Escalating trade wars & unexpected disease outbreaks have severely impacted the inventories & time-to-market for scores of reputed brands across the world. Adhering to these simple fundamentals while making your supply chain strategy will help you navigate these tricky waters while keeping vantage over your competitors.

The global ‘trade war’ sparked by the two largest manufacturing economies of the world has seen many twists and turns. Protectionist measures such as increased tariffs, import limits and bans have disrupted many a supply chain.

Just when it seemed things might steady, the industry faces another setback due to the virus outbreak in China. Many neighbouring countries with high manufacturing output have also been impacted

In such choppy waters, it is important for supply chain managers to develop supply chain strategies that are agile. Concerns have to be addressed at immediate, medium-term and long-term levels.

But looking at it from another point of view, it is also a great opportunity for those who navigate well to capture market share or a larger share of industry profits.

Here we look at some tactics you can implement in your supply chain strategy to minimize the impact of tariffs:

Product rerouting
As a response to the escalating tariff war, rerouting has played a significant role in changing the flow of supply. This is mainly through the use of Transhipment, and Free Trade Warehousing Zones (FTWZ).

Transhipment is the shipment of goods or containers to an intermediate destination before moving on to their actual destination. Several businesses have switched to the use of Vietnamese processing services for goods originating from China.

FTWZs are designated regions where goods may be landed, stored, handled, manufactured, or reconfigured and re-exported under specific customs regulation. These are generally not subject to customs duty.

Carefully planning your processes to leverage these facilities can help reduce the impact of varying tariffs, not just from China but globally.

Regularise built up inventory reserves
Considering possible hikes in tariff and anticipated volatility, it’s not surprising many businesses choose to build up stock reserves. These reserves are often stored in ‘overflow storage’ facilities, since they aren’t a part of the standard process. Thus businesses sometimes fail to account properly for this additional inventory, leading to miscalculated decisions.

It is important that reserve inventory is regularised into the system, so storage costs can be factored into market decisions. Maintenance may also be neglected, or insurance might refuse to cover such stock, if it remains outside the system.

Streamline your inventory management system
A robust inventory management system can help in many different ways. For example, using forecasts to anticipate rise or fall in demand and accordingly adjust manufacturing requirements.
This helps make purchasing decisions easier, with clarity on how stock flows.

This clarity is helpful in calculating ‘net landed costs’ - a measure of total cost incurred until the product reaches you.

Landed cost = product cost + shipping + customs + risk + overhead
This includes not only additional working capital costs, but also overflow storage, extra transportation costs, insurance premiums, etc. Only when you know the cost can you decide the best price at which to sell to the market.

Diversify your manufacturing footprint/Alternate sourcing
A long term supply chain strategy must aim to diversify the sources of production to avoid single-point failures. Ideally, each item on your product list must have a list of multiple manufacturers and suppliers. After all, it only takes one missing part to stop the production of a finished product.

The tariff war has shown very clearly that geographical diversity is one of the important factors to be considered. With 1/5th of the global manufacturing output coming from China, it is nearly impossible to entirely exclude it from your plans. But building alternate supply chains from emerging manufacturing powers such as Taiwan, Vietnam, India, etc. can help absorb the impact of changing regulations.

Perform a cost-to-serve analysis
Cost to serve (CTS) is a measure of what it truly costs to deliver a good or a service at an individual customer level. In the context of supply chain strategy, it can be used to analyse how costs are consumed throughout the supply chain.

Each product and customer demands different activities and has a different cost profile. An effective CTS analysis helps you determine the impact of tariff on each order at each stage of the supply chain. This can be used to determine short term actions as well as the long term feasibility of your current contractual obligations.

Additionally, CTS requires fewer resources than a different method such as activity-based costing (ABC). It also provides end-to-end supply chain analysis (ABC can be an input), and is a worthwhile undertaking for long-term planning.

It is important to remember that tariff regulations and changing trade environments are part and parcel of the industry. Any strategy that looks to minimise their impact must be conscious of certain boundaries that must be respected.

Here are a couple of precautions to bear in mind:

Guarantee compliance

It is imperative that all measures taken to make your supply chain more resilient must be in accordance with the law. Trying to flout these regulations can only invite trouble.

Consider, for example, the attempts at transhipping Chinese steel from Vietnam which were met with taxes as high as 250%. This was in part due to anti-dumping and anti-subsidy duties won by U.S. steelmakers against Chinese steel in 2015 and 2016.

It must be your prerogative to understand the compliances required for legal transhipment, use of FTWZs, etc. Whether you try to reclassify goods or change the country of origin - bringing compliance experts on board is a good idea.

Understand financial implications on the delivery side
Your clients are probably just as concerned about the impact of tariff wars on your supply chain as you are. It is not uncommon for financial incentives or penalties to be included in agreements related to timely delivery of goods.

A good supply chain strategy takes actions only after taking into account these financial implications. The contractual conditions can perhaps be passed on to your supplier, or maybe renegotiated for future engagements.

We hope these tactics are helpful to you in navigating the changing winds of the trade industry.

Zetwerk is a trusted manufacturing outsourcing partner with 500+ custom projects executed, and a fabrication capacity of 15,000+ MT/month. We’ve delivered our projects 99% OTIF, and assume responsibility for logistics till the goods reach you. With a global network of partners, we accept manufacturing projects requiring virtually any process you might think of.

If you’d like to know more about how we can drive away the headaches caused by the tariff war, contact us here!


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