An article in the Wall Street Journal (February 1, 2019) titled “Secret Truck Routes and backup Storage”, describes plans by one UK company, Heller Maschinenfabrik GmbH. The company gets 60% of its components weekly from suppliers across Europe, assembles it product and ships it to Germany. The company has purchased additional storage space, has plans to stockpile components, has plans for a secret transport route to avoid congestion in Dover and plans for additional staff. But all of this is on hold until the potential Brexit scenarios become clearer as they involve additional costs of over 150,000 pounds. Given the inability to pass on these additional costs, is Heller’s decision to stockpile components and remain in the UK the optimal decision or should the company make plans to move its assembly operations ? Should the company postpone any capacity expansion plans in the UK, as is has done in the past, until uncertainties are resolved ? Should Heller create an alternative source for assembly in Germany immediately and thus have other options to supply customers ?
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Global Supply Chain Musings 
This problem is a good candidate for network optimization. If they make a decision that it is optimal to relocate, I can see needing inventory to wade through a transition. Maybe the stockpiling is being done because they expect to need to relocate, and they don’t want to miss sales during a move.
In my opinion, stockpiling the components and staying in the UK is not an optimal decision for Heller. No matter how many components the company stockpile, soon or later the
company will face the impact of Brexit once the stockpile depletes completely. Also, the impact of Brexit is unknown. There is a possibility that Germany may import these
components from a different supplier based outside UK. In such scenarios, the extra amount spent on purchasing additional storage space, or having additional staff is a complete loss.
As the company gets 60% of suppliers across Europe, it could move its assembly operations outside UK, maybe in Germany itself. This action will reduce the company’s lead time
in supplying the materials to Germany, as well as Heller can have better inventory management planning.
For the immediate time, Heller should stockpile as much material as they possibly can. Other companies are following suit in this endeavor and realize the potential threat that Brexit poses to trucks along the border. In the long term, if no negotiations can be made, Heller should consider relocating to another member country within the EU and concentrate efforts in emerging markets like China. The absolute last resort would be to close its operations in the UK and sell its remaining assets to recoup the losses sustained due to Brexit.
With the new Prime Minister, Boris Johnson, Britain is moving towards hard Brexit. The worst impact is going to be on the transportation industry as the import tariffs are going to be imposed on goods produced or assembled in Europen Union or any other country. In my view, considering 80% of the financial activity of the EU was happening in Britain until the first quarter of 2019, Heller should continue the expansion of their projects in Britain and try to make sure that its headquarter is in European Union with a satellite company in Britain, giving it right to participate in voting of EU and at the same time enjoy British financial activity.
With the Brexit situation being very unclear at the moment, the company cannot be sure how any of it’s decisions will be impacted by new UK laws once Brexit goes through. To get out of all this volatility, the best thing to do currently would be to pull out of UK. It as is is takes 60% of its supplies from suppliers from Europe and ships it to Germany. Considering another location for it’s plant and moving out of UK seems like the right way, especially till there’s some clarity on how things will look post Brexit, especially for multi-national businesses.
It is depend on the cost trade off, if the holding cost is too high, the company should find some way to transport their product rather than holding it until the new way is clear. if there are some different specific product difference or requirements, it is better to do postpone in Germany rather than finish all in UK which is a risk pull and postpone method.
Also, there are maybe some unclear cost of exploring an alternative source to assembling product in Germany.
it is hard to make any decision according to current information and it should be determined by cost trade off.
The company mentioned in this blog is actually the U.K. head of German machine-tool maker Heller Maschinenfabrik GmbH. In this case, the uncertain effect of “Brexit” should even be more seriously to be considered. The effect of “Brexit” on Heller mainly is on import/export perspective. Currently, the stockpiling strategy makes sense to me because it will wave additional costs mentioned in the case. However, if tariff/tax will be infected by “Brexit”, thus causing additional costs, then this strategy may be reconsidered. So, while watching for any changes regarding to “Brexit” among EU markets, Heller should also look for opportunities from other more stable or emerging markets, say China.
The company mentioned in this blog is actually the UK head of German machine-tool maker Heller Maschinenfabrik GmbH. In this case, the impact of “Brexit” should be watched more closely since their business mainly locate in EU market, and UK is a critical place for them.
Their current stockpiling strategy makes sense for me only for the recent time range. Because it can largely alleviate the labor cost burden as well as reduce the risk of out of stock. However, this strategy should be reconsidered if “Brexit” actually has impact on tax/tariff between the UK and other EU countries. Therefore, alternative source or opportunities should be considered for assembling in Germany. Those emerging/stable markets are potential targets. For example, suppliers from China.
