Tariffs and the Supply Chain

Plenty has been written on the ongoing tit-for-tat with Trump’s tariff’s on China; the news cycle can’t get enough. And in three days, tariffs take effect on $200 billion worth of imports from China should the U.S. and China be unable to come to an agreement.

I’ll let the political pundits discuss whether this is good or bad.

What I’m interested in is: How does this effect the supply chain? And I’m not just talking the prices of goods. What about logistics, supplier choices, and make or buy decisions? What’s to be done in such turbulent times? How should risk management be addressed?

Cost of Goods

With the imposition of 25% steel tariffs and 11% aluminum tariffs earlier this year, the prices of steel and aluminum have jumped upwards of 18%. While the steel companies are enjoying the profits, the rest of U.S. companies that utilize these resources, such as automobile, motorcycle, and technology (hardware) companies are seeing costs rising, some as high as 50%.

The additional 10% tariffs on $200 billion worth of goods will effect companies and consumers even more. Items on this new list include: meat, fish and seafood, fruits and nuts, beverages and vinegars, ores, slag, and ash, rubber, textiles, and machinery, just to name a few. A more comprehensive list can be found here.

I currently work in the utilities (energy) industry, and the effects of tariffs are already hitting our transformers, steel poles, vehicles, and some motors. Specifically, we recently sourced a specialized trailer that has a motor on it for pulling shipping containers (connexes, sealands) up onto it. For whatever reason these specific motors only came from China, and with the tariffs the company in China wouldn’t ship to the U.S. Our supplier had to go through a European company to source the motors from China, hiking up the price 30% compared to what we normally pay.

This brings us to our next topic. . .

Logistics

With tariffs come challenges in logistics. Products from China are going to cost more, and some companies are making decisions not to ship certain products directly to the U.S. (see my trailer example above).

It’s not just the goods purchased, but the shipping of those goods that have gone up. With tariffs comes an increase in cost of shipping those goods. Ships from other countries are held in port longer, delaying delivery, and increasing labor costs. Even the railroads in the U.S. are seeing an increase in costs due to tariffs from Mexico and Canada. When looking at total cost of ownership, companies are going to be looking at how tariffs effect shipping, and will have to make decisions based on those numbers.

Supplier Choices

Both cost of goods and logistical challenges are going to effect supplier choices by companies in the United States. For example, if Company A is going to pay the same price for steel and aluminum from China as they do in the U.S., but the steel and aluminum from China has a tariff on it, Company A is going to begin purchasing those resources from U.S. companies, or at least from companies in countries where there are no or much lower tariffs.

A simple example of this is the steel industry example given above. If I have to buy steel, I might as well buy it from a company in the U.S., despite the higher cost, because there will be no tariffs imposed on it. The same will go for many of items on the list of new tariffs being levied.

And what if the goods being shipped to the U.S. only come from China? Then companies, and their consumers, may have to live with much higher prices which include the cost of tariffs. Or. . .

Make-or-Buy

With tariffs and the costs of certain goods rising, companies may begin to revisit make-or-buy decisions.

Make-or-buy decisions are exactly what they sound like. Does the company make the product in-house, or do they buy it/outsource it from another company. With tariffs on certain goods and costs of those goods rising, some companies may be compelled to begin to produce more in-house instead of outsourcing.

This is an interesting turn of events as our current economy is a by-product of companies selling off assets they once owned to produce everything in-house. Decades ago companies like Ford used to own steel mills and smaller factories that made everything in support of producing cars. These companies then spun off or sold these assets to focus on what they were good at; in the case of Ford it was building cars, not managing the mining and refining of steel.

My opinion is that I doubt we’ll ever return to the level of “make” seen prior to the 1970’s/80’s. It just doesn’t make economic sense in most cases. (This is an unsubstantiated statement, and some economist or financial guy out there may prove me wrong, but there it is.) But more companies will have to take a hard look at how they produce their products, and make-or-buy decisions will be part of that decision making process.

Of course, a third option is companies do redesigns of their products or entire offerings so they include less or no goods coming from countries which have these tariffs imposed on them (in this case China), or stop providing the offering completely.

What To Do

Again, my focus in this article isn’t whether the tariffs are good or bad. Individuals with a greater breadth of knowledge and experience can opine on that. What I will comment on is what can be done in each of these areas. These are recommendations based on my limited (eight years) of experience.

Cost of Goods: The first thing I’d ask is, “What does it say in the agreement?” Taking steel as an example, your organization most likely locked in a price for that product which contains steel. There is also, most likely, a clause allowing a certain percentage of price increase annually, or throughout the year. I am not saying you should necessarily buckle down on that price. Your supplier is working to be tenable just like your organization. But use it as a starting point for the discussion on how the tariffs effect the price. Just because the cost of steel has gone up 18% doesn’t mean the cost of what you’re buying goes up 18%. But maybe 5% or 8% makes sense for your organization to pay while the supplier is still profitable.

Logistics: You should look at what countries you are shipping from, and what are the lead times once what your organization purchased enters the U.S. If lead times are extended, your planning for projects or product releases should also be adjusted. Are you able to source from the same company with a presence in a different country? Or is there a distributor in a different country that can provide your organization with the same product, tariff free? Can you work with your supplier in China to ship through another country, such as Vietnam? You should also work to leverage relationships with freight companies or rail road companies you work with to see how you can work together to mitigate the costs of tariffs.

Supplier Choices: Despite personal opinions on the merits or detractions of tariffs and trade wars, organizations across the U.S. have to accept the way things are (until if/when they change). Perhaps it’s time for your organization to begin to look into other suppliers within the U.S., or from countries that don’t have China-level tariffs imposed upon them. You and your organization may have to pay higher prices due to the tariffs, but it’s better to pay just higher prices instead of higher prices plus costs for tariffs. That said, you may be in a bind if what you source only comes from a company in China.

Make-or-Buy: Finally, you and your organization may have to have a serious discussion about make-or-buy (or stop providing the offering altogether). If sourcing from China and a U.S. company doesn’t make sense for your organization, perhaps it’s time to look into producing it in-house. These decisions aren’t made lightly; producing products in-house could cost millions, or tens of millions, in construction, start-up costs, and increased overhead and labor costs. But if it makes sense in the long run it can save your company money lost in higher prices, delayed shipments, and loss of market share.

Risk

A final thought: remember risk. Throughout all of the discussions you have with your organization about how to deal with the current state of affairs with tariffs, always ensure you are managing the risk to your supply chain in all of your decisions. For example, shipping through another country to get around tariffs on China may seem like a good idea at first, but what if the infrastructure and rule of law in that country are poor? Your product may disappear, or bribes to crooked officials may raise the price of your products to the point that you may have well have paid for the product with tariffs.

Think about how your organization can mitigate risks, and what to do in the worst case scenario. (Hopefully you and your organization are already doing this on a daily basis.) Can your organization help build up infrastructure in this country? Or should sourcing be shifted to a U.S. company with less risk in on-time delivery, but maybe higher risk in quality of goods that can be more easily addressed since they are just a quick drive or plane flight away?

Conclusion

Despite what you might think of them, the current tariffs aren’t going anywhere soon. But, with careful planning and risk management, you and your organization can navigate these turbulent waters and maintain your supply chain.

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