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Build A Resilient Supply Chain Amid U.S.-China Trade War

September 26, 2019

Contributor: Christy Pettey

Global supply chains, long optimized for cost-efficiency, should view trade uncertainty as an opportunity to create competitive advantage.

It does not look like the trade disputes between the U.S. and China will resolve themselves completely in the foreseeable future. Although all industries are affected, global technology supply chains are at increased risk of fracturing.

“The disagreement over tariffs is now in its second year and global companies have already felt the financial impact,” says Kamala Raman, Senior Director Analyst, Gartner. “About one-third of all executives on earnings conference calls have cited the issue as a potential headwind. The task for supply chain leaders is now to come up with agile workarounds.” 

As the dispute lingers, the risk increases for greater economic fallout for both countries through increased consumer prices and lower profits from absorbing tariff-related costs. An expansion of trade discords may lead to larger and more serious concerns between these two giant trading partners.

“ Whether you try to reclassify goods or change the country of origin — always collaborate with compliance experts to ensure your actions won’t get you in trouble with U.S authorities”

Companies that are involved in trade between China and the U.S. should treat this issue not just as an increased risk, but as a potential competitive advantage. Those that respond proactively create an opportunity to take market share or capture a larger share of industry profits.

Leverage trade uncertainty to optimize your supply chain

Until the U.S. and China reach an agreement, the current challenges around global trade will continue. And who knows what comes next? Supply chain leaders should begin with an evaluation of key imported components by classification and country of origin. They should explore short-term mitigation actions such as product rerouting, alternate sourcing or first sale. Longer term, they should consider shifting production to other countries in scenarios that can make the supply chain more resilient. 

When considering production shifts, evaluate national, organizational and direct manufacturing cost attributes as part of any solution. Such production moves to new countries should make sense for the long term, beyond the immediacy of the current tariffs.

For ongoing evaluations, create digital models of the supply chain network so restructuring networks can be simulated and tested for impact on total network costs, service levels and inventory in the midterm. This visibility into the real-world supply chain improves situational awareness and greatly enhances supply chain decision making. By creating a more accurate representation of the real-world physical supply chain, decisions can be made faster and will be of a higher quality.

Guarantee compliance

Organizations with long-standing relationships with Chinese suppliers, those who own Chinese manufacturing locations and those who don’t have any practical substitutes outside of China are under pressure to be creative with their mitigation. However, as new solutions are adopted, there is a lingering risk that the workaround may inadvertently violate import or export laws. 

“Whether you try to reclassify goods or change the country of origin always collaborate with compliance experts to ensure your actions won’t get you in trouble with U.S authorities,” says Raman. “We have also found many organizations that import from China have become complacent when it comes to properly classifying goods for customs using the Harmonized Commodity Description and Coding Systems. Now is the perfect opportunity to get that fixed.” 

Approach resiliency as a necessity

Gartner defines business resilience as an organization’s ability to resist, absorb, recover and adapt in a complex and changing environment to deliver its objectives and prosper. The organization must return to an acceptable level of performance in an acceptable period after being affected by a business disruption.

“Supply chain leaders must treat resiliency as a necessity, moving it from a nice-to-have to a must-have,” says Raman. “This means having alternate options for suppliers, contract manufacturers and manufacturing locations to provide network flexibility.”

Although a trade agreement between the U.S. and China could happen at any time, for the long term, divergence between the western economies and China on trade, defense and technology policies is likely to create further flux in global supply chains.

To navigate those increasingly complex situations, organizations must stay up to date with the latest news on global trade, trade policies and activities of both governments.

This article has been updated from the original, published on June 20, 2019, to reflect new events, conditions or research.

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