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Brexit: Should You Forward-Buy Inventory to Protect the Supply Chain?

The March 29 Brexit deadline brings many questions and zero answers about the future of trade in Britain.

In the case of a Brexit no-deal, distributors and retailers that do business with the U.K./EU are bracing for tariffs, inflation and delays at the border. Many are considering stockpiling inventory to ensure they can still operate post-Brexit—should you?

There is evidence that businesses are considering a forward-buy strategy to protect supply chain operations and margins. If Britain leaves the EU without an agreement on future trading relations, forward buying could be an attractive choice. There’s a fine line, though, between buying inventory ahead of the March 29, 2019 Brexit deadline and cannibalizing your profits.

Firstly, companies should not forward buy just to do it. The savings could be negated by the cost of carrying inventory that can’t sell. Finding that perfect balance—no stockouts, no surplus, no surprises—requires deep analytical capability and the tools to adapt very quickly to whatever changes Brexit brings to the macro economy.

So the question is not “Should you forward-buy?” But rather, “Are you ready for it?”

Before you decide, here are some things to consider when looking at the bigger picture: What is the impact of Brexit on the supply chain? What are the pros and cons of forward buying? Why is demand forecasting so difficult? Are you ready? Do you have the right technology to adapt your purchasing strategy and protect your profits, regardless of what goes down on March 29?

Brexit’s pros and cons

Supporters of Brexit have a decent argument, with an estimated three million jobs linked to U.K. trade in Europe. In addition, prices may be lower on certain things like travel within EU countries. Finally, there is the free movement of consumer goods and of people–including law enforcement, so that U.K. and EU members with arrest warrants can more easily extradite criminals across borders.

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The cons of Brexit are much scarier, especially to businesses whose bloodline is consumer spending. After March 29, goods traded between the U.K. and EU could be subject to the same requirements as third country goods, including a sudden surge of tariffs and constraints on consumer spending. These changes could happen quite literally overnight.

Uncertainty is the only certainty

It is impossible to know what shape Brexit will take and how it will impact supply chain frameworks post-Brexit. One thing is a definite: if you rely on imports and exports to/from the EU, you must be adaptable to a wide range of scenarios and unknowns.

The key to profitability will be adaptability.

Forward buying pros and cons

Forward buying could be a wise strategy for handling the uncertainty around Brexit (deal or no deal).

A smart forward buy on inventory could bring 5 percent to 20 percent in additional savings to wholesalers, distributors and retailers. Merchants may also be able to pass on savings downstream to their customers, an added perk that can extend profitability further and cement their reputation in the market as a price leader, without sacrificing much.

Good candidates for forward buying are: non-perishable goods or perishable goods with a long shelf life (nothing that will be out of date within 30 or 60 days), as well as products in hard lines.

Before you run out and borrow cash, beware. Because inventory is the biggest asset on the profit-loss statement, you must hedge your investment buy against inflation so that you are operating profitably at all times.

Excess or dead inventory makes forward buying risky without the right math behind it:

  • Inventory carrying costs are about 12 percent of the average unit cost of production
  • Anywhere from 20 percent to 30 percent of inventory is dead or obsolete, even in well-run companies
  • Interest rates on loans for extra stock are running up to 8 percent

Forecast demand: patterns are extinct

So how do you determine what to purchase and when, so you can avoid Brexit-related tariffs, yet minimize unsold goods?

Historically, supply chain managers used manual forecasting methods. This got tricky when it came to running promotions; but for the most part, they could maintain that balance by watching demand patterns. It was typically a spreadsheet, rule of thumb or a gut feeling. When you look at the increasingly unpredictable macro-economy, there are no patterns anymore.

Manual demand forecast techniques can no longer react to today’s highly volatile, multi-echelon supply chains. More automated supply chain analytics and real-time intelligence tools are required to effectively forecast, plan, collaborate and execute on forward buying. Or any supply chain strategy, for that matter.

Technology trumps humans

Technology is the only way to effectively gauge demand volatility, react, and re-plan for elusive macro-economy conditions like Brexit. Technology should not replace humans, but rather automate the constantly changing math inputs and provide daily recommendations, which humans can use to make better purchasing decisions faster.

