Supply chain executives at companies with global supply chains are paying close attention to what happens surrounding import tariffs and trade rules now that Donald Trump is the President elect. On the campaign trail Trump promised to renegotiate the North American Free Trade Agreement, threatening to impose punitive tariffs on goods imported from Mexico. Similarly, Mr. Trump threatened to levy punitive duties on goods made in China. Carrier and Ford have already responded by promising to keep more production in the U.S.
How should global manufacturers respond? Well one thing they are apt to do when the exact details become clearer is take a close look at their global supply chain network and how new tariffs will impact their total costs.
I talked to Toby Brzoznowski, Executive VP at LLamasoft, on this topic. LLamasoft is a leading provider supply chain design software. This software allows companies to decide where they should locate their plants and warehouses in order to provide a desired service level at the lowest possible cost.
Mr. Brzoznowski mentioned that his colleagues in the UK are seeing record levels of interest in their solution following Brexit. He suspects that the Trump presidency may generate similar activity in the U.S. given similarities in the potential for introducing new trade policy.
“Companies for better or worse are forced to be global on both the supply and demand side of their businesses. Supply chains are extended globally as well. To compete, companies have to continuously trade off service and costs. The ones that do it best are walking the finest of lines. Anything that could disrupt that balance is a major risk.”
The Llamasoft Supply Chain Guru solution can integrate to Global Trade Management solutions that provide the details on tariffs and other trade rules like local content requirements. “We add in every unit cost – both fixed and variable -and the variable costs factor in taxes, based on volume, based on location.”
I mentioned to Mr. Brzoznowski that I thought if the new administration was trying to bring jobs back to America, local content requirements might be a better tool than straight out tariffs. I’ve talked to U.S. companies doing business in China that are required to source a certain percentage of components from Chinese firms in order to get a tax break. China and U.S. trade is regulated by the World Trade Organization treaty. China has said they will defend their rights vigorously based on this treaty; but they can’t complain too much about a practice they utilize.
“We’ve done a lot of analysis on local content,” Mr. Brzoznowski stated. “Manufacturers often look to find a supplier within a country that has high demand for their products. They may still do final manufacturing in another company. But then they seek return the products with local content back to the origin nation to incorporate the tax break. There can be a fine line between adding transport legs and leveraging tax breaks.”
Doing supply chain design well, requires continuous contingency planning. “It is good to know what is optimal,” Mr. Brzoznowski explained, “but the companies that are best at this pay just as much to when it is no longer optimal.”
Tariff Scenario Analysis in the LLamasoft Supply Chain Guru Solution
The scenario planning process is often done in design centers of excellence. For a supply chain design to be robust, contingency plans have to be developed. Supply chain engineers must ask themselves, “what is my tolerance around these variables I can’t control?” Mr. Brzoznowski stated that these engineers “need to do a sensitivity analysis.” If a particular cost driver goes up or down by plus or minus 50% in increments of 5, when does a design flip and become uneconomic? The network team monitors this.” They need to understand which metrics they need to monitor based on which metrics will have the most impact on making a network design infeasible.
From a supply chain perspective, the election of Donald Trump is a disruptive event. “Any new administration creates uncertainty,” Mr. Brzoznowski said. “The most recent campaign promises on tariffs – and on providing incentives to get companies back to U.S. – have already put global companies into overdrive, examining their options and determining how best to redesign their supply chains.”