As Surplus Record goes to press, U.S. manufacturers are once again threatened with the potential of having to manage through a new round of China tariffs. Never mind the fact that in 2018, 12 out of 18 manufacturing industries in the U.S. saw record profits, despite tariffs, according to a recent MetalMiner analysis.
Regardless, if you ask a typical procurement manager today about tariffs, he/she will generally have nothing but negative things to say about their impact. A recent ISM (Institute for Supply Management) study that asked procurement managers in manufacturing if they “believe that tariffs have raised the price of the goods that you produce and deliver to your customers,” 59% of survey participants said “yes.”
According to the ISM findings, the average price of goods raised to customers was 6.8%. However, only 30% of respondents thought that tariffs had “caused delays and disruptions in the supply chain.”
The numbers raise the question: How are manufacturers effectively managing through the tariff environment? Companies are generally pursuing a range of strategies.
The first one is obvious: price adjustments. As suggested by the ISM data, manufacturers are raising prices on customers. But in certain cases, despite tariffs, according to MetalMiner data, prices are actually down for key commodities, which is helping improve margins rather than just passing along cost increases to the next supply chain tier.
The second strategy involves a move to broad-based globalization. For many years, an increasing number of manufacturers were dependent on a single supply chain link for lower tier commodities, parts and components (and finished products). In our day jobs as researchers and advisers in the manufacturing industry, we are increasingly seeing industrial firms explore different supply chain options besides China on a global basis. This includes looking at producers and manufacturers in Europe and other countries in Asia. In short: companies are building resilience and rebalancing their supply chains by becoming less China-centric.
The shift to truly international supply chains is forcing procurement and supply chain organizations to become more global and multicultural in their supplier discovering, qualification and sourcing process. Whereas many were on “China autopilot” in the past decade, the effect of having to scramble to find new sources of supply is forcing many to work harder than they had to in recent years — which in part, we believe, is leading to a more pessimistic view of purchasing managers of the tariffs, as reflected in the ISM data. All work and no play makes purchasing managers complainers.
The third strategy we see companies deploying is reshoring — finding high-quality suppliers, especially in Mexico and Canada (as well as domestically, in cases where suppliers have capacity). While not a new trend, reshoring or nearshoring continues to benefit from an environment where implemented (not threatened) tariffs have generally been directed at a single player: China.
The fourth strategy that we see companies using is centered on product configuration and product substitution. “Nothing kills high prices like high prices,” and that adage tends to spur companies to develop alternative specifications and alternative suppliers. But with certain rework and/or finding additional partners, such as service centers in the metals industry, specifications can often be altered slightly to increase the available supply market and/or drive the same ultimate specification or requirement through value-added partners.
Despite the arguments put forth by procurement managers about the pain of tariffs, we would argue the end of the China-to-U.S. “chicken run” will ultimately create healthier supply chains. And perhaps more important from a near-term lens, the impact on manufacturing profitability, unemployment, and other leading and trailing indicators of overall industrial financial sustainability have not looked better in decades according to recent economic data, a topic we will explore in the July 2019 Publishers page.