Trade and Tariffs – Double-Edged Sword
The Institute of Supply Chain Management Purchasing Managers Index recorded October 2, 2019, the lowest levels of manufacturing activity since the Great Depression.
This organization is a leading association of career professionals who report monthly on facets of supply chain management – such as inventory levels and output of production in units shipped per month, and exports.
While there are major reasons to move forward with tariffs on China, the effects are now being felt here in the U.S.
As supply chain professionals, buyers have a one-to-one dollar ratio benefit to the direct bottom line in companies through inventory reductions, while maintaining – and hopefully – increasing production outputs for sales.
This direct cost benefit-to-profits focuses much attention on the supply chain group and inventory costs.
While consumer confidence is high, business is starting to see the long-term impacts of tariffs on Chinese goods with tariffs now over a year old.
Many businesses, who import originally, had a wait and see outlook on tariffs and paid the 25% increase in duties paid from their imports.
Now, as tariffs continue long term, businesses are starting to attempt to pull back and seek domestic suppliers.
Once the decision is made by management to seek alternate suppliers, the process to find alternative suppliers can be difficult for the buyers tasked to find a way to reduce tariffs.
Buyers must first determine if any qualified suppliers exist in counties where tariffs are not present.
For items that have tooling used to make the items currently produced in China, this selection process may include a complete purchase of new tooling or tear down and movement of the tooling at the manufacturers expense.
Once a new supplier is found and tooling moved, a new supplier must then submit a first article sample to the manufacturer for quality control and testing to ensure the new supplier can meet expectations for the manufacturer.
If the new supplier passes all quality and manufacturer controls, it will then be given a purchase order to produce the items at their facility.
Raw materials are purchased, and production ramped up at the new supplier to accommodate the needs of the manufacturer.
While the new supplier is ramping up, the old supplier is slowed to use up any left-over raw materials. Any old tooling is either moved or disposed of by the old supplier and the manufacturer.
The ramp up and movement to a new site often causes increases in delivery time and a slowdown of the manufacturer in need of the items, which is what is currently happening.
While this pain for manufactures will lessen in time, it can be frustrating in the short term.
Decades of neglect on trade agreements from both parties lead to the position the U.S. is in now.
If we not partake in tariffs now to rebalance our trade agreements, the U.S. will in time lose its negotiating leverage as other emerging markets overtake the volume of the U.S. economy.
So, manufacturers and buyers, while experiencing the pain of tariffs now, do understand the need and reasoning behind why we cannot accept status quo on trade agreements with China.