This is Part 4 of the content series STEEP: Five Drivers of Change in Supply Chain. The series analyzes Social, Technological, Environmental, Economic and Political issues in the supply chain industry to gain a deeper insight. To see an overview of the series, click here.
In an era of business known for companies becoming leaner and more agile, supply networks have diversified and become increasingly global enterprises. Supply chains are dependent on the financial security of their partners and, in many cases, the nations they reside in. When uncertainty creeps into the economic sector, tumultuous times often follow.
We don’t have to dig deep into annals of supply chain history to uncover high-profile cases of economic disruption in supply chains. Today, we simply have to check the day’s news surrounding Britain and Greece.
The 2016 vote for the United Kingdom to break from the European Union led to a boom of speculation on what the long-term effects would be for the nation’s supply chains.
On the other side of the continent, Greece’s economic woes threaten the nation’s status as a trade partner, one whose place in the global supply chain has always been strong thanks to its ports. Native industries such as olive oil production could be adversely affected if the country should follow Britain’s lead, as many Greeks would like to do, and exit the Eurozone.
This uncertainty has far-reaching consequences that impact overall GDP for these nations and the consumers around the world that drive their economies. For Britain, the long-term impact of Brexit remains to be seen as the UK has only begun the process of executing its departure from the EU. In the case of Greece, it is not yet known what a default on their debts would mean, but we are already seeing significant strain being placed on their supply chains as their slow economy continues to struggle.
These two cases of economics as a driver of change in the supply chain industry present specific concerns for the companies attempting to survive in that climate and valuable lessons for supply chain managers looking on from afar.
Brexit: Assessing Risk and Avoiding Potential Pitfalls Will Determine Success
Long-term repercussions from Britain’s vote to leave the EU will play out over the coming years and projections for what those effects look like vary depending on who’s doing the interpreting.
The knee-jerk reaction to the vote was not positive. More than $3 trillion worth of stock market value around the world was lost after the vote, leading to immediate concerns over Britain’s status in the global marketplace. The British pound dipped to its lowest value compared to the dollar in three decades.
Eventually, the market returned to relative normalcy as the UK is now beginning the process of negotiating new trade deals which may complicate things for supply chain managers who have parts of their operations based in Britain. In a poll from business advisory firm CEB of more than 600 corporate executives, nearly 60% said that they were not prepared for the “leave” vote to occur. Supply chain was the primary concern for 13% of respondents.
If getting goods in and out of the country becomes more complex or expensive, foreign firms sourcing goods or raw material from Britain may have to adapt and move operations elsewhere. For major supply chain players with a foothold in the British market, approaches to procurement, logistics and shipping will all be affected.
Prime Minister Teresa May faces a tough road ahead as she attempts to negotiate free trade with the EU during Brexit talks. The Wall Street Journal highlighted four trade partners in particular which will play an important role in the negotiations. France, Germany, Ireland and the Netherlands are all major trade partners which Britain is dependent on, with Spain, Belgium and Italy also proving to be net exporters that would likely be open to free trade deals.
Ireland is perhaps that most severely affected, as much of the Irish farming industry’s product is consumed by UK consumers. Sharing a border with the UK can somewhat complicate things and there has been no shortage of tension with the Irish government attempting to lure international firms calling the UK home away to its own shores. Irish airline Ryan Air added fuel to fire with a warning that flights from the UK to the EU will be disrupted if the UK government doesn’t renegotiate its place in a single aviation market.
Meanwhile, German Chancellor Angela Merkel has indicated that the UK, whose auto business is intimately connected to German imports and the freedom to export its own products to the EU, would not be granted access to the Union’s single market without accepting a free flow of goods, capital, services and people. Germany and France will both hold elections in 2017, the results of which could change the landscape once again.
The areas in which the UK is dependent on these four countries are significant. It runs a trade deficit on food and pharmaceutical products with all four. Not having open access to them could see drastic price changes to those goods, affecting Britain’s economy and political stability. Naturally, these countries will not want to lose a valuable trading partner in the UK, but political pressure to ensure their exit from the bloc comes at a price and does not encourage other countries to follow is abundant.