Supply chain planning solutions do the heavy lifting, such as optimizing every SKU/location nightly, which would be impossible—even for a massive team of forecasting planning and replenishment professionals—without technology.

A purpose-built supply chain planning solution taps into all the demand factors (new tariffs, supplier delays, price changes, promotions, and more) to optimize purchasing decisions…not once, but constantly. Much like the Waze app, which delivers dynamic route recommendations to drivers based on real-time data (traffic, law enforcement), a good solution constantly monitors demand signals and current supply chain conditions, then maps out recommendations at exactly the right time. Then it’s up to the user to decide: buy or don’t buy.

The right platform should get a nightly feed of data from automated systems and re-plan a 365-day forecast every day based on reasonable certainty that you will sell products, versus purchasing overstock. In addition to normal replenishment orders, you can use the platform to evaluate special-order considerations such as forward buying in cases where you want to:

  • Be more adaptable to changes in legislation, such as new tariffs, customs delays or price increases
  • Get special deals or volume discounts
  • Leverage a promotion
  • Hit supplier growth program targets

A good planning system calculates whether additional quantities will increase gross profit after you’ve built orders to serve normal customer demand. Recommendations come in advance of the purchase, so you can meet your customers’ needs first, then separately evaluate the economics of any other considerations.

Forward-buying can be a great strategy against any outcome of Brexit, given you have the right technology to adapt quickly. The benefits of forward buying can be huge:

  • Optimize the economics of every single purchase order
  • Eliminate lost sales
  • Minimize excess supply chain costs

But don’t waste resources on a supply chain planning solution unless it offers all four of these criteria:

Purpose-built. Is the platform designed specifically for commerce, or is it an ERP system retrofitted for the masses? The system should be able to analyze each customer transaction individually and automatically generate actionable recommendations daily. Many other solutions force users to integrate data from multiple modules and navigate across these modules–resulting in duplicated efforts, inefficiencies and security risk. A purpose-built supply chain planning application is unified in a single, secure cloud suite.

Cloud-native. Is the solution cloud-native (really)? There’s a lot of “me-too” marketing going on with “hybrid” or “cloud + on-premise” solutions. No one can be both. Legacy solutions are often migrated to the “cloud,” rather than architected from the cloud-up, so they fail to leverage the massive data processing power, storage capability and scalability of a multi-server, cloud-native architecture.

Some are simply older cloud or on-premise solutions–only now available hosted in the provider’s data center or somewhere else. More than likely, the provider is still amortizing a huge investment they made in technology long ago. The UX looks Circa 1985, perhaps with a little lipstick, but the workflow process is old and clunky. Be especially wary of the “hybrid” cloud, a term that means the provider has not made a commitment to solution architecture, either on-premise or in the cloud. These faux-cloud solution providers are opportunists just checking the box on “Cloud.”

Rather than owning a huge server and database suite that will only get used a tiny slice of the day, a cloud-native solution offers the freedom to spin up/down server capacity as needed. The barrier of entry is much lower, time to implement is much faster, and costs are nil (comparatively).

Multi-echelon collaboration. The supply chain is no longer a linear, “sell-one, buy-one” process. It is a complex multi-echelon ecosystem. Each store, DC and supplier has its own distinct demand forecast. It would be too time-cost-prohibitive to produce precise order projections for every SKU and location, optimize those across echelons, and communicate a 365-day demand plan to everyone. Is there a feature that supports multi-echelon collaboration, both up- and down-stream?

Consulting included. Finally, no supply chain planning provider should make more money off consulting than the software itself. After all, it’s about software and making customers profitable. Yet, many drag out the engagement forever, charging extra consulting hours for continuous improvement services that should be inherent.

With a cloud-native solution, the system can constantly access customers’ databases and scan their environments to make unsolicited recommendations for improving profitability and service levels. It’s a baked-in value add.

You should expect to receive real-time alerts about problems and opportunities, including: quarterly executive briefings, ongoing KPI assessments, seasonal forecast assistance, period-ending fine tuning, and category management analyses. If a provider tells you these are additional onsite engagements, you’re leaving money on the table.

Rod Daugherty is the vice president of product strategy for Blue Ridge, where he oversees product direction for the supply chain solutions company.