The company mentioned in this blog is actually the UK head of German machine-tool maker Heller Maschinenfabrik GmbH. In this case, the impact of “Brexit” should be watched more closely since their business mainly locate in EU market, and UK is a critical place for them.
Their current stockpiling strategy makes sense for me only for the recent time range. Because it can largely alleviate the labor cost burden as well as reduce the risk of out of stock. However, this strategy should be reconsidered if “Brexit” actually has impact on tax/tariff between the UK and other EU countries. Therefore, alternative source or opportunities should be considered for assembling in Germany. Those emerging/stable markets are potential targets. For example, suppliers from China.
Since most of Hellen’s suppliers(60%) are all across Europe and it ships it’s final product to Germany – a large portion of their demand and orders both upstream and downstream are outside the UK. Thus, remaining in the UK does not seem like an optimal decision and considering both geographical and assembly postponement for the parts and final product seems like an alternative which would depend on the final impact of Brexit on the taxes and tariffs imposed on their parts and product.
If the company has increasing demand from the market and the company does not have enough capacity to meet the demand, it will not be wise to postpone any capacity related decision. The question left is how to improve the capacity capabilities for the company to satisfy the demand. When seeking assembly opportunities or expand operations, the company needs to consider potential risk, cost and benefit. Local regulations, duties and taxations are some of the key things need to be considered in strategical level. Operations decisions should also take into considerations of initial installment factors including employees’ relocation, new hiring and training. From a supply chain structure perspective, if the company wants to open up an assembly plant in Germany, it needs to think about how this new facility could coordinate with the original plants, thus how should the company leverage its newly available capacity to the market demand. Another important factor would be quality assurance in the new facility.
Opening up new assembly plant in Germany could actually save time and cost in transporting the components from Europe to UK and have quicker response to customers in Europe. If the company would like to keep components and remain in the UK, it should find a more efficient way to improve assembly capabilities and efficiency so that inventory won’t hold up in the warehouse for too long; however, given the current challenges in shortening the lead time in transportation, I think seeking an alternative source of assembly would be a better way to resolve the issue.
I would divide this in two scopes:
1) Short-term solution: Stockpile components while waiting for Brexit scenarios become clearer, promptly setting up sites elsewhere needs significant capital investment (which if cancelled later may cost the company even more comparing to the cost impact of Brexit) and time, it wouldn’t be done in a click of fingers, but to guarantee the case fill rate at the current moment, stockpiling components would be the ideal short-term solution. In the same sense, capacity expansion in UK plant should also be postponed until uncertainties are resolved.
2) Long-term solution: Evaluate the impact (cost, time; which relates to batch size and safety stock level) on cross-border logistics including but not limited to duties, trade terms, transportation lead-time in the scenario of Brexit without a deal VS. the end to end investment impact on further decide on whether to expand UK plant or set up plants elsewhere. Heller Maschinenfabrik GmbH may also consider to more quickly and less costly set up sites elsewhere if they do joint venture with same industry entity in other countries that they ship their components to.
I agree with this response the most. Any investment the company will have to make in setting up operations elsewhere within the EU cannot be done immediately and will probably take a few years to implement successfully. Given this, the short term goal for the company would be to go ahead with plans of stockpiling and alternate transport arrangements till the trade deals resulting from Brexit are solidified.
The long term goal, with more information at hand after Brexit next year, would be to evaluate moving operations to elsewhere inside the EU. This would need extensive evaluation between higher costs of operating from Britain or possible capex, operational costs of moving to inside the EU.
Apart from all these monetary considerations, one must also think about the workforce and their livelihoods as their jobs might be displaced or lost. Transferring workers from the existing site to new sites, or using existing workforce for training and development at newer sites must also be considered.
Given the uncertainties of Brexit, it would not be advised to stockpile the items right now in UK. Having more inventory would require reasonable investment and big financial decision should be based on proper analytical evidences, in this case which are not available. Thus, postponing of capacity enhancement seems more reasonable.
Parallelly, company should be looking for alternate assembly location outside of UK. With provided data in the article, it can be assured that best alternative would be in Germany. Company can also look for the country where it is getting major supply from. That option would reduce the inbound logistic cost and with network optimization techniques we may find even more efficient path for the cheaper manufacturing.
There could be potential upsides to staying in Britain after Brexit. Given the situation that Britain will become a separate entity while trading with the EU, there could financial incentives the government could offer to retain business in the nation. The government would do its best to retain existing businesses and not form laws that turn them away.
Also note that even after Brexit, Britain will have few years until it starts operating independently of EU trade laws. So there is time for the company to invest and probably even recoup that money, if the financial analysis shows the investment can be made soon. This is a different angle to look at the situation. The company should analyse best and worst-case scenarios before making the decison to go or not go.
