Tariff uncertainties create new risks around manufacturing site selection, inventory policies, sourcing, distribution and logistics, and commercial terms with customers.
After decades of a globalization-friendly political climate, organizations around the world are now faced with growing protectionism and an emphasis on national manufacturing policies. This global trend has found its preliminary pinnacle in the trade war between the U.S. and China.
“The situation is particularly critical for companies that rely directly or indirectly on a Chinese supply chain to meet customer demands in the United States,” says Kamala Raman, senior director analyst, Gartner. “U.S. importers already report additional costs of $6 billion a month in customs duties due to tariffs, and many companies announced financial impacts as a result of the trade tensions.”
Affected supply chain leaders must consider their options carefully and keep a balance between over- and underreacting
Affected supply chain leaders must consider their options carefully and keep a balance between over- and underreacting. U.S. companies face a daunting task in justifying new investments in manufacturing and supply networks, while trying to gauge if the current trade issues will be a long-term problem. Despite this uncertainty, network diversification may be justified.
Managing for a broad range of interconnected risks is essential to designing resilience into supply chain networks. “Embed scenario planning and reviews in your company’s strategic planning cycles to identify possible risks and determine appropriate action plans for all likely scenarios,” Raman says.
To move or not to move
For longer-term risk mitigation, evaluate multiple sourcing options. This could mean reshoring or nearshoring to the U.S., Mexico or Canada, or product moves to existing company or supplier locations in low-cost regions.
But physically moving or rerouting supply chains is not an easy solution. “Even if companies can fall back on alternate sites, various challenges will need tackling,” says Raman. “The sheer complexity of many manufacturing processes makes shifting production difficult, time-consuming and expensive. Additionally, the interconnected nature of supply chains means that no product move can be made in isolation and the impact on all other parts of the network have to be considered.”
For those who do not have the luxury of an existing footprint in alternate countries, the process becomes more complicated and more expensive. Setting up a location, staffing, training and finding new local partners is a major project for every supply chain manager. “Do not concentrate solely on the tariff issue when you decide to take on this challenge. Conduct a holistic site selection exercise and count in other factors such as anticipated growth markets, existing capabilities in the country and potential for future improvement,” says Raman.
An exit followed by re-entry when things have calmed down can prove unwise
The decision to move parts of your supply chain out of China should not be taken lightly. Given the costs of reconfiguring supply networks, the time to execute moves and the attendant risks, companies should only take this step when they expect the new configuration to be viable over several years. Careful evaluation might even suggest that staying in China is the better option.
“China’s scale as both a manufacturer and a market cannot be underestimated and — more importantly — cannot be replicated in another country. An exit followed by re-entry when things have calmed down can prove unwise when companies with a previous strong standing in the Chinese market suddenly face healthy and growing domestic competition,” Raman says.
Learn more: How to innovate and scale the supply chain
Gartner clients can read more in “How Your Supply Chain Should React to Tariff Uncertainties in the United States and China” by Kamala Raman, et al.