RapidRatings Blog

Solving for Tariffs: 4 Key Considerations for Supply Chain Risk Management

Posted by Rapid Ratings on August 02, 2019
 
shutterstock_583869832-1With potential EU tariffs looming, and a seemingly never-ending US-China trade war, uncertainty is spreading through the global supply chain faster than ever. Across industries, protecting against disruption is a top priority, and risk managers are focusing on what can be done to navigate and mitigate the impact of tariffs and other regulatory actions threatening productive trade partnerships. Existing tariffs have even caused many OEMS and suppliers in the auto industry, for instance, to shift production outside of China to other countries. With so much trade uncertainty, how can procurement and supply chain managers successfully navigate the noise towards successful risk management?

 

Procurement & Supply Chain Management amid Tariff Mayhem

A recent New York Times article took a pulse on potential supply chain complexities arising from the latest tariff threats for retail companies such as Everlane, a clothing brand founded on the notion of selling luxury items with ‘Radical Transparency’ into its product cost structures. For many companies like Everlane, of which 25% of its outsourced factories are located in China, tariffs demand the decision of either absorbing subsequent costs or shifting production elsewhere. But what influences these decisions, and how are they made?

 

4 Key Considerations for Solving Tariffs

  • Absorbing Tariff Costs
    Absorbing tariffs is an undesirable though viable option for maintaining brand reputation in highly competitive markets such as the gaming console world where raising prices for the consumer can mean losing to a key competitor, and taking a hit to profit margins is less of a concern.
  • Raising Prices for Consumers
    For a product or service that is unique to a company or is a specific region’s specialty, as is with silk in China, shifting production might be out of the question. If the product or service is a commodity to your industry, raising prices for the consumer could be the most viable option.
  • Resourcing and Shifting the Supply Chain
    For a company like Apple with long and complex supply chains, resourcing and shifting supply to avoid tariffs wouldn't be easy, and would be expected to take a minimum of 18 months. However, with a Financial Health Rating (FHR®) of 72, Low Risk, Apple is positioned to withstand the associated costs with resourcing such as conducting new due diligence/risk management assessments, onboarding, etc. if it were to head down that path.

Download a deeper dive into Apple with the FHR report.

  • Leaning on Suppliers to Move Production
    Existing suppliers that have both vested interest in the strategic future of your company and strong financial health can shift production themselves, such as Foxconn (FHR: 64) with Apple, which has manufacturing capabilities outside of China and is willing to relocate all production, alleviating some of the costs associated with restructuring a supply chain.

 

Painting the Financial Health Picture

Figure 1 outlines the average financial health for both public and private companies in a handful of key US industries. Private retail companies, for instance, might be of particular concern given the relatively low financial health average hovering around 50, Medium Risk, coupled with growing industry challenges around the rise of e-commerce and the fall of Brick & Mortar. Those companies with lower average FHRs are less resilient and prone to disruption.

Figure 1: US Industries Private vs. Public Financial Health

Whether changing suppliers to avoid tariffs or a supplier is shifting production itself, it’s important to have a firm grasp of their financial health – do they have the financial flexibility to absorb and grow with you through future shocks beyond tariffs? Are they resilient enough to handle the new business you’re giving them? Can they handle the costs associated with simultaneously maintaining and shifting production? Stronger financial health in either instance can be a guiding light in navigating the hazy tariff landscape. For more on how and where this indicator fits into your broader risk program, dive into our guide on how to evaluate supplier risk.

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Given how increasingly globalized and intertwined, yet distinct industries and their respective supply chains are constructed, it’s becoming more and more difficult to predict the ways in which each will be affected as trade wars loom on. Looking through a lens of financial health, however, simplifies the picture and makes it easier to first understand risks coming down the pike, and make critical decisions around tackling tariffs.

  

Topics: Supplier Risk Management, Risk Assessment