Stockpiling the raw materials is the trend most companies in the UK are following who have their supplier base across Europe. It is a good decision for short term, but it should prepare to move its assembly operations out of UK, or develop a supplier base in the UK. It should hold its expansion plans until Brexit situation becomes clear and the new rules which will be effective are clear. It should evaluate its capacity and options to get new suppliers in UK, or evaluate the cost of new facility in Europe, close to its suppliers and customers.
If the capacity augmentation and other upgradations come as immediate business requirements, it makes sense to find alternatives outside of the UK given the Brexit uncertainties. 60% of the components is a big chunk of the inventories Heller handles. Adding capacity at this stage in the UK is not an optimal choice given the costs involved. An immediate solution to add assembly capacity in Germany appears as a better choice, eventually as the products reach Germany. This will reduce in-transit inventory costs of finished goods and make room for better service (reduced lead times). However, this must be complemented by finding local suppliers in Germany to take care of the otherwise increase of sourcing costs.
Heller is a global company. It has five production locations: Germany (Nürtingen), England (Redditch), USA (Troy/Michigan), Brazil (Sorocaba), China (Changzhou). With these assembly plants, they are covered for the Brexit risk. They should work to expand capacities of the plants outside UK to support contingencies instead of stockpiling inventories and finding the so called secret truck routes(how long these secret routes are going to be secrets!)
This problem should be looked at the corporate level rather than at the country level and plan.
The company’s workforce is in offshore site in UK and the work force is highly skilled and unique in what they do. The other machines required for production are in UK. The company has already rented out extra storage space and worked out expensive but faster transportation routes in case of a no-deal Brexit. From the article, the only major operation that takes place from Germany is global shipping. So, as general as it may sound, the article is not enough to recommend a solution. It depends. It depends on the deal of the exit, whether sourcing raw materials from other European countries is cheaper in UK or Germany, whether UK offers lucrative deals and economic policies for companies after losing businesses from Brexit or if Germany, who recently slumped to negative growth rate, offers better deals for businesses to boost its economy. One other major information necessary to analyze this decision is why the company had its distribution set up in Germany in the first place. I believe just as no one can predict terms of Brexit months from now, it would be incomplete on our end to predict solutions for the company in question without answering all of the above questions.
The initial impact of Brexit can be seen not only within Europe, but across the world. Brexit has specially impacted supply chain in the UK – with immigrant workers moving out, price increases, and a general difficulty in sourcing parts and products from outside the UK. The UK automobile manufacturing industry has been specially impacted, since while the assembly and manufacturing operations are in the UK, most parts like assembly line robots, body control modules, etc. are procured from countries in the EU that have a competitive supplier base like Germany, Hungary, etc.
Taking a risk and investing in the UK at this stage would involve a tremendous amount of market risk calculations due to government led decisions. Instead of stockpiling components, Heller should not make further investments in the UK until things are clearer on the Brexit front and until it has a clear idea about the future taxes imposed and any regulations formed which could increase its overall costs of assembly and procurement.
As for the final product, the company should chalk out a plan, calculate the costs and study the feasibility of moving operations and component storage to Germany itself, rather than investing in the UK and then shipping the final product to Germany.
Heller should definitely look for suppliers in Germany that could provide competitive prices as compared to its current suppliers, so that if due to higher post-Brexit costs the company does decide to move its operations to Germany, they have approved suppliers ready for sourcing.
Actually Brexit is something which can’t be stopped now, considering of that, the business of Britain would be a great burden of interational companies, because that must adopt different strategies from what they are having now in EU.
Since 60% of its components are purchased across EU and most them would be sent to Germany eventually, it is not a wise and cost-effective way to continue such huge Britain business anymore. It is meaningless to think about the investment they had put on purchasing additional storage space, because they are sunk cost Luckly for now, it is foolish to invest more on those.
Luckily, Heller still have time to adjust and reduce its amont of business in Britain, although Britain has exited from EU politically, the agreements and contracts are still valid for a few years, therefore Heller shoud change steadily within this years.
Maybe Heller sould consider of purchasing from Southeast Asia, because tha labor costs there are much cheaper than that of China or other developing countries with rapid development. As for
increasing the portion of postpone production in Germany, that should be determined only by further detailed cost evaluations.
I think Heller should gradually move from an import supplier to a local supplier. If it can’t complete the replacement, it should be prepared to transfer its assembly business from the UK. Brexit is an established fact, but the finalization of the rules still requires lengthy negotiations. During this period, related requirements such as tariffs and supply are still implemented in accordance with the previous regulations, so there will be no significant impact in the short term. But Heller needs to make long-term preparations for its supply chain layout to avoid the risks of Brexit. For example, moving the assembly plant to Germany can reduce the impact on tariff barriers and also reduce overall transit time. However, coordinating work, relocation and training are new challenges.
