No doubt most supply chains are impacted by tariffs and quotas, but at the moment it can be a good time for finding new opportunities. Proactive procurement functions are developing and executing strategies that mitigate tariff impacts and improve supply chains for business success.
Tariffs are a government-imposed tax on imports of one or more particular commodities. Quotas are the quantity of goods a country can import, meaning they restrict the amount that can be imported. Tariffs and quotas can have significant impacts on supply chains, and to mitigating these impacts falls to sourcing and procurement professionals working together. Businesses that see tariffs as opportunities to become more competitive through flexibility and agility rather than paralyzing restrictions have developed a variety of strategies. These include product exclusion requests, strategic sourcing, optimal use of Foreign Trade Zones (FTZs), and product re-engineering, to name a few. Developing a strategic sourcing plan to mitigate tariff impacts now can strengthen supply chain management into the future.
IDENTIFYING THE IMPACTS TO DRIVE THE PROCUREMENT RESPONSE
Tariffs can have multiple impacts on supply chains. They might increase prices, could lead to shortages of goods and materials, and usually cause shifts in global supply chains. Since most businesses today (including small businesses) have global supply chains, most procurement functions need to develop strategies to ensure the flow of affordable imported goods. The strategies employed depend on many factors, such as the ability to absorb higher costs, or the ability to access the required goods and materials from other countries.
It should be pointed out that this is where all the work procurement has done to develop good supplier relationships will lead to collaborative assistance. Procurement will need to communicate with critical suppliers and possibly renegotiate contracts. Sometimes tariffs do not force procurement to drop a supplier when the price impact is small, or the business does not need a large quantity of items on a routine basis - chances are they have already covered their operating costs. In addition, if demand is elastic (sensitivity of demand due to a price change), it may make sense to continue buying from the supplier in the same country, but contracts are renegotiated to address the tariff.* If demand is inelastic, the price does not affect the trade terms, but consumer prices increase.
If these strategies are not good choices because of the large size of the contract with suppliers and demand is elastic, procurement will need to search for new suppliers in countries not affected by tariffs. Reworking the supply chain to avoid tariffs includes switching countries and/or suppliers, and rerouting products through logistics changes. Of course, these are difficult strategies to deploy.
STRATEGY OPTIONS TO CONSIDER
There are a number of risks to consider when developing a procurement strategy to address tariffs. For example, finding new suppliers in a different country could be a feasible option, but the chances of disruption in other countries must be taken into account. Tariffs lead procurement to look at shifting the supply chain, but they do not cause impacts in a vacuum. For example, there are governmental, economic, financial, and social considerations. Selecting suppliers who utilize child labor is not an option if a business wants to retain a good reputation, for example.
A company can apply for exclusions from tariffs, by filing with the US Trade Representative (USTR). This works best when there are no other options to procure the type and quantity of critical goods and materials, and gaining approval requires extensive data and research supporting the argument.
It is possible for some companies to use Foreign Trade Zones (FTZs) and bonded warehouses to their advantage. FTZs are secure areas under the protection of the U.S. Customs and Boarder Protection. Imported goods and materials enter the U.S. through a FTZ bonded warehouse, and duties, tariffs, and taxes are not paid. Only when the goods are distributed within the U.S. do the tariffs and taxes become collectible. When the products are exported directly from the FTZ to another country, nothing is paid. This enables better cost management to reduce the impact of tariffs, because the U.S. company can have the product leave the FTZ warehouse in batches.
DEVELOPING A TARIFF STRATEGY FOR THE LONG HAUL
There are other approaches, but the reality is that tariffs are always going to exist, and thus it is important for procurement to develop a strategic sourcing strategy that is flexible. One of the ways companies are adjusting their supply chains is to develop a better domestic-global mix of suppliers. This can lead to greater utilization of U.S. diverse suppliers and enable movement of sourcing closer to the end customer. Global supply chains are important, but tariffs create a new opportunity to evaluate sourcing options and better ways to support domestic suppliers. Moving some operations back to the U.S. is also an excellent opportunity to increase diversity in the supply chain.
Another approach is to make engineering changes to products, so they do not require parts or materials subject to tariffs. This requires company engineers to revise the product design, and manufacturing processes are impacted. It may or may not require significant changes, but this is a strategy that can serve the company well in the long term. It may be possible to expand use of national or local buyers and, once again, increase the supply chain diversity at the same time. Also related to this strategy is seeking ways outsourced activities might be achieved inhouse.
TARIFFS HERE TO STAY SO RESPOND ACCORDINGLY
Tariffs are a fact of business life in global supply chains. They will always exist, so it makes sense to develop a flexible supply chain instead of simply stockpiling inventory or increasing consumer prices. Both of these approaches have limitations. Procurement can better minimize the impact of tariffs by developing a strategic plan that is flexible and agile, enabling a quick response when the next tariff is implemented. The added advantage of this broader perspective is that the supply chain is reviewed and reworked to not just mitigate the risks tariffs present now. It also enables avoiding a panicked response in the future when new threats to supply chain operational efficiency appear.