As trade conflicts between the United States and countries like China and Mexico escalate, U.S. companies are facing a growing number of supply chain challenges. From drastically heightened prices on imported goods to lengthy delays on inbound shipments, the repercussions of recent trade disputes have profoundly impacted the supply lines, profit margins, and overall growth of businesses across the country. Now, with potentially more trade disruptions on the horizon, how can on-demand warehousing provide an avenue for companies to navigate these obstacles without overburdening themselves or exhausting their capital?
- U.S. trade conflict disrupts global commerce. At the same time that trade disruption between the U.S. and China is being dubbed The New Cold War, the U.S. has threatened fresh tariffs against Mexico over immigration disputes. The potential for new tariffs against Mexico has cast further concerns over an already delicate situation for North American trade. And with potentially more tariffs upcoming, U.S. companies are analyzing their supply chains with growing unease.
- The costs of disruption mount. In early May, the Trump administration responded to a breakdown in talks with Chinese officials by increasing U.S. tariffs from 10% to 25% on $200 billion worth of Chinese goods. This was met with Chinese tariffs on $60 billion worth of U.S. products. And just recently, the U.S. announced the potential for new tariffs on Mexican imports. With Mexico and China comprising a significant portion of the U.S.’s suppliers, businesses across the country are scrambling to establish new supply lines and cope with steadily rising inventory costs.
- Repercussions for U.S. businesses. While many of the nation’s largest companies have made rapid headway in replacing tariff-laden suppliers with partners from other countries, this is a more difficult task for smaller businesses. As tariffs increase, it is small and mid-sized businesses that often lack the capacity to cope with added inventory expenses and shipping delays . They also lack the funding or expertise to quickly redirect their supply chains, either through new countries or entirely different regions, to circumvent tariffs. The result? As profit margins are sliced, companies are forced into laying off staff, reducing inventory levels, and delaying new growth projects. These sacrifices are made just to maintain daily operations until the conflict is over or alternative supply routes can be established.
- How on-demand warehousing protects against supply chain disruption . On-demand warehousing allows businesses to quickly scale their inventory levels up or down to cope with sudden economic shifts or trade disruptions. This means that as impending trade conflicts are identified, businesses can quickly inbound additional inventory from their foreign suppliers and stock it in U.S.-based warehouses with relative ease. This effectively allows domestic businesses to avoid tariff hikes on imported goods until normal trade practices resume or new suppliers can be onboarded. And, because on-demand warehousing does not require inventory minimums, domestic inventory could be scaled back down at the conclusion of any trade conflict as-needed to resume standard operations.
U.S. trade conflict disrupts global commerce
Over the course of the past year, a growing shadow of uncertainty has been cast over the supply chains of organizations around the world. Although supply chain interruptions can arise out of anything from a weather storm to a traffic jam, the type of disruption heavy on the minds of companies today revolves around escalating trade conflicts between the U.S. and countries like China and Mexico.
At the same time that trade animosity between the U.S. and China is being dubbed as The New Cold War by some economic pundits, the U.S. has also gone on the offensive in their trade tactics south of the border. The potential for new tariffs against Mexico has cast further concerns over an already delicate situation for North American trade, and as a result, U.S. companies are beginning to analyze their supply chains with growing unease.
The costs of disruption mount
As recently as January 2019, a U.S.-based survey of over 300 corporate and banking professionals revealed that trade conflict was not a top concern domestically. At the time, there was still uncertainty over various U.S. trade agreements, but efforts between all involved parties looked to be progressing in a favorable manner. However, the climate can change without warning, and the past several months have seen a sudden escalation in several major trade disputes.
In early May, The Trump administration responded to a breakdown in talks with Chinese officials by increasing U.S. tariffs from 10% to 25% on $200 billion worth of Chinese goods. These actions were met by additional Chinese tariffs on $60 billion worth of U.S. products. China also announced an investigation into shipping providers like FedEx for allegedly diverting certain inbound shipments, which has raised further fears over supply chain disruptions. Given that 20% of the world’s manufacturing output is driven through China , the impact of these developments has been severe.
With U.S. tariffs now covering $250 billion of Chinese goods and Chinese tariffs reaching $110 billion worth of U.S. products, research estimates that the Chinese and U.S. trade conflict has already cost U.S. businesses and consumers $3 billion through higher prices, and another $1.4 billion in lost efficiency (i.e. delayed or interrupted shipments). And still the conflict drags on.
In conjunction with Chinese trade conflict, the U.S. just recently announced the potential for new tariffs on Mexican imports unless an agreement on immigration can be reached. Although the immediate threat of tariffs appears to have been staved off in recent days, there is no telling what developments will occur over the next several months. As the first half of 2019 has shown, trade disputes can escalate quickly. Now, with numerous businesses having just turned to Mexico as an alternative supply route to avoid Chinese conflict, these connections are already in jeopardy. The result? Even more costs, additional supply chain restructuring, and an utter logistics nightmare.
Repercussions for U.S. businesses
As trade conflicts continue to escalate, the U.S. may soon have higher tariffs on imported goods than practically any other country in the world. Subsequently, U.S. businesses with suppliers in China and now also in Mexico face significant challenges regarding where their inventory is developed, how much it costs, how long it takes to inbound, and where it is ultimately stored.
For large companies with the appropriate funding and personnel, the primary strategy has been to establish entirely new supply routes. It is no surprise then to find that while U.S. imports from China fell significantly in Q1 2019, U.S. imports from Vietnam rose by 38%, from Taiwan by 22%, and from Korea by 17%. However, while this strategy is more easily achievable for larger firms, small and mid-sized businesses rarely possess the resources to quickly restructure their supply chains in this fashion. And as time passes, the costs accrue.
