Here's one way to think about trade fights between governments: Tariffs are really tit-for-tat exercises in non-collaboration that make world trade more complicated and expensive — especially for the consumer caught in the middle.
But at the same time, tariffs make collaboration among businesses, manufacturers, suppliers and global supply chains more crucial than ever.
Now is the time to plan and cope with the challenges that the proliferation of tariffs represent. It’s time to optimize supply to make them more resilient, transparent, and thus able to make quick market adjustments. In short more collaboration than ever. It’s no time to panic or succumb to an “us versus them” mindset.
Steve Bannon, President Trump’s former chief strategist, recently said the president is “reorienting the world’s supply chains” through tariff actions and the desire to rewrite — or scrap entirely — trade deals with Canada, Mexico and the rest of the world.
Remember Brexit? Well, that is still a major world trade wildcard. “There are certainly risks of short-term disruption,” said Dominic Raab, Brexit secretary, in a recent New York Times report. “We can manage down some of those risks, and we can avoid some of them,” he said, though he conceded that this was not completely in his power and that avoiding disruption “will require good will on both sides.” And doesn’t goodwill mean collaboration?
In September, the latest batch of U.S. tariffs — which start at 10 percent and increase to 25 percent at the end of the year — was imposed on $200bn worth of Chinese goods. These new tariffs were added to penalties implemented earlier this year on $50bn worth of Chinese goods. This means that roughly half of the products that China sells to the United States each year will be hit by tariffs.
In response, China announced duties on U.S. goods worth $60bn. China's new tariffs will be levied at rates of 5 percent or 10 percent, depending on the product. More than 5,000 U.S. goods will be affected, including meat, nuts, alcoholic drinks, chemicals, clothes, machinery, furniture and auto parts.
This created a major problem for the U.S. bicycle maker Kent International, which uses components from China that are subject to duties. “Seriously, we are working on how to purchase elsewhere,” said CEO Arnold Kamler in an IndustryWeek report. Kent assembles about 400,000 bikes annually at its factory in Manning, South Carolina. But this is no shield from the latest round of tariffs, because the Trump administration slapped tariffs on imported components and materials. Kent imports parts from China. Kamler says it might take three years to set up new parts purchasing arrangements, but meanwhile, the uncertainty concerning tariffs on the huge number of components, and steel and aluminum, “have forced us to put any expansion on hold.”
Kent sells bikes in stores such as Target, Walmart and Big 5 Sporting Goods, and is following other manufacturers in a rush to source from other countries, such as Vietnam, Thailand and Cambodia.
But moving a factory “is no small undertaking,” Kamler said. And what if tariff wars extend to other countries?
Optimize Your Supply Chain
Kamler’s situation underscores why it is vital to optimize your supply chain.
Steve Bowen, Maine Pointe’s CEO and author of "Total Value Optimization: Transforming Your Global Supply Chain into a Competitive Weapon," asserts now is the time to “stress test” your supply chain and make changes on three fronts:
- Optimize supply chain and operations efficiency. Irrespective of the global trade war, there are still significant opportunities for companies to drive out cost, release cash and enable growth in the end-to-end supply chain.
- Improve supply chain optionality. Balance risk by exploring sourcing opportunities in countries that are not affected by the new tariffs. In addition, in some areas, now is the time to negotiate the best possible deals on any raw materials, intermediate or finished goods that are not impacted by tariffs. Bowen notes, for example, that “companies such as 3M and General Electric, which have diversified global supply chains, have expressed confidence in their ability to change their sourcing in response to cost increases.”
- Gain market insights on shifting production facilities. Assessing the viability of shifting production facilities to avoid tariffs is a more medium-term strategy for executives to consider. “For example, President Trump has suggested Apple Inc. should move its production from China to the U.S. to avoid cost increases, Harley Davidson has shifted production for EU destinations from the U.S. to its international facilities to avoid tariffs and Volkswagen group is taking advantage of its 122 factories worldwide to give it the ability to adapt to changing needs and requirements,” Bowen says.
He says the key for companies and their supply chains is to “create, expand and optimize the value chain through high collaboration and strategic partnerships that place them in the best-fit sourcing situation.”
The key to coping with daunting and complicated trade politics should reside at the highest governmental levels. But considering today’s realities in the Trump administration, the next best approach is optimizing value at the supply chain level.
A highly collaborative end-to-end focus on the supply chain enables organizations to achieve greater levels of efficiency and resiliency, according to a University of Tennessee white paper, as supply chain partners work together to drive continuous improvement and innovation.
This is not easy. End-to-end optimization demands that supply chain partners shift from traditional transactional business models that focus on cost savings to models that shift to value creation. To make the shift organizations must first understand the fundamental differences in value extraction, value exchange and value creation.
Value extraction occurs when an enterprise attempts to shift value from one player in the supply chain to itself (a classic win-lose scenario), extracting profit and value from one member of the supply chain and transferring it to a leading player. This is often done using highly competitive bids and power-based negotiations approaches.
Value exchange is better, but still falls short because the parties’ focus is to optimize within their own four walls. In a fair and balanced value exchange, organizations strive to get to a fair price versus value tradeoff (such as quality and service).
Successful supply chains should shift to focusing on value creation, enabled by realistic end-to-end collaboration and realistic, flexible pricing models. By working as partners with a transparent, win-win mindset, buyers and sellers can identify opportunities that they simply cannot see by working in isolation. A longer-term strategic focus that includes transparency and a win-win mindset can motivate suppliers to invest in solutions they might not otherwise feel comfortable about.
Organizations seeking productivity-driven improvements in an uncertain economic climate should shift to more strategic sourcing business models with key suppliers that are more collaborative in nature.
The bottom line in a protectionist era? Collaborate your way to better value-based profit levels by forging highly strategic, win-win supply chains that optimize across all partners.
Kate Vitasek is an author of six books on the Vested business model and a faculty member at the University of Tennessee.