5 Tips to Minimize Tariff Risks in Your Supply Chain
With recent political shifts potentially leading to an influx of new tariffs, manufacturers are gearing up for considerable disruptions across the global supply chain.
In 2024, the Biden administration finalized tariff hikes on several Chinese-made goods including lithium-ion EV batteries, solar energy inputs, and semiconductors1. More tariffs are likely to follow as U.S. President-elect Donald Trump proposed additional tariffs of 60% to 100% on imports from China and a blanket tariff of 10% to 20% on all other U.S. imports as part of his new trade policy2.
Regardless of the outcome, manufacturers will need to reassess their supply chain strategies to mitigate risks and stay competitive.
UNDERSTANDING THE IMPACT OF TARIFFS ON MANUFACTURING
Tariffs are often imposed to safeguard domestic industries, encourage foreign countries to change their practices, or generate government revenue. Nevertheless, they can have far-reaching consequences for manufacturers and supply chains that rely on imported goods to build complex products.
Key challenges include:
- Increased costs: Tariffs raise the price of imported components and raw materials, leading to higher manufacturing expenses and reduced profit margins. Companies in the consumer electronics and automotive industries are especially vulnerable due to their reliance on aluminum, steel, and semiconductor components from countries like China.
- Fractured supplier relationships: Manufacturers may seek alternate suppliers in regions unaffected by tariffs, potentially severing some long-standing supplier relationships. This sudden change could result in performance issues that negatively impact product quality and operational efficiency.
- Production bottlenecks: Lower-tiered suppliers are sometimes forced to cut production of critical materials and components due to tariff hikes. This causes a ripple effect further up the supply chain, resulting in production delays.
- Regulatory and compliance hurdles: Tariff changes often bring about new trade regulations that impact product development. For instance, changes to certificates of origin, customs declarations, labeling, and other documentation may be necessary depending on the jurisdiction. Regulatory and procurement teams must communicate regularly with supply chain partners and stay abreast of the evolving requirements to ensure compliance.
5 STRATEGIC STEPS TO MITIGATE TARIFF RISKS
Given the operational and financial uncertainties that tariffs can create for your business, here are five steps to help you plan accordingly and mitigate risks.
1. Diversify your supply chain.
Consider sourcing from multiple suppliers across different regions. With access to alternate suppliers, you can pivot quickly in the event of a tariff hike. Several companies including Apple are adopting this strategy by moving part of their production from China to countries like Vietnam and India.
2. Renegotiate supplier contracts.
By negotiating long-term contracts with suppliers, your organization can lock in prices and avoid sudden rate increases.
3. Create inventory buffers.
Compiling safety stocks of critical parts and materials helps you avoid production delays and maintain cost efficiency during pricing spikes.
4. Shift production locations closer to home.
Reshoring or nearshoring production reduces your dependency on countries that are subject to high tariffs, geopolitical instability, and other unforeseen events, resulting in enhanced supply chain resilience.
5. Get to know your supply chain partners.
Today’s multitiered supply chains are highly complex. Because original equipment manufacturers (OEMs) communicate primarily with their immediate Tier 1 suppliers, there’s typically a lack of visibility into vulnerabilities that impact the extended supply chain. Changes to one region can quickly proliferate across multiple tiers without being immediately noticeable. To effectively manage the impact of tariffs, OEMs must gain a clear understanding of how each of their suppliers and contract manufacturers source materials, where critical components and materials originate, and which partners are most at risk. By extending collaboration across all tiers of the supply chain, companies get to know each supplier’s unique challenges.
TAKE A PROACTIVE STANCE TO TARIFFS: HOW CLOUD TECHNOLOGY CAN HELP
Many product companies are adopting digital technologies to enhance visibility and lessen the impact of supply chain disruptions such as tariffs. Modern Cloud PLM and QMS solutions like Arena help mitigate risks by facilitating secure, real-time supply chain collaboration.
Arena links the product record and associated supplier information in a single system, giving product teams a comprehensive view of critical supply chain activities that impact their production timelines. With access to approved supplier/manufacturer lists (ASLs/AMLs), component databases, supplier lifecycle statuses, analytics, and other key sourcing information, organizations can easily spot supply chain shifts, respond quickly, and ensure business continuity.
Leveraging Arena’s Scribe chat function and automated ECO process, product teams and partners can work efficiently to implement cost-saving measures in response to new tariffs. This might involve changing product specifications or sourcing alternative parts.
The ability to securely connect anytime and anywhere with supply chain partners from a trusted single source of truth allows for better decision-making and more agile sourcing strategies.
NAVIGATE TARIFF UNCERTAINTIES WITH CONFIDENCE
Today’s looming tariffs will no doubt create some disruption and uncertainty for your business. However, having the right technology will empower your organization to mitigate cost impacts and keep operations intact.
Gather additional insights on mitigating supply chain risks and boosting resilience with Cloud PLM. Visit our resource page.
References
Shelly St.Hill