On the heels of the United States’ July 4th celebration of one of its biggest victories — its independence from then-economic powerhouse Great Britain — another battle is on the horizon: a multi-billion-dollar trade war that threatens not just American consumers and businesses, but also the viability of commerce around the world.
Just after midnight, $34 billion in tariffs on imported Chinese machinery, auto parts and medical devices went into effect, marking the latest milestone in a heated and highly publicized series of events in which the United States clashes over trade policy, penalties and what qualifies as fair partnership with another economic superpower that exports more than $500 billion worth of goods to American ports annually.
{mosads}While the implementation of these — and further pending — tariffs are certainly the talk of today’s headlines, they are just the tip of the iceberg when it comes to challenges U.S. businesses are facing as they work to get their products into consumers’ hands and revenue into their balance sheets.
Already this year, we have seen North American Free Trade Agreement (NAFTA) negotiations sour before stalling altogether and separate tariffs on steel and aluminum strain relations with Canada, Mexico and the European Union. Even a product as specific and seemingly commonplace as the washing machine has not been spared.
While tariffs and other trade war speculation undoubtedly fuel uncertainty in global markets, they also put considerable and often overlooked strain on companies’ supply chains.
Supply chains — or the global operations related to sourcing, manufacturing, distribution, transportation and fulfillment — form the backbone of every manufacturer’s method of getting materials to turn into products and putting those products in the hands of their customers.
The only constant in today’s supply chain is change — the type of change that exposes American businesses to uncertainty and risk.
For businesses that must operate in this landscape, now is the time to develop the competencies necessary to navigate in such ambiguity. Being reactive rarely makes good business sense, and with billions of dollars and thousands of jobs on the line, knee-jerk decisions can be particularly hazardous.
Companies must now rethink how they design their supply chains to best prepare for a potential future rife with geo-political change — and treat that as both the challenge and the opportunity that it is.
The first step is to understand exactly how any changes — real or proposed — will impact the supply chain. To be effective, organizations must put aside political allegiances and perhaps even long-held “best practices” to assess changes in a fact-based, data-driven way that provides a clear view of how policy decisions affect them.
Creating a digital model of the end-to-end supply chain from the supplier’s supplier to the customer’s end customer can help organizations make optimal decisions on where they should be sourcing products; how to think about their distribution and transportation network; and where and in what quantity they carry inventory, considering duties and taxes and changing regulations along the way.
Only then can business leaders assess steps to mitigate the inevitable risk, play out what-if scenarios well ahead of policy changes, understand the trickle-down effect to other elements of the business, such as jobs, and enable decisioning that puts the long-term viability of their organization and the greater good of American business front and center.
What the data will likely show is that the tariffs we are dealing with today will have a profound impact on the way business has historically been done. Depending on the type of product, tariffs, duties and taxes will account for somewhere between 10-30 percent of the total landed cost of a product.
This, of course, introduces a wide variance that may require businesses to make end-to-end structural shifts — where they source from, whom they partner with, how they route product and what lead times they need along the way — to continue to reliably meet customer expectations.
Such disruption can be daunting, but rigorous scenario planning and supply chain (re)design leveraging relevant data and sophisticated algorithms may prove to be necessary.
The battles for economic dominance being fought at the policy level must incite parallel action among American businesses — the face of change and uncertainty needs to drive necessary disruption.
Armed with data instead of doubt and insightful algorithms instead of fear, organizations can move from making hasty decisions to creating a well-designed and responsive supply chain that organizations can rely upon as the global business climate continues to shift.
Razat Gaurav is CEO of LLamasoft, a software and services company that develops and markets technology to model and optimize supply chain networks.