Brexit could expose weak links in business supply chains - Pinsent Masons

The prospect of a no-deal Brexit looms after a week in which UK and European leaders have acknowledged they appear to be further from an agreement than ever.

Businesses are increasingly worried about the prospective impact of a no-deal Brexit on their supply chains. Picture: Lisa Ferguson

As the Downing Street clock counts down to the 31 October deadline, businesses are increasingly worried about the prospective impact of tariffs, exchange rate fluctuations, goods being held up at border checks and, crucially, the solvency of businesses in their supply chains.

We have seen a marked increase in interest around post-Brexit supply chain failure and have launched a Brexit hotline to easily access advice on spotting supply chain fault lines and how to mitigate any fall-out when a supplier goes out of business.

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There are typically a number of early warning signs that a supply chain is in financial difficulty. Businesses should ensure they have processes in place to spot and act on these early on. Some of the largest supply chain failures have resulted when early warning signs were not aggregated through a businesses’ processes.

Time and money are the commodities in shortest supply when a supplier is in financial difficulty, says Francis. Picture: Contributed

Red flags

Businesses should be vigilant for requests from the supply chain for deposits, up-front pre-payments or reduced retentions, attempts to inflate payment applications or to change payment terms.

Other red flags include failure to deliver in line with agreed schedules, unexpected price rises or attempts to renegotiate terms, a failure to file statutory accounts on time and silence or evasion tactics. High staff turnover, market intelligence and rumours (which should be treated with caution) can also provide valuable insights.

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Legal or commercial departments should be informed immediately of concerns so they can obtain financial and market information, assess how serious the situation is and plan a strategy.

If deliveries are not on schedule, a review of contract provisions should be done regarding delivery, breach and termination provisions, and consideration given on the practicalities of transferring to another supplier. Any replacement strategy may need to be agreed with relevant funders and the terms of any loan arrangements reviewed.

Right to terminate

A subcontract may grant the right to terminate in an insolvency situation but a review should be carried out to identify the formalities which have to be followed, whether other parties have to be informed and the impact of such a termination on other contracts in the supply chain.

If your business suspects a member of the supply chain is becoming insolvent but you don’t have retention of title provisions in your contracts to protect risk, aim to have equipment and materials brought to your site as early as possible. This will ensure you have these to hand, reduce delays or costs trying to get them back and ensure they are protected from creditors.

In our experience, time and money are the commodities in shortest supply in a situation where a supplier is potentially in difficulties. It pays therefore to plan ahead – waiting for the supplier to go bust may be too late.

In any contingency plan a business should stay close to its suppliers. A strong relationship and flow of information is one of the best means of avoiding exposure to a sudden insolvency and may buy time to plan and mitigate risk. Get your reporting systems and paperwork in order, ensuring you have a complete set of contractual documentation. Ensure procurement and finance teams are familiar with risks in your supplier base, can spot the early warning signs and are clear about trigger points when specific actions are required.

As the saying goes, “prevention is better than cure”. Without adequate planning your business may be a hostage to the misfortunes of your key suppliers and the prospects of recovering the situation after-the-event quickly and cheaply are often poor. Act early and be persistent. Time is unlikely to be on your side and being visible and persistent with your supplier from an early stage gives you the best chance of maximising your outcomes.

- Clare Francis, partner and Brexit expert at Pinsent Masons.