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Tariffs and Supply Chain Planning: When Does a Speculative Buy Make Sense?
Episode 3: What’s the impact of tariffs on supply chain planning, and what can you do about it?
There’s a lot of political “poo” being flung around over the international tariff situation. But today we’re here with Rod Daugherty, VP of Product Strategy & Brian Crowell, Supply Chain Applications Support Analyst, of Blue Ridge – and we’re gonna narrow down the focus for wholesalers & distributors. In this podcast, Rod & Brian will bring us up to speed on the situation & answer one key question…
When all the dust settles, how will tariffs affect supply chain costs, and how should you be planning for it?
Q: Rod/Brian, let’s start by getting us all up to speed… How did all this start & where are we now?
A: Quick history of the past year – tariffs on EU suppliers/impact of Brexit on lead times & perishables at the border, etc…. and tariffs on China. Inflation began trending almost immediately in 2018 when this all started.
Events over the past 6 months have set the stage for a trade war on an international scale.
- Earlier in May, President Trump tweeted that he was increasing tariffs from 10-25% percent on $200 billion of imports from China. China retaliated by saying it would raise tariffs as high as 25% on $60 billion of goods it imported from the U.S.
- It’s not just China; U.S. allies are fighting back:
- Canada threatened to impose tariffs of $13 billion worth of US exports from July 1 onwards – including pizza, shaving foam, sleeping bags, playing cards & quiche
- The EU with tariffs on things like bourbon (Kentucky) & orange juice (Florida)
- And Mexico with tariffs on lamps, sausages, blueberries & various cheeses
These products seem random, don’t they? Now in mid-May, Trump negotiated with Canada & Mexico to lift his proposed tariffs of 25% on steel and 10% on aluminum. In exchange, Canada and Mexico will lift the retaliatory tariffs they had imposed on scores of U.S. products.
Q: That’s a lot of uncertainty! Regardless of which political team you bat for, if I’m a distributor or wholesaler that relies on these countries for supply, what does this mean to me?
A: Higher prices (which will be passed on to consumers) & long or unpredictable lead times… If you want a good example of how impactful tariff legislation is on pricing, let’s talk about NAFTA 2.0 (or USMCA) & what it has done for the auto industry (example):
The price of a new car, when adjusted for inflation, between 1993 and 2018 has only risen 7%, while the price of all other goods (food, energy) has risen 86%. That’s the handiwork of NAFTA. If USMCA gets enacted, consumers could pay anywhere from $470 to $2,200 more for that same car – simply because the higher cost of raw materials is being passed down the supply chain.
Q: Let’s hope the lifted tariffs will soften the blow there. Because legislation certainly touches a lot of supply chain distribution & wholesale markets.
A: You’re absolutely right, Todd. Oxford Economics estimates that a full trade war, where essentially all trade between US & China is subject to tariffs, would shave nearly 0.6% off US GDP growth by 2020.
And there’s a regional aspect to this, too. Oxford says these 5 states will lose the most if all trade between the US & China is subject to tariffs:
- South Carolina – motor vehicles
- Indiana – chemicals
- Michigan – motor vehicle parts
- Oregon – semiconductors/other electronics
- Louisiana – oilseeds & grains
Q: Ok so let’s talk solutions. What can distributors & wholesalers do about this?
Well, there’s a lot in the news about companies shifting their import focus elsewhere. US imports from Vietnam are soaring:
- American imports from Vietnam rose 2% in the first 3 months of 2019, while imports from China declined 13.9%
- In addition, Chinese are moving their factories to cheaper waters in Vietnam
That’s a superficial fix, though. More unknowns are yet to come. The CERTAIN thing is that businesses across every market – from automotive & industrial to food and beverage, furniture and more – must get fiscally smarter in planning what they buy, how much and when.
Q: Yeah, we’ve heard a great deal of noise about forward-buying ahead of the tariffs… and I know Rod, you blogged about it recently on BlueRidgeGlobal.com. Is this a good strategy?
A: Yes, a well-oiled forward-buy on inventory could bring additional savings of 5-20% to wholesalers, distributors & retailers.
Let’s say a supplier pre-announces a price increase or promotion on a high-turnover item… Forward buying can certainly be an attractive choice. There’s a fine line, though, between buying inventory ahead of inflation and cannibalizing your profits. Don’t forward buy just to do it. Your savings could be negated by the cost of carrying inventory you can’t sell.
Finding that perfect balance — no stockouts, no surplus, no surprises — requires deep analytical capability & specialized inventory optimization tools that help you make the right decisions at exactly the right time.
Q: Tell us how these tools work.
A: A good demand forecasting solution helps you deal with material changes in demand caused by things you generally have no control over. Unfortunately, when faced with macro-economic unknowns like tariffs, most businesses do 1 of 2 things:
#1, they stockpile inventory to ensure service levels are met during, say, seasonal variation… which can quickly end up in clearance. Even in well-run companies, anywhere from 20-30% of inventory is dead or obsolete. The total cost of holding inventory can represent a shocking 25-30% more than the inventory’s unit cost value!
Or #2, companies tend to under-plan, leading to stockouts & lost sales. We’re seeing this a lot in the case of long lead-times from international suppliers – for example, when production shuts down for 2 weeks during Chinese New Year. Or with the additional transportation costs when transferring inventory from one DC when you need to fill seasonal demand at another.
Managing all of this in the cloud give demand planners real-time visibility into their purchasing strategy, so they can forecast accurately & make more economical decisions.
Q: It seems like this sure changes the role of the buyer, doesn’t it?
A: Yes; you can definitely say that. Today’s buyer really is more of an investor for the company, rather than a clerical worker searching through spreadsheets & making educated guesses. Inventory is your company’s biggest investment; you’ve got to have a solution for optimizing that.
Q: Got it. Alright, so for our listeners who are now all fired up about their impact on the bottom line, what should they look for in a supply chain planning solution?
A: Look for a supply chain planning solution that helps you:
- Avoid tariff-related costs & take advantage of investment buys or special pricing
- Easily ramp up/down inventory levels for seasonal, intermittent or lumpy SKUs
- Reduce days of supply
- Increase service levels
- Move inventory efficiently to save on transportation costs
- Collaborate across multi-echelon locations to improve inventory positioning
- Simplify planning with regional uniqueness