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Tariffs, Trade and the Global Supply Chain

By Toby Brzoznowski  March 8, 2018

Last week President Trump announced new tariffs on steel and aluminum., setting off talk of global trade wars, prompting the departure of a top economic advisor and rattling an already volatile stock market.  And although these topics are the ones that make headlines, there is another group of professionals behind the scenes whose jobs have quietly shifted into overdrive — of course, I’m talking about the people in the field of Supply Chain.

As the name implies, supply chains are made up of a many interconnected nodes and links including suppliers, production, shipping, ports, warehouses, rail lines, trucks, stores, and customers. To compete and remain profitable, companies must find and maintain the right balance across all these elements.  A change of any kind, be it a new cost or shift in lead time or reduction in reliability can have drastic consequences to the business — as they say, a chain is only as strong as its weakest link.

Right after the presidential election, we heard from several of our customers who said that their supply chain design teams had already kicked off new what-if scenario analysis and contingency planning focused on the possibility of import taxes and tariffs. They were trying to determine if and where these new costs would affect their cost-to-serve and their bottom line.

I recently spoke with Steve Banker in Forbes about how supply chain design technology can improve an organization’s ability to prepare for and respond to market volatility and change.

As we discussed, companies for better or worse are forced to be global on both the supply and demand sides of their businesses. Supply chains are extended globally as well. To compete, companies have to continuously trade off service and costs. Successful companies are often walking the finest of lines; anything that could disrupt that balance – like a trade war – is a major risk.

In situations like this, companies need to be extra vigilant when modeling their end-to-end logistics operations. Every unit cost – both fixed and variable – needs to be factored in. The variable costs should include taxes, tariffs and local requirements, based on volume, based on location.

Once a company has created a digital model of their supply chain, they can then use prescriptive analytics and mathematical solvers to determine what is “optimal”.  And while it is certainly important to know what is optimal, the companies that are best in class pay just as much attention to when it is no longer optimal. This means that they have done sensitivity analysis around the key cost components that are out of their control (i.e. currency value, fuel cost, new tariffs) — and they have determined at what value the optimal answer changes, and a new policy or structure is required.

For instance, a company may find that as long as fuel costs do not increase by more than 30%, they can stock products in a central warehouse, but once costs go above 30%, they must shift to regional warehouses to reduce miles and regain profitability.

If these new tariffs are implemented, there are numerous supply chains that will go out of balance, prompting shifts in strategy, and if other countries retaliate with tariffs of their own, our colleagues in supply chain are going to lot of work ahead of them — job security, perhaps?