The hidden risk of a protracted trade war goes beyond the most obvious downside of losing valued trading partners, disrupting the supply chain, and increasing costs.
The greatest risk is that an organization, facing the unpredictable nature of a trade war, will be unable to sustain its primary goal of delivering the greatest value to customers and other stakeholders at the lowest cost to the organization.
U.S. companies are being forced to re-think their sourcing and supply-chain strategies. This can involve strategic re-sourcing or tariff engineering, often resulting in a shift of suppliers from China to other Asian countries such as Vietnam or India.
This in itself can be logistically challenging and sometimes impossible, especially when the supply chain involves shifting away from trading partners with specialized knowledge and capabilities with whom trust has been established. Even if new suppliers can be found, the transition could take years to get up to parity with the previous relationship.
Finding new sources for materials, however, is only half the battle. The more difficult part of surviving a trade war requires taking a hard look at operations across the board to maximize efficiency, productivity and profitability, with the ultimate goal of thriving during a protracted trade war. At the same time, the company must continue to deliver value to customers without disruption to availability or quality, and without higher costs.
In some cases, trade wars pose an existential threat to companies. The survivors will be those that have adopted a strategy of continuous improvement and constant re-evaluation of all relationships. At the heart of the Six Sigma methodology, this kind of continuous improvement is especially useful in analyzing which changes might be necessary in a global supply chain. Companies that have already embraced this methodology have data at hand to understand precisely where their productivity and quality stands, regardless of location. They’re better positioned to maintain that level of productivity and quality should the need arise to shift manufacturing to another site.
We think of a “war” as having a winner and a loser, but successful trade does not culminate in a zero-sum outcome. Those who view trade wars as a battle between two or more countries, and expect an outcome which positions one as the winner and the other the loser, aren’t seeing the full picture. The winners and losers are individual companies within all countries engaged in the trade war, and their outcome will be determined more by their own successful implementation of business strategies and a willingness to continuously adapt to new circumstances, rather than the political wills of each country’s leaders.
Under no scenario will all U.S. companies emerge as either winners or losers. The same holds true for China. The more likely outcome, regardless of political agenda, involves the strongest companies on both sides undergoing radical transformation to remain competitive.
Much of the fear on the part of companies is that they’ll lose control of their processes and key relationships. Implementing a Six Sigma team specifically to help navigate the trade war will help retain that control, remain competitive regardless of external politics, and continue to deliver value to stakeholders.
While the Lean Six Sigma process is defined as a methodology to reduce defects, the ultimate goal is to deliver the greatest value to customers at the lowest cost to the organization. The only way to achieve that value on a sustainable basis is with a policy of continuous improvement.
Resistance to change, which is all too common in many enterprises, will ultimately diminish that value. There will always be an external circumstance that demands change and alters the calculus of profitability. Success, therefore, is less dependent on finding just the right process than on a willingness to constantly re-evaluate processes in order to respond to external circumstances, whether that means a shift in demand, an increase in raw-materials costs, or a trade war.
A trade war is nothing more than a problem that requires a solution. Applying a rigorous, data-driven methodology to the problem, based on Six Sigma’s DMAIC (Define, Measure, Analyze, Improve, Control) method, would in the specific instance of surviving a trade war begin by better understanding the problem, including which manufacturing processes would be disrupted. In two subsequent phases, “Measure” and “Analyze,” we determine the extent of the disruption.
In some instances, a subsequent analysis could determine that a move to another manufacturing facility in another country is in order. In others, where manufacturing processes are especially complex, some companies are finding that even with additional tariffs, remaining in China is still favorable.
In the cases of Apple Computer and General Motors, for example, both are highly dependent on selling into the Chinese marketplace as well as the U.S. and Europe. As a result, a physical manufacturing presence in China is an absolute necessity. Using the DMAIC process, companies might well find themselves coming to the conclusion that a Chinese presence will continue to be favorable despite the trade war. In that case, the key to success isn’t to withdraw, but to implement a plan of continuous improvement.
Applying these basic building blocks will position companies to better navigate the trade war, foresee its problems, and plan for success, despite the challenges it presents.
Michael DiLeo is President and co-founder of the Management and Strategy Institute.