Companies re-evaluate their UK-EU logistics configurations
After struggling since 1 January with new post-Brexit transition border processes that have led to increased delays, paperwork, and costs, traders are expected to further review their supply chains as they move beyond the initial firefighting mode.
European and UK shippers are expected to re-evaluate their UK and EU logistics configurations after struggling since 1 January with new post-Brexit transition border processes that have led to increased delays, paperwork, and costs.
Third-party logistics providers (3PLs) have talked for some time about some realignment taking place in anticipation of Britain’s withdrawal from the EU single market and customs union at the end of last year, with some 3PLs or their customers switching from a European distribution centre (EDC) model to a dual-hub model with separate EU and UK hubs. But some believe further review and potential significant realignment is likely now that the full implications of the UK-EU trade and cooperation agreement are better understood – and companies get to grips with new customs, ‘country of origin’ (COO), and VAT arrangements, which have been more problematic than many anticipated.
Freight forwarder Flexport observed last week in a discussion about the implications of the new UK-EU trading arrangements that the priority in these first few weeks has been simply to get the goods moved to where they need to be and resolve any short-term problems preventing or related to that. But following that initial phase of firefighting, they expect customers to review their European logistics strategies in order to minimise any additional new costs and complications and delays that are now being incurred because of the new trading arrangements.
Further realignment now
It believes there will be a further realignment now – not just for those currently using the UK as a regional hub for the EU, or vice versa, but also for those using the UK as a hub for Ireland or Northern Ireland.
UK forwarder Metro Shipping observed that shippers and hauliers were struggling with new post-transition border processes, highlighting warnings that in the short term there will be costs and delays “and in the long term, significant changes to the way manufacturers in the UK and in the EU interact”. It noted an anecdotal example of one company where shipment paperwork that used to take less than three hours was now taking them five days.
“It is certainly our experience that border processes that should take minutes are stretching into hours, as our Customs broker team work to compile the information and paperwork necessary to process inbound and outbound European movements,” the company added. Among the concerns it highlighted was that “too many shippers are being exposed to potential issues with HMRC, as uninformed drivers exit ports without following the correct procedures, or discharging transit documents and they risk avoidable duty charges, simply because the origin of goods isn’t being declared correctly”.
In addition to new customs requirements adding to costs, delays and documentation requirements, available cross-border trucking capacity is tighter and more expensive, noted Flexport. Transit and turnaround times have increased due to new border requirements, increasing the amount of work and reducing the implicit capacity. And t the same time, capacity is being taken out of the market with some haulers suspending services between the UK and EU entirely.
Meanwhile, it said new rules of origin are leading to new tariffs – including on re-exports. And even if goods do meet the rules of origin, having the evidence to support that and meet those requirements can be hard, it added.
Supply chains are adapting
As a result, the forwarder noted that supply chains are adapting. In the short term, that meant businesses are looking for alternatives for UK-EU shipments, with trucking in some cases being replaced by shortsea and other services to avoid congestion – “although this will likely not be a long-term impact as trucking congestion clears up”.
But in the long term, re-evaluating distribution hubs will be important, the company noted, highlighting that with the new rules of origin, “there’s a clear benefit now to establishing distribution hubs in mainland Europe instead of the UK if companies are supplying business in Europe”.
Companies are also “looking to consolidate EU to UK import volumes before cross-border transport, to minimise customs and other paperwork costs. Previously, reducing shipments was less relevant, but now every shipment will incur the cost of customs clearance”, it noted – even if there is no duty payable.
Flexport noted that business was “fundamentally shifting in terms of trade between EU and UK”, with
companies “looking to optimise duty exposure” – for example, “looking towards bonded storage models or to have more, singular hubs”.
Indeed, various reports in the mainstream media have highlighted businesses whose entire business model appears to be threatened by the changes, some of which claim they have been advised by UK government experts that their best way of dealing with the challenges is to set up separate EU-based entities.
B2B vs B2C models
However, some freight sources note that it is important to distinguish business-to-business (B2B) from business-to-consumer (B2C) shipping models, with some of the examples cited in the mainstream media of businesses collapsing mainly those whose model is based on small B2C shipments, where a £35 or £45 customs clearance charge may be a dealbreaker. But such charges are much less of an issue for B2B freight movements.