Many economists believe exchange rates for the pound sterling will become vulnerable to drastic swings in value as the UK negotiates its exit from the EU.
“Because of Brexit there are a lot of financial issues that need to be worked out,” Gerhard Plenert, supply chain professor at Florida Tech said. “Britain thinks they will weather the storm just fine, but they are uncertain about Scotland, Ireland and Wales, who all voted to stay. That might get confusing if they decide to rejoin the EU and not follow England’s vote. There is still a lot here that needs to shake out and there is no easy answer about the overall impact.”
As the nation creates new trade deals with the rest of the world, the pound may weaken even further against the U.S. dollar and the euro, but it’s difficult to project where it’ll end up after all is said and done. Dual sourcing materials and adopting a distributed model of manufacturing across the continent could provide the flexibility and resilience against market forces that companies need to survive Britain’s negotiation phase.
When it comes to exchange rates for companies partnered with British counterparts, contracts that keep a set rate in place may need revisiting. Exchange rate clauses inserted into contracts can only protect businesses conducting overseas trade to a certain extent. Once the exchange rate moves to a certain point, most contracts then undergo a price renegotiation.
This is good for suppliers as it allows them some flexibility if they purchase raw material in Euros, then sell a finished product in pounds or vice versa. But the effect for British companies could be devastating if it leads to a loss of business or diminished return on investments.
Trade conditions are unlikely to change in the immediate future, giving procurement firms within the UK time to calibrate their operations to any outcome. In the case of supplier relationships, EU-based suppliers may become too expensive for UK companies to work with, leading to an increase in local subsidiaries.
Conversely, companies using UK-based suppliers will have to monitor trade agreements. Depending on the outcome of those arrangements, commodity prices, as well as the risk and cost of exporting and importing goods to the UK, could increase. In particular, procurement firms sourcing globally will have major concerns to address regarding tariffs.
Firms relying on exports as their primary source of revenue have to worry about cost management and the volatility of the pound in the marketplace. According to supply chain blog Spend Matters, these firms will likely weather the storm if they can increase value-added activities by 50% or if suppliers are sourcing from local vendors.
It’s too early to foresee Brexit’s long-term implications for the supply chain as the country is only beginning the two-year withdrawal process and faces many other uncertainties. Will Scotland hold another referendum calling for its independence? Will trade deals send Britain’s import/export business in the gutter? With the value of the pound continue to crash?
Grexit: Economic Uncertainty Threatens Greek Supply Chains
The Brits may not be alone in exiting from the EU. Greece has been suffering one of its worst periods of economic turmoil in recent history over the last six years, requiring one bailout after another from other member nations. In fact, Greece’s struggles have in part fueled the rhetoric that caused Brexit, and if Britain can smoothly transition to a post-EU life, there is speculation that Greece may follow in their footsteps, thus reinstating their own currency.
Sovereign insolvency is not new to Greece. Should the nation default on its debts to the EU, it would be its sixth insolvency in the last two centuries and second under the euro.
Greece is a big player in the supply chain industry due to its ports and its place in the olive oil, crude oil and pharmaceutical industries. Businesses in these industries that export goods face a difficult dilemma if they need to borrow money to operate. With Greek banks facing stiff restrictions on lending, these companies have become risky trading partners, leaving their partners to decide whether or not they should look to do business elsewhere, in a more financially stable environment.
Greece’s struggles fell to the back pages recently, given the fresher, flashier headlines of the Brexit vote and President Donald Trump’s victory in the 2016 U.S. election.
But Greece is front page news again as talk of “Grexit” looms, just as it did in 2015 before the nation took a bailout deal from the European Union, with creditors Germany and the Netherlands doing the bulk of the lending. That bailout package came with strict stipulations for Greece’s bureaucratic government to cut costs and make the nation’s debts sustainable. The 2015 bailout brought the total of Greek debt to $215 billion, and was Greece’s third since the crisis began.
