The current trading environment is tumultuous and literally changes by the day, but the bottom line is that all procurement professionals are operating in an environment where the next tariff, fine, or levy could be waiting right around the next corner.
Most recently, for example, the U.S. placed a 25% tariff on an additional $16 billion in Chinese goods, CNN reports, and China responded with a 25% tariff on an equal amount of American exports. The new tariff impacts 279 Chinese products (e.g., chemical products, motorcycles, speedometers, and antennas), while the Chinese tariff impacts American goods like chemical items and diesel fuel.
“The idea behind the imposition of tariffs is to increase the cost of imported goods to the point where American manufacturers can compete more effectively, and to punish other countries for unfair trade practices,” Rosemary Coates writes in Supply Chain Management Review. “But the reality is that the global economy is so intertwined that most U.S. manufacturers rely heavily on imported parts to support their own U.S. production.”
With companies like General Motors, Harley-Davidson, and Caterpillar (to name just a few) all voicing their concerns about how tariffs cut into profits and force them to raise consumer prices, purchasing managers are already scrambling to find alternate sources in countries where these new U.S. import tariffs do not apply—at least not yet.
Shoring Up the Supply Chain
Because supply chain expenses are one of the biggest costs for businesses, anything that varies can impact margins and profitability while throwing off the delicate balance that a procurement professional has taken the pains to establish and cultivate. “Add a 20 or 30% tariff on top of existing costs and you can really cause panic in the supply chain,” Toby Brzoznowski, LLamasoft’s chief strategy officer, points out in Tariffs and Trade War: What Should Supply Chain Executives Do?
On a positive note, there are specific steps that procurement can take now to start shoring up their supply chains, find alternative sources of supply, and shield their companies from the negative impacts of the disruptive trade environment. Here are five steps to take now:
Adopt a long-term view over short-term solutions. At this point, it’s not about one new tariff or retaliatory move; it’s about a longer-term perspective on an issue that might not go away anytime soon. “In order for global shippers to weather whatever tariff storms may be coming, taking a longer view of trade beyond just the U.S. and China is a good step to take,” Jeff Berman writes in Tariffs Present Different Supply Chain Challenges for Shippers. “That requires looking into setting up production and distribution operations in places like Vietnam and India, as well as parts of Africa.”
Review the timing, trade terms, and country of origin provisions in your contracts. For product companies, tier 2 and tier 3 suppliers will be important and should not be overlooked, Geoff Pollak writes in Shoring Up the Supply Chain in Light of Trump’s Tariffs. Then, evaluate demand forecasts and provide visibility to suppliers. “[Companies] that complete this exercise first and communicate effectively,” Pollak notes, “will likely be first in line when markets where local supply exists tighten after the tariffs go into effect.”
Think beyond domestic borders. Don’t assume that finding domestic sources of supply that you once sourced overseas—and that are now impacted by the tariffs—is the best solution. That’s because your suppliers may themselves be using imported parts, components, and materials. Talk to your suppliers about their exposures and find ways to work together to circumvent the higher costs of shipping from countries that are directly impacted by the tariffs.
Lay out your current choices and options. What products and services do you buy? For each, from where are you currently procuring and what are your options? How critical are transportation methods? “A hard-and-fast rule to have multiple suppliers in multiple locations, using multiple transportation channels, is the safest practice, and usually the most expensive,” Bill Conerly writes in Forbes. “An intermediate strategy looks for cheap ways to reduce risks, but shuns the most expensive alternatives.”
Find competitive suppliers elsewhere. Pointing to the 2011 floods in Thailand, which highlighted the extremely large share of the world’s hard drive production made in that country, Conerly notes that a company buying many drives from a Thai factory might look for competitive suppliers located elsewhere for a portion of its purchases. “It probably won’t cost too much more to have an alternative supplier,” he writes.
Shifts Don’t Happen Overnight
Complex and decades-old supply chains cannot easily be shifted to different countries or facilities. In fact, some businesses work with contracts anywhere from six to nine months in advance of delivery, Rajesh Kumar Singh points out in Trump tariffs force companies to rework supply chains, while others have multi-year contracts with their suppliers. For some medical device manufacturers, for instance, changing suppliers is not possible without regulatory approval. “In some cases,” Singh concludes “companies have no option but to stay put as there are no alternatives to existing suppliers.”