The Tariff Effect: Rethinking Supply Chain Talent & Strategy
When this year started, I don’t believe many of us foresaw the World Economy screeching to a halt. Manufacturing and Supply Chains have been interrupted by weather, and war, and tariff policy. The Trump Tariffs have done something trade wars rarely achieve: breaking supply chains. US companies will now be very hesitant to trust the supply from foreign countries. They will start to look at diversifying their suppliers to favor US suppliers, even at higher costs.
With shifting tariff structures and international trade disputes, companies are seeing demand spikes for specific items and plummets for others, while access to parts and labor worldwide is becoming increasingly complex. “Weather-related supply disruptions have been much more common over the last 20-25 years,” Sunil Chopra, IBM Distinguished Professor at the Kellogg School of Management, said, “but this is the first time I have seen a supply-disruption risk due to sudden and widespread trade policy changes.”
Because of these trade disruptions, companies must focus on developing new supply chain talent and adding new skills. Because supply chains are fragile, supply chain leaders must focus more on a talent strategy, including training and recruiting, as an integral part of their overall strategy. Once that is in place, the organization can build and invest where the most significant gaps and needs exist.
Larger companies can build regional supply chains, and smaller companies can use technologies such as 3D Printing to make needed parts. Larger companies are not building walls; instead, they are building a less concentrated system. Smaller companies do not have to build stockpiles of parts and let them sit; instead, 3D printers can manufacture the parts they need immediately.
Several experts have reiterated the need to obtain more visibility across the chain in the wake of supply chain disruptions due to tariffs. Companies that sell finished goods generally know production and shipment schedules for their Tier 1 suppliers, but they usually have little to no knowledge of suppliers further up the chain.
This visibility is key to optimizing supply chain efficiency and agility during normal production. When critical supply chain disruptions hit, this visibility becomes crucial to understanding the disruption's impact on the rest of the chain so that others in the ecosystem can plan and take action, such as developing routes to alternative suppliers.
Because the tariff environment has created international friction, suppliers in the chain are temporarily ceasing production, and logistics providers can no longer transport goods as seamlessly, particularly across borders.
Solutions include moving toward more digitalization and away from paper. Companies also need to ensure data privacy for suppliers. Another move they need to make is to give suppliers an incentive to share data, as Tier 1 suppliers probably do not know much about Tier 2 or others further up the chain. Start early and don’t assume current disruptions will never happen again.
Trade is notoriously reliant on paper-based processes: The "Bill of Lading" – a detailed list of a ship’s cargo; notices filled out by hand; paper copies of packing lists from each logistics carrier. In some cases, such as with the Bill of Lading, physical paper copies are required by law. For the most part, however, companies have yet to digitize their supply chain processes because they have determined the cost of doing so does not bring enough efficiency or security to justify the endeavor.
Protective measures in response to tariff-related disruptions have clarified that operations dependent on physical assets, such as paper, can face serious issues when regulatory and border conditions rapidly change. Wet signatures and paper printouts are usually handled by operations personnel who must come to the office or another place of work and coordinate with others. In addition, value chains that rely on information in these paper documents lose access to that visibility very quickly and cannot react to changing conditions.
Digitizing is not simply a matter of cost, but primarily of visibility and managing supply chain risk. To limit the impact of points of failure in the value chain, it is essential to make data available digitally. In the current environment of trade volatility, governments and businesses with strong digital infrastructure and enabling regulations, such as e-signature and e-transactions laws, are dealing with the supply chain disruptions much better than those without.
What should companies expect from their supply chain leaders? As we mentioned above, many supply chains have been inflexible. This trade-driven disruption has shown that they must be nimbler and more adaptable to change. Tariffs have forced companies to consider the well-being of their people, so they are traveling much less. Glenn Steinberg, E&Y Supply Chain Leader for Global and the Americas, lists five key fundamental changes to transform their supply chains.
These are steps companies can take now to help ensure their supply chains are transformed in ways that allow them to function effectively, even when stressed and stretched by unexpected global events. Supply chain resilience is not simply about protecting profits. It is critical to securing the health and well-being of people all over the world. Companies may also be required to have developed a “Tariff Playbook” for future interruptions.
Transforming Supply Chains
How can businesses boost the resilience of their supply chains? Fundamentally, they need talent who understands how to move away from having rigid, linear supply chains to operating within agile, networked ecosystems by focusing on five key areas:
1. Assessment and strategy: Conduct an end-to-end supply chain risk assessment to stress test the supply chain, identify critical risk scenarios, and define potential responses.
2. Capability build-out: Invest in key supply chain capabilities, including visibility and monitoring, alternative business operating models, alternative supplier sourcing strategies, network flexibility, and agile planning.
3. Intelligence monitoring: Implement risk monitoring and reporting tools and an early warning system that enables a rapid early response to risks or disruptions. Undertake new product risk assessments and look for changes in demand and supply. Conduct ongoing risk and controls assessments, including systems and facility risk and cyber reviews.
4. Operating procedures: Establish a Plan B for disruptive events, covering operating procedures and responses to predefined supply disruption triggers, such as a natural disaster or regulatory crackdown. Ensure clear delegation of authority and decision-making and that external and internal communication protocols are in place.
5. Major crisis management: Establish a crisis management framework for major events where predefined responses will be inadequate. This framework should be accompanied by governance procedures, a desired operating model, and standard ways of working.
Summary
Traditional supply chain structures are optimized for cost and are not equipped to cope effectively with an increasing number of unplanned disruptions. To build resilient supply chains, enterprises should focus on hiring supply chain talent who can help them build capabilities to prepare them for, sense, and respond to future disruptive events.
As the tariff and trade environment change frequently, all parties must have visibility into the supply chain to share data and communicate effectively. Top talent, and technologies accompanied by enabling new policies can play a significant role in rebuilding the trade and supply chain system and making it more shock-proof over the decades.
The bottom line is that a company needs exemplary leadership and a talent plan to address these changes.
Please feel free to reach out directly to Bill Wright with any questions or comments.