Supply chain amidst tariff uncertainty
David Iwinski Jr.
Supply chain amidst tariff uncertainty
Brexit, China tariffs, the USMCA, and other global events roiling markets are creating uncertainties in the supply chains of nearly every firm on the globe. Strategic sourcing is now more important than ever. In the paragraphs below, we will outline a few basic risk mitigation strategies that will help you manage the risks these uncertainties pose to your global supply chains.
The first step in managing your risk is to understand it. Begin by evaluating critical components. Where are they coming from? Are you sole sourced or supplied by multiple vendors from one country? A periodic review of critical components is a good business practice in normal times and is an absolute necessity now. In this period of uncertainty, you must not only evaluate supply chain consolidation on a vendor basis, but also geographically. For example, three unique vendors, all located in China, may not provide the risk mitigation necessary for your supply chain. Once you understand the risk, the next step is to mitigate or eliminate it.
Use multiple sources
The post-cold war era has seen remarkable stability in trade terms and conditions. Until now. Many firms have become complacent, assuming this stability would continue indefinitely. Keep in mind your supply chain must be exercised to stay in shape – selecting second and third sources is not enough - they must be utilized. By regularly sourcing from multiple vendors, you will systematically apply the same processes to measure and maintain quality and on time delivery from your second and third sources as you do from your primary source, assuring they are ready when needed. Where possible use the Pareto principle, creating classes of vendors: Class A vendors (top 15% of vendors providing 75-80% of spend), Class B Vendors (25% of vendors providing 15-20% of spend), and Class C Vendors (bottom 60% of vendors providing at most 5% of spend). In the current climate, consider geographic concentration in your supply chains as a risk nearly equal to that of vendor consolidation. Resisting the temptation to sole source is more important in this climate than ever before – the cost of a supply disruption on a sole sourced critical component will dwarf the cost of managing multiple vendors in multiple locations.
Critical component elimination
The best way to mitigate risk is to completely eliminate it. Where you have custom components, try to design them out of your end-product. If critical components cannot be eliminated, make an effort to redesign to allow use of standard components. If COTS components will not work be willing to spend what is necessary to bring a second or third source on line, even if that entails spending money on tooling or other non-recurring expenses. If you think it is expensive to buy, for example, a second set of dies just imagine how expensive it will be if you need to rush order new tooling while production is shut down waiting. Do not take that risk unless there is absolutely no other choice.
Contract management can be employed in several ways. When possible, by contract ensure you are first in line for components. Try to outsource the risk of increased costs due to tariffs by writing cost-sharing in to your contracts. Include also hedges against currency fluctuations. Not only has Brexit driven wild fluctuations in the Pound, but also instability in France, budget battles between the EU and Italy and other events may cause Euro fluctuations. One of the primary goals of current U.S. trade negotiations with China is to end the currency manipulations that have kept the Yuan below market value. Building hedges in to contracts for currency fluctuations is an important methodology to ensure cost certainty and supply chain continuity in the current environment. Ensure your supply chain is insured against important risks as well, thus preventing a failure on the part of your vendor to become your failure. Building safeguards in to your contracts with your vendors will vastly reduce risk to your own organization.
Inventory management: use with caution
While this is a short-term strategy only, it may be useful in certain circumstances – especially if you are sole-sourced on a custom component. Evaluate the time required to move purchasing to a second or third source (if they are being properly exercised, you may not need this strategy at all), and use this strategy to temporarily cover the gap. Look to use bonded warehouses, free trade zones, and other strategies to reduce the risk you will be caught with inventory, and to reduce the amount of inventory you need to physically store and/or carry on your balance sheet.
You cannot forget the primary goals of strategic sourcing and cast aside your corporate goals or longstanding relationships with suppliers due to the current environment. However, ignoring it is not an answer. Some adjustments are necessary to ensure business continuity and reduce risk. By more aggressively diversifying risk across geographic areas and nations, making a concerted effort to eliminate custom components and other drivers of sole-sourcing, employing intelligent contract management, and through the use of selective and creative inventory management, you can mitigate the risks to your enterprise and ensure you will weather these turbulent times.