Given the chaos and uncertainty unleashed by the trade war, it is hard, if not impossible, for companies participating in global supply chains to formulate even medium-term strategies. To find out how businesses are coping in the short term, we interviewed supply chain leaders at more than a dozen manufacturers and retailers inside and outside the United States. Those conversations provided insight into the steps companies are taking to mitigate the adverse effects on their businesses, including employee morale. Here are six they shared with us.
- Be honest with stakeholders about the lack of clarity.
There is a lot of uncertainty in the supply chain and across the company caused by the trade war and how it changes from day to day. Leadership that communicates about this openly and transparently both internally and with close supply chain partners can dispose of a lot of fear and angst that distracts and gets in the way of action. People at one company told us that they have been holding town hall meetings with employees to openly address the situation, and managers at another firm said they were hosting similar discussions with key suppliers.
- Get organized.
Reopen the war room created during the Covid-19 pandemic and bring together functional experts from finance, marketing, engineering, and supply chain. Conduct a cost and sourcing teardown analysis to gain a detailed financial and spatial understanding of how tariffs will impact raw materials, components, or products by source location.
Understanding this at a granular level—by product and by market—sets a company up to take targeted actions to address specific problems as opposed to taking sweeping decisions to redesign the supply chain. In anticipation of the tariffs, one food manufacturer, for example, increased its order volumes of selected ingredients from key markets that it identified as being particularly sensitive to tariffs.
- Consider product-formulation options.
By evaluating the materials that go into each product from a tariff-adjusted cost perspective, companies can target viable alternatives and make appropriate adjustments. Managers at one medium-sized manufacturer shared with us that by increasing a product’s aluminum content and reducing its steel content, it was able to reclassify the product in a category that was subject to much lower tariffs. (While steel and aluminum imports are both taxed at 25%, selected article and product specifications are exempted under the harmonized tariff schedule. President Donald Trump announced on May 30 that he was doubling the tariffs, to 50%, effective June 4.)
- Consider location options.
Several manufacturers shared how they have been working with suppliers to develop new warehouse operations designed to avoid higher tariff rates by shifting the location of work. They imported semi-finished goods, completed the final product assembly, and packaged the finished goods within local warehouses. Another company now has facilities on both sides of the U.S.-Mexico border to provide similar flexibility and agility to address the dynamic tariff environment.
- Consider bundling options.
When multiple items are packaged and sold together as a product bundle, tariff classification becomes more complex. The “essential character” of the item grouping determines the tariff, but such an assessment can be subjective.
One retail supplier leveraged this opportunity by changing an individual item to a gift bundle through the addition of a celebration card. By making this change, the supplier was able to successfully reclassify the gift bundle under “stationery,” a classification that would be subjected to a lower tariff than the item would have been.
- Build on previous actions.
One manufacturer shared that a few months before the trade war, it had decided to replace a Chinese supplier with a U.S.-based supplier in order to increase local sourcing and reduce reliance on Chinese supplies. When the tariffs kicked in, it was able to leverage this prior change and expand it purchases from the U.S.-based supplier. While competitors were scrambling to secure supply continuity and absorb higher landed costs of critical components, the manufacturer increased production to take advantage of competitors’ stockouts and price increases.
Another U.S. manufacturer had started developing a U.S.-based local supplier during the pandemic as a way to reduce reliance on disrupted global supply lines. The company initially provided space to its supplier in its own operations, co-invested in equipment, and collaborated to help the supplier scale up and become highly productive. This productivity, combined with the logistics savings from being located in the United States, enabled the supplier to compete with suppliers in low-cost countries. When tariffs on imported products kicked in the company found itself in even more favorable circumstance and was able to further increase the amount domestically sourced.
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It is not feasible to redesign an entire supply chain during a quickly evolving trade war. So don’t bite off more than you can chew and don’t shoot for perfection. Keep in mind that your competitors face similar uncertainties, fluctuations, and dynamics. Those who take measured and prudent steps will ride out the storm better and emerge stronger than others who take a wait-and-see approach.
Source: HBR