Britain’s vote to leave the European Union has raised a number of short-term practical concerns for corporate finance, with potential long-term implications. Given that brexit is a done deal, it’s just a matter of time. Heller needs to consider restructuring their supply chains and even their structures to minimize the overall impact of tariffs. The UK capacity expansion plans should be shelved by the Heller company. And as things stand, Heller should move its assembly operations to Germany and look for suppliers in Germany to reduce the company’s supply chain costs.
Brexit is almost a certain fact, but the changes in trade rules that are going to be implemented will take more time to get implemented. Considering this uncertainties, Heller should not make any more big investment in UK right now. Apart from this, secret route can never be a sustainable solution. Therefore, Heller should move its assembly plant from UK to some other place in Europe. Now, it is a fairly good choice to have the assembly plant as close as possible to the market location in order to provide a better customer service. So, in my opinion Heller should start moving its assembly plant to Germany immediately.
Heller GmbH has already purchased additional storage space and planned a secret transport route to avoid congestion, thus reducing supply chain disruptions. Taking into consideration the uncertainties involving the Brexit scenarios, at this stage the company would not be able to accurately forecast the additional cost it would have to incur, making it difficult to take an optimal decision at this point. Heller’s decision to stockpile components in the UK seems like an optimal short term plan for the company at this stage.
Keeping into mind the uncertainties involved at this stage, it would be recommended to postpone capacity expansion plans until more clarity is obtained on Brexit. Though, since the company procures most of its components from suppliers across Europe and the final product is shipped to Germany, planning capacity expansions in Germany would be a feasible option.
Heller GmbH has already purchased additional storage space and planned a secret transport route to avoid congestion, thus reducing supply chain disruptions. Taking into consideration the uncertainties involving the Brexit scenarios, at this stage the company would not be able to accurately forecast the additional cost it would have to incur, making it difficult to take an optimal decision at this point. Heller’s decision to stockpile components in the UK seems like an optimal short term plan for the company at this stage.
Keeping into mind the uncertainties involved at this stage, it would be recommended to postpone capacity expansion plans until more clarity is obtained on Brexit. Though, since the company procures most of its components from suppliers across Europe and the final product is shipped to Germany, planning capacity expansions in Germany would be a feasible option.
Global Supply Chains have always been prone to changing policies between Nations. With Hard Brexit on its move. Many companies in UK and EU will be affected in following fronts:
1. Customs and Tariffs: Eased up customs and low tariffs helped companies from UK and EU to cross boundaries. Heller and other companies shall be affected by increased Tariffs and complex custom policies.
2. Legal: Companies will now have to reevaluate their contracts with suppliers and make room for changes caused by Brexit. Contracts might be dependent on the clause of UK being a EU member. Hence Heller will have to renegotiate it’s contract.
3. Administration: With sourcing turning into import and export after the Brexit, it shall require more paperwork and more processing in receiving and transferring of goods.
4. Stock Holding Location: Sourcing from EU and holding in UK shall be more taxing after the Brexit, Heller shall evaluate the trade off in holding stocks in UK against in Germany to better serve it’s customer base.
5. Lead time: Increased processing at the border leads to larger lead times and thus requires larger safety stock and may result in loss of business.
6. Inventory: Heller shall compare it’s inventory holding cost, procurement cost, operation cost and maintenance cost of continuing it’s stocking in UK to building new facilities and stocking in Germany.
Hence Heller move to stock in larger quantities and secret transportation shall have them to ensure during the transition and revaluation phase. But in the long run the Brexit upheaval shall be too taxing to continue operations in UK and hence it should plan to move it’s facilities to Germany.
Heller’s decision of expansion in the UK is largely dependent on Brexit. The extent till which effects of Brexit will be felt, is not something one can predict accurately. Because of this, it would seem ideal to shift the source of assembly to Germany, as that is where the products are shipped. This would ensure a significant reduction in lead time, and holding and transportation costs. However, for a company that has an established assembly unit set at a place, to shift it to a different location, it will incur additional set up costs. The logical thing to do would be to not expand in the UK, and maintain the same capacity of the plant while gradually starting to set up a smaller new plant in Germany. This situation allows to company to have multiple options once it has analysed the costs and make a suitable decision.
