The Brexit Storm – how procurement in the energy sector is performing since the UK voted to leave the EU

The tidal wave of change has hit the UK and European economies offering highs and lows since the UK’s decision to leave the EU. The resulting volatility in currency has offered advantages for exporters while importers have struggled with higher costs and less uncertainty than they once knew.

Keeping supply chains of goods and services open to fuel customer and business needs is a fascinating study in these interesting times. So CIPS (The Chartered institute of Procurement & Supply) decided to run a survey amongst its global community of procurement professionals to see how this momentous decision for more than two generations is impacting on supply chains.

The EU referendum vote was split – a majority of 51.9% compared to 48.1% who wanted to stay in Europe. But once Article 50 was invoked on the 29th of March 2017 the formal process of ‘divorce’ had begun. This decision is just one example of the global lack of trust and transparency in business as supply chains are being increasingly disrupted by ideological battles, and the move away from globalisation towards more protectionist agenda. Any prolonged conflicts whether physical or ideological are likely to result in supply chain no-go areas, and potentially, a scarcity of some goods.

Over 2000 professionals from a variety of sectors and from around the world responded to the survey* and the overall results showed that at least in part, companies were going to do business in a different way. For instance, the overall results showed that 32% of UK businesses using EU  suppliers were already looking for British replacements. The value of insourcing is not insignificant. Turbulent times means high-critical products may need more management and closer control and UK supplier costs attractively lower because of the weak pound making imports more costly. However, there is always a flipside. According to 46% of the respondents in the global results, procurement professionals in the energy sector are planning to reduce their use of UK suppliers so this certainly does not necessarily mean more business for the UK.

In the energy sector itself, a high proportion of supply chain managers (26%) said they were looking for more suppliers inside the UK. According to the Energy in the UK report in 2016, the energy sector is a significant contributor to the UK economy, with the creation of 637,000 jobs and with £18bn invested in generation, distribution, and customer service. It could be argued that this contribution will rise if more UK suppliers are employed by the sector.

The survey found that currency fluctuations have had the biggest impact as the UK moves towards the EU exit doors. 55% of respondents said that supply chains had become more expensive as a result of currency fluctuations. Though the pound has regained some of its strength, marginal gains, it has fallen around 15% against the dollar since last year’s vote and doesn’t look like making a strong recovery any time soon. The UK is a big importer of energy and these price rises are impacting on every sector and business margin unless there was currency hedging in place and price caps in contracts keeping costs low.

But, that hasn’t been the experience of 20% of survey respondents who have admitted to having to re-negotiate contracts with their suppliers. Procurement teams are likely to see more pressure from their Boards and CEOs to bring prices down as Brexit negotiations progress and volatility continues. Around 12% of procurement professionals responded said they have had to cancel contracts in response to this uncertainty.

With all this turbulence, energy procurement teams in the main, haven’t been slow in attempting to at least begin to understand any impact to their business as 41% said they were performing a risk analysis exercise. Others were mapping the possibility of new tariffs (35%) to control their costs but almost a quarter, worringly (24%) had done nothing at all to prepare. When the survey was conducted we were still waiting for the results of the General Election and an expected Conservative majority. But following the surprise result the political and economic situation became even more complex, so we would expect more businesses to be planning their contingencies as we approach the second survey of the procurement community in a few weeks’ time (amend as necessary).

Looking to the future, the sector had decided on a number of major factors that would make Brexit negotiations difficult. The UK’s weak negotiating position at 47% came top of the challenges as the EU’s unwillingness to offer an easy deal became obvious. Next, the lack of negotiating skills was also an impactful result as 41% of respondents were doubtful whether the existing skills were strong enough to make a meaningful deal. Time was also an issue amongst 37% of procurement professionals and the difficulty the Government faced of having too few business contacts was of concern to 33%.

Judging their own supply chain skills, the profession was optimistic in the energy sector. 71% believed they had the right mix of skills to manage future disruptions to their supply chains along the Brexit road. The free movement of people was also of lower concern as only 13% thought ensuring free movement of peoples between the UK and Europe was important in the sector.

As volatility and uncertainty follows every Government Brexit announcement, the energy sector agreed (59%) that uncertainty around trade agreements would continue to make long-term planning difficult. This uncertainty also made the management of supply chains difficult for 38%.

And finally as 85% believed international global supply chains would still play an important role in business, the results of the second CIPS survey should be fascinating reading. Maintaining the health and strength of crucial supply chains, keeping businesses and consumers supplied with their energy needs will be uppermost in the sector’s response to Brexit no matter what the obstacles are ahead.

www.cips.org

*The survey comprised of 12 questions and ran from 31st March to 12th of April 2016. The survey included 904 UK businesses with European supply chains and 117 European businesses with UK supply chains. The highest number of respondents came from the manufacturing, banking, retail and energy sectors.