There’s no doubt the global trade environment is changing quickly and in ways that are not always easy to anticipate. Just think back to two years ago. The trade war with China was just beginning, virtually nothing was known about how Brexit would unfold, and the U.S. was still signed to the Trans-Pacific Partnership.
The speed of change has accelerated to a point where unforeseen shifts can occur in a matter of minutes or days — not years, months, or even weeks. Massive tariffs can come without warning, and be announced in the form of a tweet. Hopes of trade deals are of little solace to players in industries which are paying tariffs of more than 40 percent. Supply chain leaders need to know how to mitigate those extra expenses, and they need to know now. But how do your address the current situation while also preparing for future trade conditions that are increasingly hard to forecast? The answer is with supply chain modeling.
A robust supply chain modeling environment gives you the ability to rapidly evaluate many options simultaneously. It allows you to properly trade off tariff decisions with other operating costs like freight, labor, and taxes. This is not an easy task when you consider the volume of possible network configurations coupled with tariffs and other macro forces. There could easily be tens of thousands of possible options.
A robust supply chain modeling environment gives you the ability to rapidly evaluate many options simultaneously. It allows you to properly trade off tariff decisions with other operating costs like freight, labor, and taxes.
Here’s what you need to know to make sure you are making the right moves:
Don’t prioritize regulatory costs over others. The 24-hour news cycle puts tariffs and other regulatory costs square in the public eye, but remember they are only a part of your overall expenses. Even though it’s tempting to do everything in your power to minimize them, pulling those levers often produces a ripple effect. Imagine you decide to institute a “lift and shift” to move manufacturing out of a country with high tariffs. You then run the risk of raising labor, freight, and other costs enough to erase any potential or realized savings.
Continuous modeling with dynamic data is the building block of confidence. To be a useful tool for decision-making, leadership must have confidence in your supply chain model. And a model is only as good as the data used to build it. Historical company data is a good starting point, but a realistic analysis also requires “design data” — that is, information that does not exist historically. Examples include lanes that you don’t ship on today, tariffs that you don’t incur today, and “candidate” or greenfield sites that do not exist currently.
This exemplifies why it is so vital to hook into the right data systems and content sources, like Chainalytics’ Freight Market Intelligence Consortium. A trusted supply chain modeling environment with access to up-to-date and accurate data gives you the full insight needed to understand how changes to your supply change impact the overall operation.
Nimbleness can be worth its price. In an ideal situation, your supply chain would be able to respond swiftly to identified opportunities. However, we all know there is a transition period. And the time lag from decision to implementation can be longer for companies that own buildings, fleets, and are engaged in long-term contracts.
To avoid aiming at a moving target, consider adding 3PL support for freight and flexible storage space. While this option comes at a premium price, it can also accelerate your supply chain’s ability to respond quickly to changing conditions. If your company is highly susceptible to the negative effects of tariff or other regulatory changes, it may be cost-effective in the long-run to fund this flexibility instead.
As with much of supply chain planning, change is the only constant in the global trade market. When will a deal with China go through? Which one of the 36 countries identified on the United States Trade Representative’s Special 301 report may be subject to future tariffs? How will Brexit play out? It’s impossible to know the answer to these, and countless other questions. The best thing you can do today is to establish a trusted supply chain modeling environment — whether that’s an internal center of excellence or a composite team like Chainalytics’ Managed Analytics for Supply Chain Design — to be ready to respond to any one of them with full knowledge of how that response will impact your operations and profitability.
Steve Ellet leads the Supply Chain Design practice at Chainalytics as Senior Vice President. With more than 20 years of experience, he is a trusted adviser for organizations looking to optimize their supply chain strategy.
