Thursday 7 February 2019 8:04 am

Millennium Bug lessons: Stop Brexit stockpiling

UK manufacturers are stockpiling raw materials at the highest rate since figures were first collected 27 years ago.

While it might look like a sensible response to uncertainty, this kind of Brexit anxiety will have long-term implications for supply chains and for the UK economy as a whole, regardless of what happens in the negotiations. “Demand amplification” is a recognised phenomenon in the logistics world – and we have direct evidence to show why it’s a problem.

Businesses and politicians appear to have short memories when it comes to stockpiling. Just 20 years ago, the UK saw a similar nervousness over the fragility of supply chains in the run-up to 2000 – the “Millennium Bug” – if global IT systems were disrupted or even failed.

At Cranfield, we carried out work to look into stockpiling plans and model what they would actually mean in practice.

For individual organisations, based on an average 12.5 per cent planned increase in stocks, there was the sudden burden of “dead money”. Finances invested in stock limited the ability to grow.

Looking at real accounts, a retailer’s growth prospects were reduced by more than one per cent, while the wholesaler and manufacturer were pushed back into a “minus” growth situation. In other words, wasteful investment increases the risk of business failures.

Even small increases in customer demand result in large variations being transmitted down the supply chain. A cycle of over-ordering and stockpiling leads to demand distortion, and any further over-ordering contributes to the amplification.

Typically, a demand increase of 12.5 per cent will more than double when passed onto a supplier, to 26 per cent, resulting in that supplier placing an increased order for their own supplier of 55 per cent.

This means that big oscillations in inventories and supplies can occur for many years into the future. For the economy as a whole, there’s the danger of boom and bust cycles until the distortion works its way out of the system.

Meanwhile, the increased costs put more strain onto the smaller firms – at a time when more businesses choose larger supplier partners.

We also need to be careful when looking at the figures for UK GDP. That modest growth which seems to show a nation in better shape than the rest of the EU might well be a mirage for the moment, just the effect of stockpiling, to be followed by a steep fall off in demand.

In 1999, we were called in by the Department for Trade and Industry to calm industry nerves, explaining that stockpiling could cause worse problems than the bug itself.

Now, the government is encouraging (or at least not discouraging) stockpiling as a precaution. Perhaps politicians are trying to increase public concern for a no-deal Brexit, or maybe they’re misguidedly trying to be prepared. Either way, this is an issue of responsibility.

Organisations and individuals need to look at stockpiling with their eyes wide open. It might be a useful precaution in some cases, but understand the risks. We need more conversations across supply chains to help increase certainty and trust, to determine what’s necessary and what’s overreaction.

Otherwise stockpiling could be a bigger problem for Britain than even the most chaotic Brexit.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.