Trade War Myopia and Supply Chain Leadership!

Trade War

All of the protectionist tariffs that are being imposed are surely upsetting the world order in international trade.  The starting position that initiated all of this was that it was to protect national security in the U.S., largely from its Allies!  Seriously?

This is all politically motivated with the intent of generating more jobs within the U.S. and improving real, or perceived, trade imbalances by the richest country in the world.   Not unexpectedly those countries that have been hit by tariffs from the U.S. are responding in kind to protect their own interests.  The death spiral spins on.

While we must wait to see how all of this mess sorts itself out the Supply Chain leaders of today must create and implement the strategies necessary to combat these trade complications and ensure the ongoing integrity of their Supply Chains.

The Scope

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

The retaliatory tariffs are intended to be a dollar for dollar match against the U.S. initiated tariffs.  So who is the winner here?  The U.S. has declared that it will further escalate the trade war with even more tariffs in response to the retaliatory tariffs from other countries.  And these other countries will continue to respond in kind.

Prices will likely rise as most companies will not willingly absorb cost increases.  Any market based price ceiling as well as bottom line margin pressure will force companies to look at ways to mitigate, if not eliminate, these cost impacts.

Supply availability may become a real issue.  While the tariffs are meant to create more domestic jobs do the domestic industries even have the capacity to increase their share of market?  Even if they have the physical capacity are there really enough people to fill those jobs given the generally low unemployment rates and specialized skills required?  Lead time extensions are certainly possible.  Without enough capacity or labour fulfilling demand increases may  be problematic.

Trade war

Further the trucking industry’s capacity is also already tight.  Increasing the demand on over the road transportation in the U.S., which is already concerned about a trucker shortage, is a real concern.  You can make all of the goods that you want but if you can’t move them, on time, it’s a problem.

This is where Supply Chain leadership comes in!

We Need Supply Chain Leadership Now!

All of the issues that are created by these trade wars fall within the purview of the Supply Chain.  Sourcing, supply, delivery, materials cost, total cost of acquisition … it’s all Supply Chain!

Harley-Davidson is one of the more prominent companies declaring a Supply Chain impact from these tariffs.  The tariffs on steel and aluminum are creating such a significant increase in costs (approx. $100M) that they are moving manufacturing out of the U.S. to other overseas facilities to service the European market.  This will avoid the U.S. initiated tariffs and keep costs in check.  This is a Supply Chain sourcing move for sure!

What are the general tactical, and strategic, actions that Supply Chain leaders should be initiating:

  1. Network Cost Analysis
    • Supply Chain must complete a revised cost analysis for all impacted raw materials, sources, and network nodes (eg. manufacturing facilities, distribution centres)
    • The analysis must include total costs including tariffs (current and forecasted), local content/country of origin requirements, costs for changing or setting up new sources, and transportation implications
    • The cost analysis must also include what-if scenarios and sensitivity analysis.  Who knows how this will play out?  Will the tariffs be in place for the next 2-6 years (depending on the results of U.S. elections and negotiations)?  This is a critically important step.
    • This analysis must also include the costs of changing sources and whether a cost-benefit analysis makes any moves financially viable.  But if you can’t get parts and you lose business this may make the analysis moot.
  2. Sourcing Analysis
    • You must identify the Suppliers or network nodes that are at risk.  This should include 2nd tier and 3rd tier Suppliers.
    • You must identify the Raw materials that are impacted.
    • For both the Suppliers and Raw materials you must assess whether you can dual source or resource these, along with an assessment of the ease or difficulty in doing so.
  3. Continuity of Supply Analysis
    • With a solid understanding of your future demand forecasts you need to determine where you truly have a continuity of supply risk or threat.  Note that other companies are going to be doing the same thing.  So you must understand unequivocally from your critical Suppliers what their capacity situation is and whether they can meet your demand requirements.
    • Sensitivity analysis is required here also.  If lead times are extended will you still be able to get supply?  If critical Suppliers run out of capacity and start allocating supply will you be ok?
  4. Sourcing Decisions
    • With a costing analysis in place, a comprehensive understanding of sources and supply, and an assessment of continuity of supply pain points you should now have enough information to make sourcing decisions.
    • In some cases sources can be changed quickly and easily for commodity items.  But in other cases changing and qualifying sources can be very expensive and can take a long time.

Depending on your Industry these steps may be easy or they may be difficult.  Having dual sources for instance may not be practical for many but may be natural for others.  With dual sourcing it can be much easier, and faster, to move demand so as to navigate through the trade issues.

At its core you will need to make one fundamental decision.  Do you stand pat and take no action and ride out the situation in hope that it will quickly be resolved?  Or do you take action now anticipating a long, protracted trade war?  If you do take action then Supply Chain must take the lead.   The very survival of your company may be determined by this decision.

Trade War Myopia in Conclusion

A trade war has now begun.  Who knows how it will play out, how long it will last, and how it will end.  But in the interim companies will need to make dynamic decisions in the face of today’s tariff situation and what they perceive will happen in the future.

Supply Chain is always focussed on risk mitigation and ensuring continuity of supply from qualified, secure sources.  Contingency planning has long been a cornerstone of a sound Supply Chain strategy.  The trade situation is upending the stable base that many companies have had in place for years in setting up their Supply Chains.  Now is the time to invoke that Contingency planning.

Sourcing, cost assessment, and supply-demand management are core Supply Chain responsibilities.  The global trade balance, or imbalance, and uncertainty is a wake-up call for everyone regardless of how long it will last.

So long term decisions still need to be made.  Any trade war has ramifications.  And Supply Chain must lead the way.

Originally published on July 10, 2018.