As the escalation of trade conflicts continues, it is often small and mid-sized businesses that lack the capacity to cope with rising inventory costs and supply disruptions. They also lack the funding and expertise to effectively redirect their supply routes, either through new countries or entirely different regions, to circumvent tariffs. As opposed to larger businesses, it can take months or even years for smaller businesses to identify new suppliers, complete the necessary due diligence, and establish alternative shipping routes. This wastes valuable time and creates further delays. And as profit margins are sliced and costs increase, companies are forced into laying off staff, reducing inventory levels, and delaying new growth projects just to maintain daily operations. Such is the case with Roger Alves, the owner of a small, California-based consumer electronics company.
Roger’s company, Scosche Industries, has for decades maintained several major suppliers in China. However, the past year has seen Roger’s business directly impacted by regional trade conflicts. Just within the past 12 months, Scosche Industries has paid more than $2 million in tariffs. This has forced the 40-year-old company to lay off numerous workers and indefinitely delay new investment initiatives.
As the China-U.S. conflict drags on, Scosche is now looking to establish supply centers in Vietnam to replace Chinese partners, a strategy many businesses are considering with Mexico’s viability in jeopardy. But rerouting supplies from Vietnam requires intensive analysis, investment, and logistics specialization. Inbound inventory must be completely redirected from new suppliers, additional compliance documentation is required, and operations are in many ways restarted from scratch. It’s a laborious process that takes time to implement, and all the while Alves continues to eat the cost of rising tariffs. But what else is there to do?
Ideally, small and mid-sized companies would not be scrambling to alter their supply lines as trade conflicts arise but would be able to quickly increase their levels of domestic inventory to account for impending disruptions. This additional inventory would be warehoused in U.S.-based facilities so that daily operations could continue uninterrupted until more about the situation becomes clear or an effective long-term solution is established. But how can this type of ad-hoc inventory management be applied in a cost-effective manner? For a growing number of businesses, the answer is on-demand warehousing.
How on-demand warehousing protects against supply chain disruption
For those that may be unfamiliar, on-demand warehousing is a logistics model that provides businesses with complete flexibility to increase or decrease the levels of inventory they maintain at their warehouses without requiring any minimums or long-term contracts. A benefit here is that, as trade conflicts arise and the risk of supply chain disruption increases, businesses can quickly forward-stock their levels of domestic inventory so that future tariffs, restrictions, and delays don’t result in product shortages. The idea is to create a safety supply of domestic inventory that won’t be impacted by an escalation of trade conflict down the road. This can buy companies valuable time to either wait out a trade conflict or establish alternative supply routes. And while this strategy involves additional inventory investments on the front end, if the alternative is paying millions in tariffs and experiencing frequent inbound delays, the costs may be justified.
To further illustrate how on-demand warehousing can alleviate the burden of trade conflict, consider some of the caveats currently associated with the warehousing industry. First, the price of owning a U.S. warehouse is beyond the reach of many small and mid-sized companies. At the same time, outsourced warehousing typically requires either a long-term contract or high inventory minimums. These warehousing arrangements rarely allow for quick or immediate adjustments to the level of inventory maintained. Instead, there is a pre-established parameter that must be contractually adhered to.
So, even in the event that a company recognized the need to quickly inbound additional inventory, how and where would they store it? The strategy only works if warehouse space is available immediately and without contractual inventory parameters. This is the advantage on-demand warehousing provides.
With the arrival of on-demand solutions to the supply chain landscape, businesses of all sizes are afforded with an additional option for mitigating trade conflict disruptions. Looking ahead, if further tariff hikes on Chinese and Mexican products are expected, businesses could inbound extra inventory from their foreign suppliers now and store it in U.S. warehouses. This effectively creates a safety supply of inventory that is unimpeded by future tariffs and shipment delays. And, because on-demand warehousing does not require inventory minimums or contracts, these inventory levels could be scaled back down at the conclusion of the trade conflict as business returns to normal.
Final thoughts & next steps
As the Chinese and U.S. conflict shows no signs of slowing down and additional conflicts with Mexico and other nations remain on the horizon, domestic businesses with global supply chains face a growing number of risks. And without the technology, expertise, or funding to quickly restructure their supply lines as disruptions occur, growth for small and medium-sized businesses can rapidly deteriorate.
The all-too-common reality for small and mid-sized businesses, just like the one owned by Roger Alves, is that as the cost of inventory increases and margins are reduced, salary and budget cuts have to be made across other business areas. Added inventory costs may also push businesses to increase the price of their goods, which can negatively impact their ability to remain competitive in the marketplace. These factors can cause a severe drain on working capital, limit the capacity for expansion, and eliminate opportunities to invest in new ventures. But on-demand warehousing can help.
Although the cost of purchasing surplus inventory up-front may sound daunting, on-demand warehousing provides an effective avenue to avoid rising tariffs and other supply chain disruptions without overpaying for extra storage space. As potential disruptions are identified, inventory can be forward stocked domestically so that there is no interruption in the company’s ability to handle customer demand. And, once the threat of disruption has been minimized, companies can scale inventory down without any burden on themselves.
Compared to the cost of dealing with constantly rising tariffs and frequent delivery delays, this strategy is worth a serious examination by businesses. As trade conflicts continue to escalate, small and mid-sized businesses struggling to cope with supply chain disruptions owe it to themselves to consider an alternative warehousing strategy. The on-demand service structure could make all the difference.