A brief review of current of global trade news cycle can send our heads spinning as supply chain professionals, rightfully so. The simple question of “Where to buy?” coupled with the supporting regional sourcing best practices many of us were trained on feels conflicted with our “new reality”. What seems like it’s here to stay though, is the overabundance of disparate data, daily direction changes, and evolving alliances.
A couple of our blogs from late 2016 and mid 2017 – “Navigating Sourcing in a Volatile Trade Agreement Climate” and “5 Steps to Produce Onshoring Success in a Shifting Global Economy” – highlight many purchasing dynamics still present today. So, the question remains, “What can we do through sourcing to mitigate the impact of evolving trade agreements, and now tariffs?”
First, we’ll review how we got where we are today, and how trade agreements might affect the broader economy. Then, we’ll share four smart strategies for sourcing in any trade environment.
Trade Climate Overview
To appreciate how best to utilize each sourcing strategy, we should review how we got where we are today. At present, NAFTA and trade with China and European allies sit in the administrations crosshairs. Below is a brief historical timeline:
- The US exits three major agreements
- Exit of Trans Pacific Partnership
- Exit of Climate Accord
- Exit of Iran Nuclear Deal
- The President calls it the worst trade deal ever
- President George H.W. Bush signed the US into NAFTA in 1992, and today NAFTA imports and exports between the US, Mexico, and Canada is over $1 Trillion
- The White House justifies tariff roll-outs as national security issue
- The administration has roped the NAFTA countries in with tariffs it also rolled out on the European Union
- This provoked responses from those parties:
- Mexico with a $3B tariff on pork, apples, potatoes, bourbon and other products
- Canada with a retaliatory $12.8B tariff
- European Union with $3.3B in tariffs set to hit in July
Overall, what’s happening, and will likely continue until a resolution is reached, is a series of retaliatory tariffs, targeted to affect specific industries.
How Does This Affect the Economy as a Whole?
It’s early, but the reviews are in and most of them aren’t positive:
- Some steel workers – the group these rounds of tariffs are supposed to benefit most – are not enamored as of late. Some larger groups are asking the President to stop
- Distillers aren’t too happy either
- The National Retail Federation has weighed in, negatively
- House Republicans are looking into blocking them altogether
- Ironically, even the White House’s own analysis paints a gloomy picture
Chances are, this trade war hasn’t affected your industry yet, or at least not noticeably. The major risk factor beyond increased prices is uncertainty in the economy because of the back and forth tariffs. Trying to understand what’ll happen next and how effective these new trade strategies will be is a tough task. The good news is there are plenty of best practices you’re likely already doing that can help, and if you’re not already doing them, your business will benefit from them beyond just planning for tariff hikes. Below are four smart strategies for sourcing in any trade environment.
4 Smart Strategies for Sourcing in Any Trade Environment
1. Develop Local Backup Suppliers
Start by ensuring that your procurement team has the necessary technical and commercial information to properly qualify and establish local backup suppliers in your system. Expand your supply base in the same countries you manufacture your products in, outside of the regions with trade agreement blocks. Many of these agreements are in flux, so qualifying local suppliers across all direct and indirect spend categories will be your safest bet.
Beyond qualifying suppliers, ensure that you take the time to develop a relationship with the backup suppliers’ key executives. Get to know your new suppliers’ contacts; invite them to new product announcements, supplier development meetings, and future product planning workshops. Developing deep relationships with backup supply partners will increase the likelihood of favorable supply terms if major trade agreement changes play out.
2. Brainstorm & Build Proactive Plans
Large organizations have internal Supply Chain Risk Management (SCRM) teams. However, companies with fewer resources can emulate the responsibilities and undertakings of SCRM teams at bigger companies by assigning personnel from different departments to an SCRM committee – a huge step to de-risk supply for any size firm.
Diverse teams composed of employees from different functions within your organization will better brainstorm various trade scenarios and potential problems than a committee composed solely of people from your production control department, for example. This will create the foundation for designing proactive plans and enable quicker responses to future issues. Balancing agility, speed, and risk should be the focus when developing contingency plans to significantly mitigate supply disruption.
3. Have External Resources on Standby
Massive transformations of global trade agreements are high-stakes events with dire consequences for businesses who lag their competition in making executive decisions. As a result, it’d be wise to seek external guidance with a fresh perspective.
Develop a relationship with a services firm that may be leveraged for expertise and additional bandwidth to support supplier identification, qualification, resourcing, risk management, and distressed supply chain management. There are no guarantees in the future, so having additional resources in place will provide your company and leadership with piece of mind to take on whatever’s next.
4. Test Contingency Plans
This seems basic, and it is, but don’t test your contingency plans in a crisis setting. Companies often have several backup suppliers that, on paper, have available capacity and could be great alternatives if problems arise. However, trade agreement changes and/or sudden shifts in the global economy will likely result in many businesses also scrambling to buy from your backup supplier.
Therefore, experimenting with fallback strategies through supplier purchases will boost your supply partner relationships, help address unforeseen complications, and improve your organization’s probability to receive advantageous terms, i.e. capacity if additional supply needs to be shifted. Sourcing new product development and prototype projects with your backup suppliers is also an effective way to demonstrate to them your commitment and credibility. The key here is when getting started; sourcing raw materials first, and then non-mission critical direct spend capabilities/commodities, will provide the lowest risk opportunities when testing your supply contingency plans.
The only constant in the foreseeable future is change, so ensuring your organization is prepared to weather future trade storms will be essential to sustaining long-term profitability. Firms who implement the four proactive sourcing strategies described above can build more engaged and responsive supply bases, avoid expensive supply chain disruptions, and reduce future supply risk, enabling them to outperform the competition.