Artificial intelligence shall save supply chains from Brexit

Author: Marcus Schilling
Date: 26.11.2018

Europe-wide preparations in companies

The British-Swedish pharmaceutical giant Astra-Zeneca is in trouble. The drug manufacturer has set up warehouses to the left and right of the English Channel, in which a heap of drugs are stored. These shall last about six weeks if no supplies are delivered.

But why does the company actually hoard the drugs? The reason is that medicines that are exclusively controlled by British institutions lose their approval in Europe in the event of a hard Brexit. Although the company is currently also trying to set up quality controls in Sweden, this will hardly be possible until the EU withdrawal date of 29 March 2019.

Astra-Zeneca has made this decision by using complicated algorithms. These were developed by Llamasoft, a supply chain specialist from Detroit. “Astra-Zeneca is one of our customers” Michael Wallraven, head of Germany at Llamasoft, told the magazine Handelsblatt. Companies such as consumer goods giant Nestlé, Henkel, Nike, the chemicals group BASF and the furniture chain Ikea are also among the company’s customers.

This information shows that other large companies are also preparing for the hard Brexit. Llamasoft is particularly good at what-if scenarios, i.e. what happens when important suppliers disappear or transport routes are no longer usable? And what alternatives are available? In order to present these alternatives, Llamasoft creates a digital value chain. If there are changes in the political environment, algorithms calculate alternative solutions and suggest new suppliers, transport routes and customers.

Should it really happen that Great Britain completely splits off from the European internal market; a lot of work will have to be done on the algorithms. After all, in addition to customs duties, the exchange rate between the pound and the euro would also have to be taken into account. Just-in-time delivery and compliance with cooling chains will also no longer be possible in future.

Current studies confirm how realistic these scenarios actually are. “We are increasingly seeing hamster buying – like after a storm warning” says Ron van het Hof, head of credit insurer Euler Hermes in Germany. In order to avoid customs duties and disruptions in the supply chain, more and more manufacturers are buying their imported goods in stock.

And German companies are not unaffected by this issue either. “Among our customers there are companies that have set the first course in order to withdraw their production from the island” reports Llamasoft’s German boss Wallraven. Especially the automotive suppliers will be affected.

Airbus, BMW and Jaguar Land Rover have thrown their investment plans overboard, for a reason. Due to the political discussions, a “no deal” scenario seems far more likely. After all, the probability is around 25 percent. “This would mean,” the study says, “that the rules of the World Trade Organization (WTO) would apply and that about four to five percent tariffs would apply on both sides.”

And even if an agreement is reached at the last minute, this would be an enormous challenge for most companies. Euler Hermes assumes that 70 percent of the companies will reach an agreement on the separation arrangements in January. “It’s like a blind date for companies” believes Ludovic Subran, chief economist of the credit insurer, “because they don’t know what to expect.”

This can have both positive and negative effects on companies. Depending on the separation contract, the distortion of the Brexit can be quite different. If there is a no deal, the exchange rate for one pound could fall to 0.88 euros at the end of 2019. However, should a last-minute agreement be reached, the currency would settle at a value of around 1.14 euros.

The Brexit will probably hit Great Britain hardest with a drop in sales of 30 billion euros. Second place will go to German exporters. They must expect a loss of around 8 billion euros. The Dutch are missing around four billion euros.

So it’s no wonder that more and more companies are investing in the services of technology companies like Llamasoft. For example the Llamasoft rival JDA Software takes care of the supply chains of German companies like Otto, dm or Ernsting`s Family. And other small technology providers are also involved in the market and are hoping for additional sales.

“These technology providers are absolutely helpful” says supply chain expert Michael Dittrich of Accenture, praising the algorithm acrobats. Consulting firms such as Miebach or KPMG also pay for the help provided by Artificial Intelligence.

Llamasoft makes no secret of what they enter into their computers for calculation. “Everybody is preparing for a hard Brexit” Dittrich reveals. Those who currently still have several options open will run out of time and a timely rescue of the supply chain will be virtually impossible.

Michael Hüther from the Institut der deutschen Wirtschaft also sees it like that. Even an extended deadline of 2020 would not change the situation. “The companies must already draw their consequences from the threatening Brexit now” said the economics professor at the congress of the Federal Logistics Association in Berlin. “With the high risk they would face otherwise, the companies have no other choice.”