Britain enjoys a very blessed shipping and port infrastructure, and I believe that’s one of the chief reasons why Heller Maschinenfabrik GmbH gets 60% imports of its components at such short lead times. The EU and Britain enjoy a borderless shipping and logistics system now, but after Brexit things will certainly change. Custom checks and cargo inspections are always the bottlenecks for any logistics operation, and not to mention the increased documentation that will affect back-end operators. Lead times will definitely shoot up, thus Hellar’s current strategy might not pan out post Brexit.
Operating costs will also rise with increased duties, higher minimum wages. Thus in my opinion Hellar should keep its expansion plans on hold as investing in so many fixed assets could eventually prove catastrophic for the company.
Given the lack of clarity on the Brexit issue, it is of utmost importance for Heller Maschinenfabrik GmbH to evaluate the political climate carefully before making major decisions. Keeping that aside, considering that Heller acquires a weekly supply (60% of its components) from Europe, assembles and supplies the finished goods back to Germany, it is a wise decision to propose a long term goal of an assembly plant, in a strategic location in the larger part of the continent, thereby reducing the costs involved in transportation of the goods to and from the British mainland. So, plans of expansion within the UK is out of question. Coming back to the issue of Brexit, it is a good decision to stockpile on goods, as setting up a new assembly plant outside the UK, being a long term goal, may hinder the supply to Germany within the stipulated time frame. So, Heller can continue to operate from the UK, and supply its customers while simultaneously planning its own exit out of Britain. Heller should even consider supplying to other upcoming markets in Asia and Africa, where the need for manufacturing equipment is rising.
Like any capital expenditure that entails risk, Heller should carefully consider the costs and damages that could be incurred if they invest the necessary funds into expansion just to arrive at a Brexit deal. My personal decision I would advise Heller to pursue: pursue a long term deal for assembly outside of the UK. The pros to this decision would be less risk when dealing with future Brexit opportunities with the UK and EU. Assumptions would include lower transportation costs as a majority of the components come from outside of the UK. Cons: In the article, Heller mentions that after 40 years of operations they have become highly trained and would make relocation extremely difficult.
Brexit – a deal whereby the U.K. is planning to leaves the EU.
If that becomes the case, the general laws governing customs and tariffs go into immediate effect and the usual customs checks and clearances for foreign trade would apply. Any special allowances or procedures in Britain would be invalid.
Dover port is the shortest crossing between the U.K. and continental Europe and also the country’s leading ferry port. Brexit is expected to increase paperwork and administration, leading to delays in the ports.
The demand for flexible responses to handle changing flows of goods will be crucial in this case.
Exactly how cross-border trade will be affected by any kind of Brexit remains unknown, but major changes are certain to occur.
Definitely stockpiling will be an option for Heller to mitigate the future risk, but again, how much to stockpile will become a million-dollar question as there is no certainty on U.K leaving European Custom Union.
The burden of trade barriers, tariffs and labor restrictions would damage competitiveness and limit growth for manufacturers & will impact overall logistic & transportation industry.
In this scenario, Heller should prepare & start working to check the feasibility to create alternate source for assembly in Germany. Trade-off between moving an operation to Germany & staying in U.K. need to be given due consideration.
I believe the optimal strategies for Heller Maschinenfabrik GmbH depends on whether Brexit will take place or not. As Brexit is still not clear at current stage, the company is supposed to hold on the plan of capacity expansion in the UK but keep on the production and assembly. The biggest issue lying in front of this is whether the free trade between the UK and EU would continue or not. If the free trade ends, there would be an extra cost of more than 150,000 pounds including a significant part of tax imposed to the company. Moreover, since the company seeks for components of over 60% overseas and the final destination is Germany, the company should also prepare for the possibility of Brexit, where it could search for new locations and alternative source for assembly. Hence, if Brexit happens, the company would be able to make adjustments immediately.
In my opinion, based on the possibility of Brexit with non-agreement is growing, the advantage of European Union Customs Union(EUCU) for Heller Maschinenfabrik GmbH may disappear.
As Heller have 60% of components are from EU’s supplier and have amied market at German, move its headquarter or only assembly plant to the continental of Europe could be a logicial choice. With this chioce, even the a non-agreement Brexit happend, Heller could still have the benefit of EUCU for its bussiness. Assembly plant near final market could reduce the fluctuation of lead time, which can also reduce the cost of Heller.
There is another choice if Heller unable to move its headquater out of UK. Heller could find more suppliers from emerging markets, such as China, India or Southeastern countries, and reduce the ratio of EU based supplier. As the cost of material and labor for emerging markets based suplier would siginifican lower than EU based, choose these supplier could reduce Heller’s poucurement cost and the impact of Brexit.
In my opinion, based on the possibility of Brexit with non-agreement is growing, the advantage of European Union Customs Union(EUCU) for Heller Maschinenfabrik GmbH may disappear.
