If there is one takeaway for the procurement world in the wake of the Trump Administration’s announcement of tariffs on steel and aluminum imports, it’s that supply chain disruptions aren’t a question of if, but rather when? In March 2018, President Trump announced duties of 25.0% and 10.0% on steel and aluminum imports, respectively. The decision sparked a flurry of anxiety among procurement and supply chain professionals worried about the tariffs’ financial impact on their budgeting and sourcing activities.
These concerns exacerbated further with the announcement in May that the European Union (EU), Canada and Mexico, major allies that were previously exempt from the tariffs, would be subject to the same duties. With targeted countries now announcing retaliatory tariffs of their own, there are fears of a looming trade war that could upend decades of global trade policy that has helped build the post-World War II global economy.
ProcurementIQ has identified several strategies buyers can take to minimize the financial impact of these tariffs.
- Hash out new supply agreements with supplies not under contract and negotiate aggressively for the best possible price during this transitionary period
- Leverage high-volume purchases or long-term contracts to incentivize suppliers to offer lower prices
- Purchase steel and aluminum inputs from countries exempt from the tariffs, including Argentina, Australia, Brazil and South Korea
- Consider the potential cost competitiveness of purchasing American-produced steel and aluminum now that these tariffs are a reality
However, the best way to mitigate procurement costs is to develop proactive solutions that go beyond simply responding to a supply chain disruption after it has already happened.
Proactive Solutions Needed
The United States is not alone in its shift toward trade reform and other forms of protectionism. The collapse of manufacturing in advanced nations, rising inequality and a refugee crisis in Syria and other Muslim-majority countries are straining economies across Europe, fueling a rise in populism and nationalism across the globe. The result has been Brexit, tariff wars and increasing economic and political uncertainty.
These trends are concerning for procurement professionals because protectionist policies are antithetical to how they operate. The fragile and interconnected global supply chain relies on borders being open, not closed. Furthermore, while populist sentiment is preoccupied with preserving manufacturing jobs, procurement leaders want to continue disintermediating the supply chain to improve value and efficiency. What’s more, supply chain risks go beyond tariffs and political instability. Other hazards, such as natural disasters, supply shortages and shipping delays, which were previously managed on a national level, now need to be monitored globally. These increasing risks require a more proactive approach to supply chain management.
Proactive Steps Buyers Can Take
Implement “What-If” Costing
One way that buyers can prepare ahead of time is by implementing “what-if” costing, which effectively models the potential impact of variables, such as tariffs, on landed costs. Cost simulation software can perform cost scenarios based on different external variables, thereby enabling buyers to test their supply chain systems in a risk-free environment.
What-if costing differs from traditional manual budgeting and forecasting in that it enables procurement leaders to account for nearly every possible supply chain disruption, a task too monumental to conduct manually. The sheer amount of historical and real-time data available in today’s economy means that buyers need to be able to simulate every possible scenario to make the best purchasing choice now and in the future. Done right, what-if costing improves the accuracy of orders, simplifies the vendor selection process and provides cost savings by reducing the need for consultants and other middlemen.
Avoid Sole Sourcing
Buyers should stray away from sole sourcing, which is essentially relying on a single supplier for critical input materials. Avoiding sole sourcing is especially important given the multiplying effect that globalization has on risk, in which a supply disruption in one part of the world can reverberate throughout many other regions and markets.
To combat these risks, buyers should have sourcing alternatives in place prior to a disruption. For example, in May, a fire at a facility owned by Meridian Lightweight Technologies, a supplier of die cast magnesium automotive parts, knocked out production. Following this supply disruption, Ford was forced to halt production of several of its pickup trucks, and General Motors suspended production of its full-size vans. The problem for these and other automobile manufacturers stemmed from the fact that Meridian was the sole provider of certain parts for particular vehicle models.
Evaluate Risk vs. Reward
Proactively mitigating supply chain risk also means carefully evaluating risk versus reward. It took five months to restore power in Puerto Rico in the aftermath of Hurricane Maria. Without electricity, production from one of the only manufacturers of IV fluids was wiped out, and US hospitals faced a critical shortage of IV bags and up to a 600% price markup. The supplier, Baxter International, established their IV fluid manufacturing operations in Puerto Rico to take advantage of favorable tax laws, which in turn kept costs low for hospitals and other buyers. In this example, the potential risk for hurricanes and the fact that Baxter was essentially the sole provider of these products was glossed over in favor of the reward for cost savings.
While natural disasters of this scale are relatively rare, they are increasing in frequency and severity due to global climate change. Even relatively localized natural disasters, such as wildfires, flooding and storms, can have devastating consequences on global supply chains if they hit the right area. For example, the Gulf Coast of the United States is a major oil-producing region and a highly trafficked supply route. These factors, combined with the region’s proneness to hurricanes and tropical storms, make it especially important for businesses economically tied to the area to carefully consider the risks and rewards of relying on suppliers in this region.
The three steps mentioned above are just starting points. Though supply chains are becoming more globalized and harder to effectively manage, there are a variety of tools that exist for procurement officials, including supply chain management software. This software helps businesses execute transactions, manage inventory and track shipments. Cutting-edge software can even track news sites and government data to convey minute-by-minute intelligence on earthquakes, social unrest, port strikes and other issues that could potentially disrupt supply chains. Another tool that helps to minimize risk is business interruption insurance (BII), which provides coverage to a company if a supplier’s factory or warehouse is damaged in a fire or other disaster.
While supply chain management software and BII provide additional management and protection solutions, they are not without limitations. Software can track the aftermath of an earthquake, but it cannot as easily monitor mundane risk factors such as quality and productivity issues. Similarly, BII’s coverage is limited to very specific incidents of property damage and does not include industrial accidents, regulatory changes, public health emergencies and other risks. The best way to minimize supply chain risk is to use these tools as part of a more comprehensive approach that involves diversifying and organizing supply chains proactively to allow for quick action if one or more parts of the chain experience problems.
Learn how Market Intelligence can help you proactively manage and mitigate supply chain risks with our white paper: Make Smarter Purchasing Decisions with Market Intelligence.
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