When mitigating the impacts of increasing tariffs, organizations need to consider 4 important levers – procurement costs, supply chains, customers, and competitors.
Lever 1: Procurement Costs
For larger organizations such as Ford or GM with products integrating parts such as microchips, drives, and other critical components, tariffed materials may account for up to 10-15% of costs.
For small players, like metal stamping, material costs are unlikely to be significantly affected by increasing tariffs. In this case, suppliers will likely be domestic and they in turn are unlikely to face tariffs.
- Ensure sources of expertise are accessed during the evaluation process, including engineering, manufacturing, legal, regulatory and commercial teams
- Evaluate the impact of an increase in the cost of raw materials throughout the production chain – for example, the impact of steel and aluminum tariffs from China could increase raw material costs by 2 to 5%
- Undertake risk analysis to identify the cost impact of different tariff scenarios
- Focus on total cost of ownership, not just prices to understand the actual impact of tariffs relative to costs
Lever 2: Supply Chains
With few alternatives, or with significantly limited capacity, we would expect costs to rise even more severely throughout the supply chain than would be indicated by the tariffs alone. Margins should be locked in by seeking long-term contracts with suppliers and buyers, so that uncertainty is reduced.
Supply chains that involve sourcing from providers whose goods and materials may be subject to increasing tariffs will need to evaluate which suppliers will pass on the tariff load and, if so, explore alternatives.
- Deepen relationships with existing suppliers to identify joint solutions to mitigate the impact of tariffs
- Switch suppliers – identify the long-term supply chain risks, including the impact a supply shortage would have on manufacturing and operational costs
- Make engineering changes so that non-tariffed substitutes can be used
- Negotiate with suppliers to share in the tariff burdens
- Work with existing suppliers to source from factories they may operate in non-tariffed countries
- Insource – look for existing opportunities to produce items that were previously outsourced
- Seek product reclassification to place items outside the tariff bucket (e.g., specialty steel may also qualify for tariff exemptions so that in such cases, prices would not be impacted)
Lever 3: Customers
When evaluating if and how much of the cost increases can be passed along to customers, it is critical to consider how responses to price will vary. This depends on the relative value they ascribe to your products and their ability to source elsewhere.
Organizations should try to predict customer behaviour:
- If your product is key, or it cannot be easily substituted, or switching represents a significant risk, then customers will likely be less price sensitive (e.g., where switching products can be difficult or illegal)
- Conversely, if there are readily available substitutes, or customer margins are tight, or you sell large volumes that are not critical to their own activities, expect price sensitivity
Lever 4: Competitors
While competitors will also face the same tariff pressures, they may be impacted differently. Their responses may differ depending on their own cost structures, objectives, supply chain options, target markets and customers, geographic considerations, regulatory implications and strategies.
- Look at previous competitor actions to determine which markets or customers are viewed as critical
Also, competitors may try to minimize price increases in critical markets while countering the impact on their bottom line by increasing prices more in other markets.
- Understand key markets and develop pricing strategies based on which markets are critical and prepared to defend them given competitors’ objectives and strategies
Which lever(s) will work best for your business?
Overall, it’s important for businesses to make decisions that provide them with flexibility, given the continuing uncertainties with respect to tariff policies. Procurement organizations must ensure that mechanisms are in place to monitor changing developments, disseminate that information to key stakeholders, assess the potential impact of changing tariff policies, and use the four levers to mitigate the impact.