As Heller have 60% of components are from EU’s supplier and have amied market at German, move its headquarter or only assembly plant to the continental of Europe could be a logicial choice. With this chioce, even the a non-agreement Brexit happend, Heller could still have the benefit of EUCU for its bussiness. Assembly plant near final market could reduce the fluctuation of lead time, which can also reduce the cost of Heller.
There is another choice if Heller unable to move its headquater out of UK. Heller could find more suppliers from emerging markets, such as China, India or Southeastern countries, and reduce the ratio of EU based supplier. As the cost of material and labor for emerging markets based suplier would siginifican lower than EU based, choose these supplier could reduce Heller’s poucurement cost and the impact of Brexit.
As per the current business scenario explained in the blog, Heller Maschinenfabrik GmbH sources products from across the EU, assemble it in the UK and then ships it off to Germany.
The reality is, that a No-Deal Brexit is happening, which will not allow the UK privileges of free trade agreements. Almost 90% of the items exported by the UK to the EU will invite tariffs, and the UK will give a similar response.
The conundrum of the situation is, Heller Maschinenfabrik GmbH is faced with a financial question of moving the assembly operations out of the UK, as to avoid paying import and export taxation, post-Brexit. Hence the company is exploring alternative solutions such as stockpiling resources.
The “alternate plan” of stockpiling will invite one-way taxation and will also attract a large amount of “inventory carrying cost.”
The above option will have a tremendous impact on the cost of the product as well as the competitive ability of the organization.
Stockpiling resources is not a viable solution in the long run, and sooner or later, Heller Maschinenfabrik will have to move its operations out of the UK. Not to mention the clients are in Germany and the suppliers in the EU.
Ignoring the first option of moving out is ignoring the inevitable. Hence I believe that Heller Maschinenfabrik should no longer invest in the UK and should think about moving the assembly operations closer to its customers or tier-1 suppliers.
Heller has been postponing its expansion plans in UK and now with the uncertainty with Brexit, I think its high time that Heller takes an action and expand geographically and have an assembly operations set up in Europe. This will not only provide them stability from the negative results of Brexit but will also greatly affect their transportation costs as they import 60% of their components from Europe and send the final product to back to Europe in Germany.
Even in scenarios of positive result of Brexit, They can then safely proceed with their initial plan of stockpiling and delivery of parts. I believe, it is beneficial if they hold this decision for a while and focus on other concrete and robust ways satisfying customer orders like extending their supplier base to Asia.
The decision for Heller to remain and grow in UK or start in Germany will depend more on internal factors than the external ones. The internal factors include Heller’s business model, market segmentation, market growth, product mix, supplier base, sales mix and labor productivity. The Brexit will prevent free flow of trade between UK and Germany with the implementation of duties, complex custom procedures and restrictions on worker and services access. However, as the internal factors indicate the extent of Heller’s dependency on the German market, it is primary to analyze the internal factors to evaluate the trade-offs among less time-to-market and setup cost, imposition of duties and stock sharing, etc.
Political scenarios such as Brexit have always disturbed free trade. Considering the recent developments of Brexit, wherein there are chances of no contract regulation to be passed by the European union, there would be a supply chain catastrophe as no agreements shall be signed for free excise trade between EU members and UK. Even if such a ‘No Deal’ regulation is not passed, there would always be an atmosphere of uncertainty for UK manufacturers selling or buying products in other European countries.
The company in concern, Heller Maschinefabric GmbH, which is heavily dependent on suppliers and buyers in Europe should exercise alternatives to move its assembly operations in European Union. This not only will avoid uncertainties the company is facing in their operations but would also give them an upper hand over its UK competitors, if free trade negotiations amongst UK and EU does not go forward.
Stockpiling to face unavoidable scenarios is not the solution the company should invest in at the current stage of ambiguity as it involves strong financial decisions and a large capital to build inventories for storage. In addition, stockpiling is not a long-term solution considering the continuous trade tensions as highlighted above.
Increasing the capacity will result in increased fixed cost and stockpiling will only help to meet demand in short term .The company should postpone any capacity expansion plans in UK until the uncertainties related to Brexit are resolved. Based on the modelling of the sales and cost data under different scenarios such as tariffs, regulations, labour, etc the company should devise a strategic plan. The company should also evaluate options to move the assembly operations to Germany because 60% of the supplies are from European union and Germany has a major customer base (result in increase in service level and comparatively less order to delivery lead time) and would also help to take advantage of the European Union trade policy of custom union and single market.
