insight magazine

The Tariff Tightrope

Here's how to keep your business agile and upright in uncertain times. By Alex Saric | Digital Exclusive - 2018

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Agility is a word that shows up often in discussions of digital transformation, and for good reason. When dealing with complex technologies, global supply chains, and dynamic geopolitics, the ability to move quickly, easily, and nimbly is paramount. Physical agility involves balance, speed, strength, and coordination. Business agility isn’t much different. In business and industry, people, processes, and technology power these capabilities. The more integrated these are — the more automatically they work in sync with each other — the more agile and competitive your business.

Tariffs are the latest geopolitical disruption to test the agility of businesses. In just the past few weeks, several rounds of tariff threats have turned into tariffs placed and threats of full-blown global trade wars. Much of the public debate has centered on the impact to consumers and the overall U.S. economy, but it is individual enterprises that suddenly face enormous challenges — think sharp price increases on direct materials, new import restrictions, identifying new suppliers, and potential retaliatory tactics that could endanger or complicate access to certain markets (e.g., China). Currently, U.S. businesses in manufacturing, agriculture, oil, aerospace, autos, and marine goods are most likely to be affected. The countries outlining tariff changes in response to U.S. policy include Canada, China, the EU, India, Mexico, and Russia.

A recent survey about global trade conducted by the American Institute of CPAs found that 40 percent of financial executives reported their business would be hurt by trade conflicts — and the survey was conducted before steel and aluminum tariffs were imposed by the U.S. and more recent China and EU retaliatory tariff announcements.

Executives are likely concerned about the pace and scope of regulatory and trade policy changes in general — they worry about the impact on the global economy, the risk in hiring and other investments, and their ability to conduct long-term planning. But many others, especially those involved in procurement, direct materials acquisition, and supply chain management, are already grappling with more specific scenarios. Even for indirect items, you may find existing contracts suddenly have major issues, depending on how they were negotiated. Tariffs may fall on top or below, such that your pricing is no longer competitive. Alternatively, if you have negotiated to include tariffs in the final price, you may be killing your supplier. They arranged a 10 percent margin, for instance, but are now paying a new 25 percent tariff. This quickly becomes infeasible, and they may no longer have incentive to sell goods to you or treat you as a preferred customer.

It’s not surprising that new tariffs — and uncertainty about escalating responses — result in significant supply chain problems. Many companies have carefully fine-tuned their supply chains and may now have to reconsider them entirely. Each tier of suppliers tacks on a few percent to the cost of goods to make their margin. Tariffs can cause the whole thing to breakdown when individual suppliers can no longer meet the price or are providing materials at a loss.

For example, if you source parts from Mexico, ship them to Canada for assembly, then ship to the U.S. for distribution to customers, one or more aspects of that arrangement may no longer work. And if it works well enough for now, what does it look like in six months? There’s too much uncertainty to know. There are a lot of details to chase down — will it work if you ensure a certain percentage of materials are from the U.S., are there quotas, etc.

Many producers will have to completely rethink their Bill of Materials (BOM) to buy more supplies in their home country or find suppliers that haven’t been negatively impacted. This is particularly painful when managing a New Product Introduction (NPI) — every single item in the BOM you have painstakingly developed has to be reviewed, before you even know if the product will be successful in the market.

Regardless of the specific product or situation, the ability to collaborate and work out a feasible solution or new model with your suppliers — or to quickly identify new and equally reliable suppliers — is the key to agility. We’re all in it together; if one link in the chain is suffering, it eventually hits everyone. To expeditiously pull in all stakeholders, gather and share information, and collaborate on action plans in a scalable manner, you need to leverage a flexible technology platform. Adapting to trade or regulatory changes that may impact hundreds of your suppliers (and their suppliers) will require a central platform for assessing, tracking, auditing, and monitoring. Without comprehensive, integrated technology solutions, there is no way to agilely scale this process to the required levels, ensuring the right level of visibility to all stakeholders.

Supplier Risk and Performance Management (SRPM) or broader Source-to-Pay (S2P) solutions are a natural source. The ability to quickly and efficiently capture information from all relevant stakeholders is paramount when you must pivot while remaining steady and competitive. Effective solutions can support assessments through flexible and easy online surveys/questionnaires that can be configured by end users and distributed both internally and externally.

Robust, integrated project management functionality is also critical to developing and tracking progress and compliance on a mass scale. It can enable the sharing of information, assignment of responsibilities, automation of alerts and status tracking, and documentation of auditable activities.

Sourcing solutions that enable effective BOM collaboration can greatly streamline planning for new and existing products and then launch new RFPs as needed to ensure a healthy and competitive supply chain.

It’s important to remember that technology can reduce agility if it indirectly imposes new constraints. The shift towards Software-as-a-Service (SaaS) solutions has provided tremendous benefits, including rapid ROI and lower total cost of ownership (TCO). Standard configurations and the inclusion of upgrades in fixed subscription fees keeps costs low but, depending on the architecture, can also limit your ability to adjust to new or evolving requirements. This is particularly true among S2P solutions, where the focus has been squarely on rapid deployment and embedding best practices (for which companies often must adjust their processes). If SaaS software cannot meet a requirement, often the only recourse is to ask the provider to add it to the road map — which is far too long and uncertain a process in the face of a rapidly developing trade war.

Companies impacted by emerging trade and regulatory requirements must have the flexibility to meet unique or evolving requirements without any dependence on vendor enhancements. This should be among the key criteria in technology evaluations, and companies should demand it from their vendors. After all, if it’s not new tariffs, it will be something else disruptive — cyberattacks, energy costs, raw materials scarcity, war, new regulations, etc.

The unknown is a primary catalyst for agility. Like the boxer who dances nimbly to avoid blows and find an opening for his next move, global organizations must be able to pivot and shift, adjust processes, re-assess risks, and develop new strategies. The best way to do this in the supply chain context is collaboration. You can’t adjust in a vacuum, and the more you include your suppliers, the more likely you’ll be to preserve your valuable relationships and preferred customer status. After all, they are dancing, too — if you are easy to work with, you enable their agility.

There’s no such thing as a set-it-and-forget-it mode in global business. If you’re the fastest, strongest, and most balanced among your competitors, you’ll be the first to secure suppliers, market share, and margins. Those are the moves we all want to make.