Guest Opinion: Mitigating Tariffs in Supply Chain Design

Editor’s Note: This guest column is co-authored by Haley Roberts and Paul Baris of enVista, a leading global software solutions and consulting services firm.

Supply Chain Strategy for an Ever-Changing Political Environment

The ever-changing political climate has made it more important than ever to consider the impact of tariff regulation changes on supply chain design. The past couple of years of uncertainties have limited companies' options to mitigate tariffs and off-set expenses to their supply chain networks, putting strains on moving into known and unknown markets. To reduce the effect of tariffs on cost, companies should consider best practices for strategically managing this new but increasingly common volatile market.

Rationalize Supply Chain Network Design

When trying to implement something as unpredictable as tariff regulations into network design, the recommended strategy is long-term scenario rationalization. This is the process of discerning the long-term future by evaluating the impact of different scenarios before they occur. This is not predicting the future, rather it is examining all possible outcomes and future developments that could have an impact and trying to maintain flexibility.

When we try to predict the future, we tend to lock in processes using fixed assumptions, which does not bode well with currently fluctuating tariffs. The goal of long-term strategic thinking is to identify paths forward that work independently of each other to help mitigate the future.

Companies need to consider the following factors:

1. Flexibility with Supply Chain Design Flexibility is vital to finding the right balance between all costs, including tariff obligations. Companies need to be flexible enough to change their supply chain design when a country's political climate changes overnight without offsetting the balance of their operations. The key consideration is supplier and country diversification. Diversifying suppliers within different countries that meet the demands of your supply chain and network design provides the opportunity to switch or adjust the demands on certain suppliers with limited impact on your supply chain performance.
2. Planning for Volatility Planning is also crucial when including the impact of volatile tariffs into your network design. Future planning allows for quick reaction times. This is increasingly important as we are seeing more and more complicated rules and regulations for international trade. The paperwork process alone can put operations at a standstill for months. However, if you are well-prepared and the proper planning measures have been put in place, the impact on downtime and costs can be mitigated. Standardizing a company's financials is imperative when implementing tariffs into a network design. Clear communication of tax and duty obligations and prospects can make or break tariff implementation.
3. Diversifying Resources After identifying the key factors of implementing tariffs, it is now time to decide resources that will help mitigate large swinging changes. China and the United States clearly come to mind. However, taking a wider view of trade outside of the U.S. and China is a good step when trying to mitigate tariff costs. As mentioned before, diversification is key.

The company that will survive volatile changes in tariff policy will have a competitive advantage. It will be more agile, quicker to evolve, and will be positioned to continually reinvent itself to seize new opportunities and defend against sudden threats.

There are many ways to diversify. For example, it is critical to understand the rules of how tariffs are applied and seek out opportunities to minimize. Another way to diversify is to break up your supply chain by manufacturing, assembling and distributing in different countries. This will minimize the total cost of tariffs and leverage the skill sets, technical capabilities and quality performance of various countries. While the impact on supply chain complexity and delivery lead times must be taken into consideration, diversifying and breaking these processes up provides flexibility, especially when demands in the market are so uncertain.

In order to diversify amid rising costs, it is important to recognize tradeoffs of transshipment costs, market price difference, manufacturing costs and demand distribution. You must be able to balance the costs and revenue benefits with the uncertain world. If a company can learn to navigate and balance the costs and benefits of fluctuating tariffs, they are more likely able to withstand this new political climate.

Invest in Long-Term Strategy

Companies will respond to these changes in tariffs by engaging in a set of network design tools that help forecast a multitude of scenarios in order to identify feasible new sources of supply and new capabilities to serve demand. Network design focuses on static plans that cover where to invest, where to source and where to serve. This will work in the short-term, but since the eruption in the past couple of years, it would not be feasible for companies to make such investments every time there is a volatile change in tariffs or foreign policies.

A longer-term solution is to create a strategy for where to invest, source and serve under an integrated Sales & Operations Planning (S&OP) process. The S&OP process provides more agility and flexibility by managing consistency and mitigation plans around risks and managing action plans around opportunities. S&OP is executed frequently and collaboratively, harnessing the collective intelligence of all stakeholders across the supply chain. Network design is executed infrequently and in isolation within centers of excellence. This does not diminish the importance of network design, but when you need to quickly respond to a new foreign policy, integrating tariff changes into an S&OP system may help you forge through the bumps in the road more adequately.

Reduce the Impacts of Tariffs with Sales & Operations Planning

There are many factors to consider in mitigating the impacts of the recent and likely future political climates. Tariffs will continue to be volatile, and the best way to eventually integrate this volatility into your network design is through a company's Sales & Operations Planning process, which will allow for the agility and flexibility to manage the ebbs and flows of the unstable political climate.

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