In today's highly integrated global economy, supply chain disruptions with ripple effects are the norm. However, most companies are not equipped to deal proactively with and/or quickly mitigate these situations. The threat of tariffs sparking a trade war between the U.S. and China exposes the lack of readiness most companies are facing should additional disruptions strike already lean and interconnected suppliers.
Case in point: Many of the proposed tariffs will directly impact supply chains for a range of industries, including automotive, high tech, chemicals, pharmaceuticals, electronics, and manufacturing. The direct effect of an additional 25% tariff is that end products become more expensive.
Further exacerbating pricing impact are commodity price and electronic component price increases. These industries have already had to endure these increases over the last several years. The shift has led to significant negative impact on the bottom line. Such economic policies create a vicious cycle. Enterprises typically pass price increases on to consumers, with the result that demand for these products is expected to go down. It’s a ripple effect.
These new risks and opportunities force corporations to renegotiate with their sub-tier manufacturers, locating waste, extracting value, and reducing costs to alleviate pricing impact due to the tariffs. Today, our proprietary insights, generated from a dataset of more than $50 billion in annual spend, indicate that there will be direct impact to mechanical sub-commodities using steel, aluminum, and plastics inputs, with potential cost increases ranging between 5% to 20%.
The passive commodities that already saw cost increases over the past few years face continued instability, with proposed tariffs on tantalum; aluminum; ceramic, paper or plastic capacitors; many carbon, composition or film resistors; fuses; relays; LEDs; transistors; and similar components.
We expect the automotive sector to be one of the hardest hit industries, with consumer demand taking a hit as a result of tariff-induced price hikes. More than 60% of the commodities used by these manufacturers are sourced through supply chains that run through China, increasing their exposure and risk.
How can companies deal with these potential disruptions to their businesses while still delivering value to their customers? The key is to be able to take a proactive approach to assess supply risk and optimize accordingly.
If simply moving goods across borders imposes price hikes, the strategic procurement manager should look to their supply chain to find savings and value. Capacity planning, anticipating disruptions, and arranging back-up suppliers enable the enterprise to stay agile during uncertain market conditions. Business intelligence and continuous monitoring become critically important during unpredictable economic cycles. Companies need to augment and strengthen the decision-making capabilities within their organizations, enabling supply chains to react nimbly to sudden risks or fleeting opportunities.
Leading companies have begun investing in the digital transformation of their sourcing and supply chain functions. This will help drive rapid visibility in their supply chains, proactively getting insights into the larger patterns of risks and opportunities.
Today, with the vast amount and velocity of information changes every day, even the smartest individual can no longer process and analyze data and make decisions at a pace that helps optimize the result. IoT-connected devices are increasingly prevalent in every corner of the supply chain, providing big data streams that can be leveraged for value and profit. Geopolitical decisions impact a vast array of transnational governments and agencies that require business compliance.
Other disruptive factors, including severe weather events, changing inventory levels, transportation and shipping conditions, cyber-attacks or other issues affecting communication infrastructure, and even the health and deployment of human workers in a range of distribution centers, will ripple across localities, impacting the supply chain. Companies can no longer rely on just picking the lowest-cost component, supplier, or region but need to have the ability to manage risk, scenario planning and optimization, and rapid response from a strategic sourcing standpoint when faced with disruption.
Companies seeking a strategic foothold against the coming headwinds have already started on their journey of digitally transforming their sourcing function. However, a large majority of companies do not have full visibility over their supply chains. Whether the task ahead requires firms to begin or accelerate digitization, the geopolitical events now unfolding should serve as a wake-up call. Don’t lag behind.