I think Heller should remain this stockpiling plan until the upheaval is over. If the company plans to switch its assembly line, it definitely costs much more than staying in the UK. For one thing, it is not easy to find a decent location in such a short time when considering many aspects. On the other hand, it has to face many new regulations or associate laws to survive in the new environment. Brexit is a very tough decision for the whole country, and because of the unstable economy after Brexit, like the depreciation of the currency. All local businesses will be affected. Therefore, expanding capacity should be postponed until the problem resolved. Although setting an assembly source in German looks like an excellent strategy to immediately meet the local demand, I think that Heller should gather all the capital and resources in their home country in order to face any possible regulations or policies changed in the UK. The company is not supposed to do anything internationally in the short run.
I would advise Heller to stop any further investments in UK and find a potential location to replace its UK assemble operation.
Given the following reasons:
1) Brexit will very likely happen.
2) 60% of its components are sourced across EU and its finished goods are going to be shipped to Germany, if Brexit happens and there are tariffs in the future, both components imported and finish goods exported will be taxed.
3) Potentially there will be customs lead time added to the transportation.
4) Closer to customers, which means shorter lead time and lower transportation costs.
For me, Heller should postpone the capacity expansion plans in the UK, as it has done in the past, until uncertainties are resolved. And for the long-term, it is a good plan to stockpile components and set up a new plant outside the UK that would be in Germany according to the article to provide a better customer service, or choose to expand the UK plant by evaluating the cost.
If the UK leaves EU with “no deal”, the Heller will face risk that it will encounter the blockage at port. First of all, if Heller does nothing until everything becomes clear, demand won’t be fulfilled without question. Stockpiling the raw material seems to be a good option to go with high possibility of “no deal” exit. However, the additional associated cost can’t be neglected. Therefore, personally, I think Heller can find suppliers in other emerging countries with relatively lower labor cost such as China, Indian. The transportation may go up but it could be offset by the cheap labor cost. In the meantime, Heller can reduce transportation cost by setting up assembly in the Germany since the customer base is in Germany. It may require Heller to make considerable initial investment, but over-all cost will go down in the long run.
For short term solution, I think Heller should stockpile components to limit the impact of Brexit, buying more extra time until the situation is clear enough for better decision either move the production line abroad or seeking for local supplier instead. As for long term solution, Heller should definitely plan on remodeling of supply chain, to be prepared of possible worse case Brexit. An assembly plant near Germany or seeking for other location with lowest unit cost within Europe could be a possible choice depends on the product attribute.
Political uncertainty is one of the most expensive risks that an international company must face. Therefore, Heller Maschinenfabrik GmbH must prepare ahead to a very possible exit of the UK from the EU. The company should look for a possible reallocation of production either in Germany or another competitive country in the European Union. The political tension is very high, and even with a trade agreement (like Turkey-EU), there will still be new costs associated with regulations.
Situations like Brexit, where unavoidable repercussions follow there are two approaches. One solution or action would would help to deal with the situation in short-term and the other in the long-term. It is very difficult for a company to shift or establish its assembly operations in a new location in a span of few months with a huge cost associated with the same. So the approach Heller could take would be to add extra storage and stockpile for the short term solution so that it does not have to halt its operations. And meanwhile according to the Brexit deal implementation, Heller could plan to move its operations to Europe as it has an already established supplier base there and Germany being its important customer market. Also, as Europe and UK market become volatile with Brexit implementation, Heller should consider exploring emerging economies in Asian continent.
As Brexit will likely happen, the company should postpone any capacity expansion plans in the UK until uncertainties are resolved. If they take any action at this moment, everything they do will be in vain. Heller should create an alternative source for assembly either in Germany or other countries in the EU so the company can continue to operate without any loss. Even Brexit doesn’t happen in the end, they will not lose anything but get extra assembly operations.
Since 60% of components come from suppliers across Europe, and customers are in Germany, it might be better to move out from UK. They could set at Germany, which is closer to their customer and could reduce the lead time. Hence, the ability of satisfying the customers’ demand would be improved. Since no one knows the result of Brexit, it would be better to avoid the possible bad influence.
In my opinion, Heller Maschinenfabrik has already incurred some amount of ‘sunk costs’ in terms of purchasing additional storage space in a bid to stockpile components.
Also, any decision to introduce assembly plants outside the UK not only increases the fixed costs but also jeopardises the position of the company even before air over the brexit scenarios clears
. Therefore, a better plan is to utilise the additional space bought in UK and stock pile components for the time being, to cater to surge in demand – if any. The company should also keep
its expansion plans on hold as there will be taxation on goods coming from the EU into UK, in any case when the deal goes live.
With Brexit going almost towards the certain end as Johnson takes charge, companies operating within the bounds of Britain’s geography and European laws would have to pick sides. The economic activity showing signs of reversal after manufacturing boost at the start of this year will definitely be giving jitters in the board room. With an optimistic view of both sides, i.e. the UK and Europe, Heller could:-
1) Stockpile the input materials as per the optimum level, which would be decided as per the contracts that they have in place as of today and reasonable future forecasts.
