Trade War Myopia and Supply Chain Leadership!

All the protectionist tariffs being imposed are sure to upset the world order in international trade. The starting position that initiated all of this was to protect US national security, primarily from its allies! Serious?

This is all politically motivated to create more jobs in the US and improve the actual or perceived trade imbalances of the richest country in the world. Not unexpectedly, those countries hit by US tariffs are reacting in the same way to protect their own interests. The death spiral continues.

While we wait and see how all of this chaos resolves itself, today’s supply chain leaders must develop and implement the strategies needed to combat these trading complications and ensure the ongoing integrity of their supply chains.

The scope

The US began imposing tariffs on steel and aluminum. The retaliatory tariffs from Canada, Europe, China and Mexico include not just steel and aluminum but a variety of other products, including agricultural and consumer goods.

The retaliatory tariffs are said to be equivalent, dollar for dollar, to US-initiated tariffs. So who is the winner here? The US has said it will continue to escalate the trade war with even higher tariffs in response to retaliatory tariffs from other countries. And these other countries will continue to respond in the same way.

Prices are likely to rise as most companies will not readily absorb cost increases. Any market-based price cap and pressure on profit margins will force companies to look for ways to mitigate, if not eliminate, this cost impact.

Delivery availability can become a real problem. While the tariffs are designed to create more domestic jobs, do domestic industries have any chance of increasing their market share? Even if they have the physical ability, given the generally low unemployment rates and the skills required, are there really enough people to fill these positions? Term extensions are quite possible. Without sufficient capacity or manpower, meeting increases in demand can be problematic.

The capacities of the forwarding industry are already tight. Increasing demand for road transportation in the US, already worried about a trucker shortage, is a real problem. You can craft any goods you want, but if you can’t move them in time, that’s a problem.

This is where supply chain leadership comes into play!

We need supply chain leadership now!

Any issues raised by these trade wars fall under the purview of the supply chain. Sourcing, delivery, delivery, material cost, total cost of ownership…it’s all supply chain!

Harley-Davidson is one of the more prominent companies explaining the impact of these tariffs on the supply chain. Tariffs on steel and aluminum are driving up costs so significantly (about $100 million) that manufacturing is being moved out of the US to other overseas facilities to serve the European market. This avoids US-initiated tariffs and keeps costs in check. This is a step in supply chain sourcing for sure!

What are the general tactical and strategic actions that supply chain leaders should take:

  1. network cost analysis
    • The supply chain must conduct a revised cost analysis for all affected raw materials, sources and network nodes (e.g. manufacturing plants, distribution centers).
    • The analysis must include total costs including tariffs (current and projected), local content/country of origin requirements, costs of changing or setting up new sources, and impact on transport
    • The cost analysis must also include what-if scenarios and sensitivity analyses. Who knows how this will turn out? Will the tariffs apply for the next 2-6 years (depending on the outcome of the US elections and negotiations)? This is an extremely important step.
    • This analysis must also include the cost of switching sources and whether a cost-benefit analysis makes switching financially viable. But if you can’t get parts and you lose orders, it can make the analysis obsolete.
  2. Sourcing Analysis
    • You need to identify the vulnerable suppliers or network nodes. This should include 2nd and 3rd tier suppliers.
    • You must identify the affected raw materials.
    • For both suppliers and raw materials, you must assess whether you can source or provide them twice, along with an assessment of the ease or difficulty of doing so.
  3. Analysis of continuity of care
    • With a solid understanding of your future demand forecasts, you need to determine where you really have a risk or threat to the continuity of supply. Note that other companies will do the same. Therefore, you need to know unmistakably from your critical suppliers what their capacity situation is and whether they can cover your needs.
    • A sensitivity analysis is also required here. If the delivery times are longer, can you still be supplied? When critical suppliers run out of capacity and start allocating supplies, are you okay?
  4. procurement decisions
    • With a cost analysis, a thorough understanding of sourcing and supply, and an assessment of continuity of supply weaknesses, you should now have enough information to make sourcing decisions.
    • In some cases, sources for commodity items can be changed quickly and easily. But in other cases, switching and qualifying sources can be very expensive and take a long time.

Depending on your industry, these steps can be easy or difficult. Having two sources, for example, may not be practical for many, but is natural for others. With dual sourcing, it can be much easier and faster to move demand to navigate through trading problems.

At its core, you have a fundamental choice to make. Do you stand still and do nothing and endure the situation hoping that it will be resolved quickly? Or are you taking action now in anticipation of a long, protracted trade war? When you take action, the supply chain must take the lead. The survival of your business can be determined by this decision.

Trade war myopia in conclusion

Now a trade war has started. Who knows what will happen next, how long it will last and how it will end. But in the meantime, companies need to make dynamic decisions given today’s tariff situation and what they see as future developments.

The supply chain is always focused on risk mitigation and ensuring continuity of supply from qualified, safe sources. Contingency planning has long been a cornerstone of a sound supply chain strategy. The trade situation is turning upside down the stable base that many companies have had in building their supply chains for years. Now is the time to invoke that contingency planning.

Procurement, cost assessment and supply-demand management are core functions of the supply chain. The global trade balance or imbalance and uncertainty is a wake up call for everyone no matter how long it will last.

So there are still long-term decisions to be made. Every trade war has consequences. And the supply chain must move forward.

Originally published July 10, 2018.

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