same (or more as the deal is no longer standard and will have introduced complexity, risk and cost). Other customers will be watching you.

But the UK isn’t just a customer, it’s a supplier too. Exiting the EU may mean higher costs for the UK’s customers, meaning they have less money to spend. They may want to trade, but could buy less, or need lower prices to compensate.

Let’s consider Framework Agreements. Frameworks are really useful commercial vehicles (a separate debate!) to access products and services without complex, lengthy advertised procedures.

Typically, a set of suppliers are appointed to a Framework for a fixed period. Suppliers who are not appointed to the framework cannot trade through it, and consequently find it more of a challenge to trade with the public sector, who want to use the ‘easy’ route.

Think of the EU as a framework, and the member states as the suppliers appointed. The UK could be about to give up its hard fought position on the framework. In doing so, the UK will be making itself more difficult to trade with, and it will be natural for current EU customers to look at other, less complex, sourcing options.

So, if the referendum goes for #Brexit, does the UK become just a country geographically in Europe, but in the ‘no longer free to trade’ area? Is the UK’s slice of the EU trade pie more at risk than either campaign have realised?

Well, I conclude that…my train has arrived on-time! Don’t forget to vote if you’re eligible!

Want something to take your mind off the referendum? Here are the week’s procurement and supply chain headlines…

Starbucks Names New Supply Chain Chief

Hans Melotte, former Johnson & Johnson CPO, and current Chairman of the ISM Board of Directors, has been appointed by Starbucks as its new Executive Vice President of Global Supply Chain.
Starbucks has approximately 16,000 suppliers and operates in over 70 countries and has recently announced plans to open a 20,000 square-foot roastery in New York.
Mr Melotte will oversee supplier relationships, distribution, transportation and store delivery, and is expected to transform stores’ distribution channels in line with company expansion.
Mr. Melotte also featured in Procurious’ recent article on the use of the term ‘strategic’ in the profession.