2) An optimum can also be calculated basis the trade-off between holding costs and costs of losing business.
3) As far as investing more money in expanding operations is concerned, that can be kept on hold. This is in view of uncertain economic policies the UK might be following after Brexit. But having said that it should also be noted that this can not be the reason for leaving UK as there are highly probable chances of UK giving favorable business discounts to companies choosing to stay in the UK in order to ensure the economic health of the country. This is also in line with the fact that the UK has not been one of the cheapest sources of labor lately.
4) Option to move to Germany would be something that the standards and customer preferences will decide. With Germany showing negative signs due to contraction in automobile sales worldwide and ongoing love affair of Jinping and Trump, you can expect certain favorable benefits from Angela’s side too but all this remain speculative.
Hence, in short, maintain EOQ with a buffer as per optimistic forecasts, hold off expansion plans, start signing new contracts, secure suppliers, wait for Germany’s economy to get back and trade tension world wide to loosen up, keep all options on the table.
There is significant uncertainty surrounding the situation with Brexit. The company currently procures 60 percent of its components from across Europe and eventually ships them to Germany meaning it has a considerable portion of its supply chain outside of Britain and inside Europe. Considering the situation with Brexit there is a large amount of uncertainty and risk associated surrounding trade between Europe and Britain. Stockpiling at this point becomes a reasonable option for the short-term considering the very real probability of quotas, tariffs and other trade restrictions which could negatively affect the firm’s ability to perform competitively, thus allowing the firm to avoid the risk of high tariffs and costs that could come as a result of trade policies. In the long term, the decision to move its operations outside of Britain and into Europe and Germany can be made based on a cost-benefit analysis when the Brexit situation becomes less volatile and the trade environment and the policies surrounding it become clearer
I think in any case, expanding the business would be a good idea. Heller should probably look for suppliers around Germany and put up a assembly house in or around Germany. With Brexit scenarios in place, Heller wouldn’t want to take risk of loss by stockpiling components. They should certainly postpone capacity expansions until the uncertainties are resolved
Opening up a new operation in Germany would usually be a good idea without Brexit going on. Brexit only amplifies the need to make a move like this. It would diversify their operations and mitigate risk by spreading out their manufacturing operations.They would be able to reduce a lot of the shipping costs for receiving components all over Europe and then paying tariffs on them when they came into the UK and then avoid the shipping cost and tariffs of sending the finished goods to Germany at the end. Setting up a new operation is an expensive move, but its the right long term option.
I would definitely err on the side of caution and wait for the Brexit issue to get sorted. The EU had benefits in terms of lesser trade barriers and that could be gone by the time Brexit is finalized. Looking for a new Assembly plant in Germany makes sense if the business wants to continue servicing the EU nations.
Boris Johnson moving for a hard Brexit complicates the issue at hand. In my opinion stockpiling is the right route for the short term for Heller. Once Brexit is passed, if it does, then the larger implications can be assessed and informed decisions on whether they can move operations to within EU, workforce management and cost optimization decisions can be made. The overall implications of moving operations within EU, only for sanctions to be placed on them since they are based out of UK could adversely effect them.
A backup plan has to be made. Seek for other supplier channels, such as India and China and calculate the potential cost of these plans. of course building new plants in UK should also be considered. When we are facing some uncertain issue that would impact production ans sales much, we have to make plan B. Or we could try to order some components from other countries and areas now to test the feasibility of plan B before Brexit result really comes out. It would be a bit like not always counting for sole supplier. Always keep potential choices especially for some important material supply.
As mentioned in the article, the major parts of its business including supply and demand are generated outside of Europe. Therefore, even though not considering the underlying risk caused by Brexit possibility, it is more reasonable to locate its assembly operations outside of UK. Moreover, even if the uncertainty of Brexit is resolved for now and UK decide to stay in EU, I think the possiblity still exist and for the stable operations of its business, it is better to move Europe.
The decision depends on how much impact on the financial side of the company this stockpiling takes. It is not a good decision to stockpile in these uncertain times, as not only Brexit has come to strain supply chains, now the virus is a reality too.
I believe the company can and should delay a bit those plans, until some uncertainty is resolved. Moreover, it would be a good idea to plan other sourcing since we don’t know exactly if Brexit will be hard as the Prime Minister is trying or it will end up being a soft one. Even if it is a soft Brexit, it will cause troubles as other EU members may ask to leave in the same soft terms, which will further disrupt the EU and cause more strains to the supply chain.