Now, as Greek creditors and the International Monetary Fund (IMF) seek to collect on what they’re owed, they find a country that still cannot meet the basic requirements of the agreement and may not be able to be free of “emergency care” before 2018, as was originally planned. As they and the Greek government look to the future, the latter is under pressure to increase taxes and lower spending even further than they did following the 2015 bailout.
With heavy restrictions on Greek banks and the stock market, political stability is badly needed. Since 2009, Greece has had six prime ministers and nine finance ministers, none of which have been able to stabilize the country’s economy. Greek industry has been left reeling while the IMF and EU attempt agree on what austerity measures come next. The limbo those businesses currently find themselves in can be just as damaging a weak economy.
“Greece needs a supply chain structure more than ever,” Plenert said. “They are a major shipping port and they need to have goods flowing through the country. Greece, of course, now has less buying power and there are fewer goods that they can afford to buy and which can flow into the country. The biggest concern is whether the EU will continue to support Greece’s economic decay in light of their unwillingness to put up with German restrictions and economic demands. A showdown is imminent. And the supply chain impact can only get worse for Greece. Supply chains will simply move to other locations if Greek ports end up being restricted.“
Rock Bottom or Just a Preview?
When Greek banks closed for a period of three weeks in 2015, channels for funding and access to capital was shut off, meaning doing business became much more difficult for supply chain companies. Those affected included firms that worked with international partners as well as domestic companies working together to take products to market.
The olive oil industry saw particularly troubling trends as the nation’s half-million producers of olive oil began to demand cash payments from their distributors to take the product. The loss of confidence in Greek banks meant that exchanging funds for Greek businesses would have to be done without the banks, something most companies were not prepared to do.
Greece imports more than half of its food supply and is reliant on feed for livestock from foreign providers, meaning agricultural activities were suddenly thrown off balance when companies had limited funds to pay for those services.
The nation is also home to a large number of third-party logistics providers that service much of the Balkan nations, Italy, Russia and Turkey, thanks to its ports and extensive railways. With banks struggling, cutting off and limiting the funds a company or individual can use, the outlook for Greek businesses remains grim.
Greece’s domestic consumption rates took a major hit due to cash problems for the average working individual. A July 2015 article from The Economist estimated that Greek consumption levels have dipped by 70% during the crisis. With that decrease in demand, small and medium-size companies have found that some of their operations have come to a halt.
A survey conducted by The Journal of Business Science and Applied Management interviewed executives at a large number of Greek logistics companies, which provide a range of services from transportation to warehousing, distribution, packaging and customs services.
When asked what effect the economic crisis had on their businesses, executives listed applying stricter procedures and criteria for the selection of customers as the biggest effect. If customers prove to be inefficient, firms have to cut ties with them.
The second most noted effect was the reduction of price for their services, followed by a shrinking of their customer base and as a result, the postponement or suspension of investment and reduction of operations.
The report also broke down the concerns of managers at each logistics stop in a supply chain. For example, procurement managers noted that the search for cheaper suppliers had intensified due to the crisis. Meanwhile, warehousing managers struggled most with key performance indicators as they experienced a decrease in commodities per order and lower profits per order, as their customers had been severely affected by the decrease in demand for their products.
When it comes to inventory, reduced demand has decreased the need for transport and storage. This means less need for warehousing as companies shift toward a customer-centric model for demand planning rather than building up stocks of goods. It also means smaller order sizes for shippers who make more money based on the size of the load they carry.
In general, the executives’ outlook on the crisis was bleak. Nearly 70% said they expect the competition from foreign third-party logistics providers to increase substantially, while 62% said they expect the cost of transportation to rise, and just over 50% said they expect operations within Greece to slow down even further.
Whether or not Greece can meet the EU’s austerity measures and make the necessary payments to service its debts remains to be seen. What happens to Greece’s logistics and banking sectors may help determine whether a Grexit does materialize, but in the end, Brexit may play just as important of a role.