Chinese Manufacturing Solutions Blog

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Tariff Relief: What Are Your Options?

May 20, 2019

 

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300 days and counting since trade tensions started between two of the world’s largest superpowers. Last week the Trump Administration increased tariffs on $200 billion of Chinese goods to as much as 25% and China’s retaliated with an announcements that would increase tariffs on nearly $60 billion of U.S. goods. The era of uncertainty is here to stay.

 The “hill” of a 10% increase just changed to a “mountain” of 25%. Certainly, raising prices to customers is part of the solution (Walmart just announced they will be).

Another part of the solution is fine-tuning your supply chain through price concessions or through shifting to regions which are out of the scope of the current tariffs (i.e. SE Asia).

For those with deep supply chains in China, there are no magic pills providing overnight relief. On supply chain (and business in general), we take a long-term view. Although down turns and cost increases are never a welcomed discussion, they certainly are a natural part of the supply and demand cycles (which include changes in policy).

For many leading brand owners, top priorities include:

  • Maintaining immediate flow of product to customers.
  • Maintaining product quality levels on which the brand depends.
  • Acting on the first two points in the best financial interests of the company.

In times of trouble, buyers may be tempted to put heavy pressure on factories to share part or all of the cost increases. From the factory’s perspective, decisions made by world leaders are out of their control. As a result, they won’t respond favorably to demands for immediate cost relief.

We believe it is important to be respectful of the supply chain that has taken your company years to build. We’re recommending buyers carefully negotiate during these very turbulent times. CMD is taking an approach to protect our clients from supply chain mutiny and irreparable damage to your brand (resulting from missed deliveries to customers).

Any rash communications to suppliers demanding tariff relief could jeopardize your position, leaving you exposed.

Companies which are successful are taking steps like these:

  • Rank your suppliers top to bottom, thereby identifying where you have the highest tariff exposure.
  • Understand what your Plan B options are product by product and supplier by supplier.
  • Reach out to current suppliers and ask about their cost-down plans for the immediate future (face-to-face discussions are best).
  • Prioritize your largest and most critical supply partners and work with them proactively concerning cost-downs for logistics, manufacturing processes, material changes, etc.
  • Work with suppliers which have a plan to mitigate tariff exposure (e.g. SE Asia supply options)

A proactive approach like this one avoids alienating the relationships that have taken you years to build.

Another strategy many businesses are using is adding a new line item to invoices called a “tariff surcharge,” similar to the “fuel tax” many companies adopted when energy costs spiked years ago. This doesn’t have to permanent and can be relaxed should the tariff issue become resolved.

Struggling with next steps and Plans B (and C)? Connect with us today.

Topics: Manufacturing, In The News, Thought Leadership