How to Prepare for Supply Chain Disruption Caused by Tariffs

How to Prepare for Supply Chain Disruption Caused by Tariffs

At the outset of March 2018, the President of the United States announced a decision to impose tariffs on steel and aluminum imports with the aim of protecting domestic producers. These taxes on foreign goods were announced to be of 25 percent on steel and 10 percent and aluminum. Naturally, with any trade policy announcement of such significance, investors, media, politicians and corporations alike all weighed in with a largely negative outlook without mentioning the supply chain disruption aspect.

Stock markets also responded to the news negatively, with the Dow Jones closing down 420 points that day. Media outlets began using the phrase “trade war” with greater frequency. FiveThirtyEight even created a trade war simulator for users to test their own trade preferences in an economic warfare scenario.

The reality is that the new tariffs raise a lot of uncertainty, which is the enemy of professionals trying to minimize disruption in the supply chain. As a result, many supply chain professionals are asking themselves questions like, “What are the immediate impacts of the new policies?”, “What should I look out for?”, and “How can I mitigate risk in this type of climate?” We hope our discussions below will answer these and add confidence to both your supply chain disruption and risk management strategies.

How to Prepare for Supply Chain Disruption Caused by Tariffs

Pricing

The most immediate and obvious impact of a tariff on steel and aluminum imports is the increased price of those commodities. Major automakers – consumers of large quantities of steel and aluminum to build their vehicles – have said as much, with Toyota, Ford, and Honda  all releasing statements that amount to the same warning: increased cost of raw materials will make vehicles more expensive to the consumer. Where most of the steel and aluminum comes from in a supply chain shouldn’t matter much though, because if a US company sources much of those commodities domestically, the increased demand for domestic steel and aluminum will raise the prices just the same.

From an overall cost perspective, the impact across the board is straight forward. Products are set to become more expensive in a relatively short period of time.

Lead Times

The new tariffs are expected be a boon for US producers of steel and aluminum. Previously unused capacity can now be utilized and increased demand from new or existing customers will make producers busier than ever. But suddenly busy suppliers aren’t always good for supply chains when it comes to minimizing risk. Supply chain professionals should be on the lookout for late deliveries because of the increased demand, and the potential for decreased attention to their orders as suppliers ramp up could pose a threat to quoted lead times.

Not Just Metal the Industries

The elephant in the room is the talk of a trade war. While media is merely speculating the possibilities at this point, the concern should be very real for professionals across all industries, not just those utilizing significant amounts of steel and aluminum. However, before these policies become part of an official trade war, they’ll need a nation to retaliate. China is the most likely combatant, considering they’re one of the US’s largest trade partners, as well as the presumed target of the tariffs in the first place. Those in charge of supply chains in the US should be wary of the coming political developments, as retaliation from China will likely affect an industry like agriculture.

Risk Mitigation Strategies

Preparing for the worst doesn’t mean monitoring the news and following the day-to-day minutiae of international trade policy. In fact, utilizing traditional best practices in purchasing can insulate your firm from unexpected shifts in US trade and potential supply chain disruption.

A good first step is to check in on, and strengthen, relationships with backup suppliers. If US trade policies move in the direction of protecting domestic industries from foreign goods, it means suppliers will likely be dealing with new levels of demand they may not be prepared for. Distributing this burden to backup suppliers and ensuring they’re ready to step in when needed is a good way to mitigate risk.

It’s also prudent to dust off any contingency plans your organization has for supply chain disruption. In a way, it’s best to break glass in case of emergency before the emergency happens and begin simulating how these plans play out for the purposes of long-term risk reduction and profitability of the firm. As always, if your organization doesn’t have such contingency plans, now is as good a time as ever to begin creating them.

Conclusion

Risk mitigation in the supply chain is all about being prepared for anything. Creating contingency plans, understanding how these plans look in practice, and implementing backup suppliers to respond to shifts in demand are just a few fundamentals that’ll help your company adapt to changes in international trade policies and fluctuation in the global economy, keeping your organization in a position to maximize profitable revenue streams.

-Justin