Expert Opinion: Two new strategies to deal with supply chain volatility
The trade war is the most significant issue facing global supply chains. Any interested parties that expected a respite after the Democrats won the House in the 2018 midterms, have for the previous three months been left with little in the way of progress. In the 1960s, Congress delegated its authority to impose restrictions on foreign trade, which under the current political environment it is attempting to reclaim. Several bills were introduced in 2018 to strengthen Congress’ constitutional role in trade policy, but none were passed. It is uncertain if these legislations will gather more support under the newly elected Congress. Even if they did, the President would most certainly veto any enacted laws in order to maintain the executive branch’s unilateral power in this domain.
Ironically, if there is one issue where House leader Nancy Pelosi and President Donald Trump can agree on, it is tightening the screws on China. Pelosi and many other Democrats have been vocal about the economic ramifications of China supposedly pushing unfair trade practices and subsidizing Chinese companies to gain an advantage over American firms. All in all, this means that global corporations have more tumult and uncertainty coming their way as the trade war continues.
Where do the two countries stand?
The current duties on China imports are set at 10% and were slated to increase to 25% on March 2, as the 90-day ultimatum to ink the deal ended. However, tariffs still stand at 10% as the negotiations have been delayed until at least April.
Meanwhile, as these tariffs lead to rising prices, U.S. retailers have been dealing with the dilemma of whether to pass on the price increases to consumers or shrink their margins. While this period of uncertainty continues, supply chain leaders in the retail industry must continue to be proactive in managing global supply.
Strategy #1: Forward buying
The first strategy to look at is forward buying. Walmart, Target and other retailers have reportedly pulled orders forward in anticipation of a tariff hike to 25%. Retailers utilizing this tactic must consider two factors—increased warehousing and logistics costs due to over-ordering, and the potential to negotiate favorable short-term pricing arrangements with suppliers to offset the increased costs.
From a global perspective, the same strategy is also being deployed by corporations in Britain in anticipation of Brexit.
Strategy #2: Supply base diversification
The second strategy adopted by retailers and consumer packaged goods companies is supply base diversification. In recent years, operations in China have become more expensive due to increased labor costs and changing regulatory environment among other factors. Now, these tariffs have given importers an opportunity to accelerate their plans to move to other low-cost locations such as Vietnam, India, Bangladesh, and the Philippines. For example, there is growing interest from manufacturers in the industrial parks of Ho Chi Minh City, Vietnam. Supply chain leaders progressing on this option must carefully understand local policies and changes to supplier contracts to protect future price and product quality, while also contemplating changes to logistic networks.
Supply chains expecting support from the newly elected Congress and potential policy reversals must wake up to take matters into their own hands. These new variables call for complex modeling of potential future purchasing scenarios and only companies that can adapt quickly will come out on top.
Shiven Khosla is a manager in the operations and performance transformation practice at global management consulting firm A.T. Kearney. He can be contacted at [email protected].