Trade Talks, Disruption. You need to be Flexible

Trade talks continue to confuse the markets, while USA and China meet to discuss how much to penalize each other for doing business together. In the end, the supply chain doesn't change much but the planning for how to keep the pipeline filled changes a lot.

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With each new round of tariffs to be levied, the supply/demand scale tilts off balance. The first-time tariffs were added on Chinese products in 2018 and then 2019, we saw a huge spike in orders to fill warehouses in advance of the new costs. Manufacturers and distributors have no choice but to buy ahead when the cost of owning now, even though holding inventory for a longer time is less than the cost of buying later at the 25% higher prices. BUT - this does NOT generally change the volume to be traded. If we are consuming X amount of goods before the tariff, we are still consuming the same amount after the tariff, with very few exceptions. So, the demand has not changed but the location of supply has changed. This makes inventory plentiful for a while. The outcome will feel like we have a greater supply when we really only have an earlier supply. The capacity to make more has not changed and in fact probably won't for most things. As we burn off the excess we bought ahead of the tariff, we will see a similar reduction in new orders for a given period of time to our Chinese suppliers following the tariff. This is especially true for US buying from China. US has fewer alternatives to buy from while China on the other hand has more options in many products. Airbus over Boeing for example.

The Disruption caused here is driven by price changes causing both ends of the supply chain to change plans. The overall demand does not change very much but the timing of delivery does. Which means US customers need more cash to purchase with, (credit), more storage space to hold it all, (driving up warehouse demand and prices), taking on more risk for long term should designs change or quality issues surface. The key here is to have planned in advance for being more flexible than your competitors. Having bonded warehouse placed strategically on a port hub or the ability to receive only what you can sell through quickly are ways to keep more of your profits, but in the end, the buyer here is going to pay more, both now and later as the tariffed price lands on his dock.


Flexibility is now a competitive advanatage if you have planned well in advance to minimuze risk and leverage your trading partners. Flexibility means having the ability for your supply chain to flex up or down quickly, with little direct cost impact inside 30-60 days. It means having a network of supply chain partners positioned to order and hold certain amounts of stock based on current and expecte future pricing actions. It means evening out the flow of goods as much as possible even if you must take title sooner than planned to hold a current price.

All these things are parts to a high level strategy plan developed annually and review quarterly to allow you to make needed adjustments as conditions change. Think of this as a roadmap of goods and costs.

Of course this has limitations. If you are not importing large volumes into USA consumer markets, you probably have far fewer options for flexibility and instead have to work the pricing into the products with each new order because you cannot order and hold stock early. So, the cost is not added storage now, but higher prices as the next orders arrive. Additionally this knee-jerk approach to the supplier will be felt on the capacity side as his order flow becomes more lumpy with maybe larger time gaps between orders so either way, as a customer you need to plan for this risk as well. Or you could decide to source locally. But that is often not an option.




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