UK-based freight forwarder Davies Turner has significantly expanded its customs teams in the months leading up to the end of last year, and is seeing a threefold or fourfold increase in the number of customs clearance instructions it needs to process.
Like many freight forwarding and logistics companies, its UK-EU volumes remain well below what would normally be expected for this time of year – either because of pre-stocking, uncertainty about the processes, or a possible general reduction in UK-EU trade of goods.
Lower UK-EU volumes
Davies Turner director Alan Williams estimates that UK-EU volumes have been down by about 40% in the first weeks of this year, on average, although he expects traffic to increase significantly in the coming weeks.
He does not expect many cargo owners in the short term to switch suppliers – for example, EU companies to seek EU rather than UK suppliers – to avoid costs, because there is no duty to be paid on goods manufactured on either side when moved between the two jurisdictions. “Incrementally, the charges for paperwork shouldn’t be prohibitive; it’s the time delays that hit clients and hauliers more,” he notes.
Nevertheless, despite working closely with customers ahead of 1 January, he has been surprised that some companies have not been well prepared.
“We have been surprised just how many European businesses and European hauliers have put in little or no preparation to the UK leaving the EU,” he noted.
To some extent, the new ‘country of origin’ arrangements have been a challenge to customers, and the new VAT arrangements. He notes: “COO was always going to be tricky and we have been for months encouraging clients to use a bond facility – be that a DT warehouse or CFSP (Customs Freight Simplified Procedure) to assist on the challenges of non-EU or UK-origin goods.”
Looking at the additional challenges faced by customers, he says it is “easier to categorise these problems into sectors: big ‘blue chips’ and supermarkets moving goods across the channel with relative ease; SMEs, especially those with a turnover below GBP 1 million seem, to have less preparation – especially when the freight is paid overseas.
“Lack of knowledge regarding Incoterms is also playing its part as before this wasn’t really an issue.” In contrast, since 1 January the Incoterms have become much more significant “since it has a consequential process to follow for all when it comes to payment and declarations” – for example, the consignee being required to pay duties or customs charges on delivered at place (DAP) shipments.
But Williams believes it is still too early to know how many companies will want to significantly restructure their UK-EU supply chains, although customers are reviewing their options on aon ongoing basis. “I think we need to see things settle done and see if easements are added to make it easier to move the goods,” he added, highlighting that had been some minor easements in France only yesterday relating to greater flexibility regarding declaring the Office of Transit in France.
He agrees that that the priority in these first few weeks has been simply to get the goods moved to where they need to be and resolve any short-term problems preventing or related to that. But following that initial phase of firefighting, customers may be expected to review their European logistics strategies in order to minimise any additional new costs and complications and delays that are now being incurred because of the new trading arrangements.
“I think that is a reasonable assumption to make,” he notes. “Clients will also be able to see the impact the increased costs have on sales and customer satisfaction” – for example, longer transit times.
Meanwhile, he highlights a number of options available to eliminate or minimise additional costs. For example, CFSP or customs bonded warehousing offers non-UK or EU products to be stored and not entered into free circulation. A client can then re-export to Europe under DDP terms (delivered duty paid), paying the duty for the EU client.
“This doesn’t add additional cost other than the cost administration (bond) as the client would have to pay the duty anyway if selling in the UK,” Williams notes. “This works on B2B very well.”
“This also allows the UK-based company to mix its inventory – be that e-com/wholesale/retail to match forecast and sales expectation much quicker.”
He says B2C delivery to Europe “is a challenge and they would need to have either a fiscal entity set up in Europe or work with an approved distributor”, he notes. “B2C business can work on high returns – from 5 to 20% of sales – so you wouldn’t want this coming back to the UK, otherwise you would pay double on duty due to COO (country of origin) rules; so having an EU warehouse can aid this channel.”
Whether customers choose to have two warehouses or just one “will be based on the companies’ projected sales forecast to that particular region. It’s all about a ROI (return on investment) and if your EU trade is significant, then having an EU warehouse pays for itself, and vice versa in the UK.”
But there are downsides to this approach. “Having two sites splits inventory and makes it harder to react to trends against forecast. For example, hotpants are up 50% on sales, but T-shirts down 50%: how do you get the best-selling product to the areas of sale when having two sites? It’s an expensive transfer, but again it’s all about ROI.”