Will Tariffs Hurt Your Customers?

Recently I’ve had a number of discussions with company owners and other consultants about Trump’s tariffs. Many companies are wringing their hands because of the sharply increased costs associated with the 25% tariffs on many commodities, and in some cases, the lack of availability of materials. Do these tariffs need to have that great an impact on your company or your customers?

A recent editorial in the Wall Street Journal (My Customers Don’t Pay Trump’s Tariffs – July 1, 2019 p A17) shared the experience of the CEO of a consumer-electronics company that sources 90% of their products from China. Even though his products should have a 25% tariff, the company only experienced a 2% cost increase. How is that possible? The company’s purchasing department took a proactive partnership approach with their Chinese suppliers, appealing to their best interests, and got price concessions that all but wiped out the impact of the tariffs.

Now, one might suggest that this situation is not the norm, but this company was not large, and they dealt with multiple factories in China, all of which offered concessions. The CEO’s buying team understood how Chinese companies work, and partnered with them to remain cost competitive and shield customers from the tariff impacts.

Here are three ways your company can achieve similar results.

Use Buyers for More than Just Buying

At many companies, buyers are simply PO executors who don’t understand their suppliers’ motivations or how to partner with them for mutual benefit. Many buyers are incentivized to either not run out of materials, (often resulting in higher costs and excess inventory), or to buy cheap, which is why many companies went to China in the first place.

My best clients use what I call Supplier Business Managers instead of buyers. Their job is to partner with suppliers for continuous improvement of cost, quality and lead-times, sharing the benefits with the suppliers. The result is lower inventory, lower costs, improved quality, and a solid relationship with suppliers.

Focus on Total Cost of Ownership

Buyers often focus almost exclusively on part cost, but especially when buying offshore, the total cost of the item can be much greater than the part cost. Total cost includes:

  1. Pre-transaction costs
  2. Transaction costs
  3. Post-transaction costs

Pre-transaction costs include visits to China by engineers to qualify factories, confirm the ability to produce quality parts, tooling, and setting up payment relationships and ordering processes. For example, an engineer’s one-week trip to China can cost $5000 or more.

Transaction costs include order placement costs, cash management, currency exchange rates, inventory costs while the product is being transported by ocean, airfreight costs, customs fees, and taxes.

Post transaction costs include quality problems, delays in returning and getting refunds for bad parts, field failures, and obsolescence driven by large order sizes.

One company I spoke to is experiencing 30% customs and taxes on their products that are produced in India. That 30% was not factored into the total cost when the product was designed and then sourced offshore. It is very important to consider the total cost of ownership, especially when sourcing offshore.

Partnership With Suppliers

Companies should partner with no more than two carefully selected suppliers for each part, who will work with you to constantly cut costs, improve quality and reduce lead-times through better product designs, innovative inventory management, and materials cost reductions. Sharing the savings with the supplier incentivizes them to constantly be on the lookout for improvement opportunities.

Partnerships include strong communications, so the supplier knows how they are performing, and so you know what drives the supplier. For instance, Chinese companies are often more focused on monthly shipping volume than profits. The government will subsidize their margins while encouraging more volume to employ more people and grow company revenues, so they look better on the world stage.

Many companies are shifting to regionalization as a strategy. This involves shortening the supply chain by working with suppliers that are closer to your factories and your customers. Often regionalization not only dramatically reduces lead times, but makes communication more effective since suppliers are only a time zone or two away.

The Take Away

In order to reduce the impact of the current tariff environment on your company and your customers, look at your current supply chain strategy. Make sure your buyers are doing more than just executing POs, and that they are developing partnerships with your suppliers. Consider the Total Cost of Ownership when selecting supplier partners. By doing so, you can significantly reduce or even eliminate the impact the Trump tariffs have on your company and your customers.

If you would like a review of your supply chain strategy to help mitigate the current tariff environment, give me a call.

 

© 2019 – Rick Pay – All Rights Reserved