While economists agree that tariffs will raise costs for companies and consumers, it can be difficult to understand the far-reaching ramifications of these added expenses.  Also, it is difficult to quickly analyze the options around the range of possibilities.  Just watch the news, and the tariff landscape will change. 

In other words, it’s challenging for companies to create resilient, agile and cost-effective supply chains when so many things are so uncertain. But it’s a challenge they need to face, head-on.

The Anatomy of Tariff Impact and Beyond

Much of the tariff debate centers around direct cost implications. Will consumers or companies pay the levy? Will prices rise, and for whom? Will supply remain strong, or will we see empty shelves? But the reality is much more complicated.  

Responding to tariffs and other disruptions involves far more than simple cost adjustments. It demands a deep dive into complex calculations and multi-faceted considerations that impact everything from sourcing and production strategies to long-term investment and risk management. 

Understanding the true costs of tariffs requires a three-fold calculation.  

• Analyzing the initial tariff impact on the landed cost of goods.
• Evaluating the options around sourcing from different countries and applying different inbound and outbound transportation strategies.
• Understanding the interaction of varying objectives such as cost, service, optionality and responsibility. 

Consider a mid-sized electronics company that sources critical microchips from a country suddenly impacted by a 25% tariff. The initial, obvious calculation is the direct increase in the landed cost of these components, forcing a difficult choice between absorbing the cost and reducing margins, or passing it on to customers, thereby risking a drop in demand.  

However, the cascading impacts and opportunities are far more complex. A good supply chain will have optionality built into its planning horizon.  This means that it qualifies and quantifies the value of alternative suppliers in alternative countries.  And it will have explored different and creative options around use of its production facilities, distribution facilities and transportation partners. 

Businesses must also consider the ripple effects on their inventory strategy; any change of supplier will change lead times. 

A New Approach to Supply Chain Management  

Logistics and supply chain leaders know their supply chains need to be more agile, ready to withstand everything from a global pandemic to geopolitical conflict.  

That’s why, in the wake of the COVID-19 pandemic, 93% of supply chain leaders said they wanted to make their supply chain more flexible and resilient.  

Today’s responses to tariff-induced supply chain uncertainty prove that the mission still isn’t accomplished. Most organizations reacted with a “situation room” mentality.  They executed via reactive decisions such as re-deploying inventory ahead of tariffs or modifying production schedules.  An agile supply chain would have options that can be activated without inducing shocks into the system. 

To become more agile, flexible, and resilient, the present and future of supply chain management can’t be reactive. It must be proactive, anticipating problems before they arise, and implementing solutions that work.  

To gain a competitive advantage in supply chain management, companies should start by designing supply chain flows. They achieve this by implementing rapid iterations of supply chain design and creating what-if scenarios around potential disruptions. This allows them to sense changes and respond more quickly to even small supply chain shifts. 

It demands a shift in strategy and mindset.  

This requires: 

• Developing scenario planning capabilities to anticipate and model potential disruptions.
• Exploring alternative sourcing locations, multi-sourcing strategies, and nearshoring/reshoring feasibility.
• Assessing opportunities for product redesign or network optimization to mitigate tariff impacts.
• Enhancing transparency and collaboration with suppliers, customers, and logistics partners. 

In other words, companies don’t just need to manage their supply chains. They need to design them.  

For example, an apparel firm successfully shifted its strategy from reactive cost management to proactive network design. 

Instead of simply accepting higher costs from its primary manufacturing hub in Asia, the company initiated a multi-sourcing strategy by partnering with a secondary supplier in a tariff-free nation. At the same time, it launched a nearshoring initiative, moving a portion of its production for the North American market to Mexico to shorten lead times and increase supply chain flexibility.  Yes, direct costs went up slightly, but overall distances and service times went down.  And distance has its own inherent costs, as the longer the distance and the more regions transited means more chance of disruption.  Also, distance means emissions.  Almost any company will admit that the focus on emissions is only increasing. 

This strategic pivot mitigated the tariff’s financial impact while also making the company's supply chain more resilient to future regional disruptions.

Data-Driven Decision-Making 

Companies and their logistics partners have never been better positioned to make important organizational change.   

Equipped with a mountain of data and powerful artificial intelligence (AI) technology, they can perform advanced planning like never before, especially when coupled with intuitive technology that can run countless simulations that allow decision makers to understand the broader impact of supply chain changes 

This can help: 

• Rapidly develop and compare viable scenarios
• Quantify trade-offs in terms of cost, service, optionality, and emissions
• Embolden leaders with confidence in their choices and assurance in their ability to change and adapt to future unknowns
• Synchronize optimized network models with planning and execution tools–removing any latency to benefit 

For instance, an electrical harness manufacturer importing from Singapore to Rotterdam for its German production facilities faced significant slowdowns due to operational constraints.  

The company evaluated moving its European import hub to Marseilles, a change projected to increase annual costs by €3.1 million ($3.59 million), due to higher transportation and material expenses.  

Despite the cost, the company opted for the Marseilles route to establish a more predictable and streamlined import channel, prioritizing supply chain stability over baseline cost. The detailed cost analysis of the alternative also provided leverage in subsequent rate negotiations with carriers. 

For many companies, data-driven decision-making is still a work in progress.  

Notably, while 71% of organizations say they have fully funded digital transformation initiatives that fund data-driven insights, 57% still cite data quality as a barrier to AI adoption, and 35% struggle to build a business case for AI technology investment, limiting their ability to capitalize on the quantity of information available and the technology capable of converting raw intelligence into actionable insights.  

Uncertainty is certain to define the present and future of supply chain management. Today, this means navigating tariffs, geopolitical conflicts and economic instability. Tomorrow, those challenges will inevitably change again.  

To effectively navigate supply chain uncertainty, companies need more than top-tier supply chain management. They need to intentionally design their supply chain, leveraging data-driven scenario planning and proactive inventory management strategies to accurately forecast expenses, anticipate inventory disruptions and maximize potential opportunities.  

It’s the best way for companies to bring a level of consistency to their customers and propel their companies forward.  

Steve Johanson is the SVP Industry Principal for network optimization at Logility, an Aptean company.