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How to Proactively Defend Against Supply Chain Risks from Section 232 and 301 Tariffs

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The escalating U.S.-China trade war has put billions of dollars of Chinese imports under tariffs — but thousands of Chinese products are about to fall under additional duties.

Off the back of the Trump administration's Section 232 investigation, which resulted in steel and aluminum tariffs, the recently finalized Section 301 investigation has targeted numerous Chinese products. Many procurement organizations have been following the investigation and its potential effects on their supply chains, but knowing exactly how a decision could introduce risk on a part, supplier and regional level has been far from easy.

To shield their businesses from uncertain trade risks, procurement organizations need to take a proactive approach. This requires functional leaders to be able to quickly and comprehensively visualize their supply chains, enabling them to measure risk at all levels and make preventative decisions with both efficiency and accuracy. In this article, we explore how procurement organizations can do just that, along with how supply chain risk management tools can facilitate this process for current and future trade risks.

Mapping the Supply Chain

Before procurement organizations can fully assess and plan for the full impact of tariffs, they will need to map all of their supply chain data. This first step provides a full picture of how parts and materials travel from their country of origin to the business, creating a foundation off of which to perform risk analysis and develop mitigation strategies.

Most organizations understand how important this capability is, but they also struggle to attain it. In a 2017 Geodis survey of 623 companies, respondents named improving supply chain visibility as the third most important priority for their businesses, behind only full deliveries and product availability. Yet only 6% of those respondents said they had full visibility of their supply chains.

Narrowing this gap between the acknowledged need for visibility and current capability is easier said than done. The imperative for doing so now, however, is clear: Companies that cannot trace their parts and materials from country of origin to factory risk being caught off guard when the next round of tariffs raises costs or jeopardizes availability of a single-sourced good.

The fastest way to get a handle on supply chain visibility is to enlist the help of a software provider that specializes in this area. Resilinc’s RiskShield product, for example, enables procurement organizations to visualize their end-to-end supply chains through geographic maps and network graphs. By loading supplier and purchase data into a centralized platform, RiskShield consolidates supply chain data (e.g., part-site mapping, recovery times, alternate sites, risk assessment surveys) from not only tier 1 suppliers but also suppliers several tiers below. This allows companies to consolidate siloed corporate data, creating a single version of the truth about a business’ risk exposure.

Analyzing Tariff Risks

Once procurement organizations have taken the first step to fixing their visibility problems, they can begin to compare risks across suppliers, sites and parts as they relate to potential tariff-related products.

There are numerous criteria to consider when conducting these analyses. At a basic level, procurement organizations should begin by looking into four categories:

Supplier/Company:

  • Financial stability (e.g., bankruptcy)
  • Innovation potential
  • Operational capabilities
  • Disasters at supplier site
  • Material and services availability
  • Price increases
  • Environmental stability
  • Quality
  • Delivery
  • Regulatory/legal
  • Brand/reputa-tion (e.g., a PR meltdown)
Location:

  • Local events
  • Civil unrest
  • Terrorism
  • Strikes
  • Natural hazards

 

Country-Specific:

  • Financial stability (e.g., country rating, GDP, unemployment rate)
  • Pandemic outbreaks
  • Political events/situation
  • Corruption, bribery
  • Labor costs
  • Currency fluctuations

 

Other:

  • Freight status (e.g., temperature, pressure, shocks)
  • Industry-specific risks

 

The above table is not meant to represent an exhaustive list of potential risks within a company’s supply chain; rather, it is the starting point off of which more detailed analyses can be based. And in the context of tariffs, certain risk elements will receive greater emphasis than others, such as supplier stability (both financial and operational), currency fluctuations, and material or product availability.

With that focus narrowed, organizations can then begin comparing risk exposure across their various products, suppliers, site and parts. Tools like Resilinc’s RiskShield allow procurement and cross-functional partners to create customized risk profiles for all of these various levels, using an unlimited number of risk indices (e.g., financial, reputational, disaster, geopolitical) to define custom weightings and tolerance limits for specific risks.

Creating a Playbook

With both improved visibility and risk insights in hand, organizations can now move on to the most critical step of a proactive tariff mitigation plan: creating a playbook of risk prevention and mitigation strategies.

The goal of mapping supply chain composition and assessing potential impacts is to prepare for risk events in advance. With respect to tariffs, that means that as governments release lists of potential tariffs, organizations should be able to compare named goods with their material and product lists to select an alternative solution (e.g., a second supplier as needed).

To begin developing your tariff risk playbook, consider the answers to questions such as:

  • What are all of the risk factors that need to be monitored, and how are we planning to mitigate them should events arise?
  • What are the measurable risk thresholds (e.g., price increases) that need to be defined?
  • What are the key failure points in our supply chain, and how can these be mitigated in the event of a disruption?
  • Do our supplier contracts have the necessary language (e.g., force majeure clauses) to address trade risks or other disruptions?
  • Do internal resources have the information and visibility needed (e.g., supplier contact information) to quickly deal with risks as they arise?
  • What are the key metrics we need to evaluate before, during and after a risk event takes place?
  • How could a risk event affect sourcing, supplier network and product development in the future?

These questions, while not exhaustive, should illustrate the type of thinking that goes into developing a tariff risk playbook. The idea is to compile all of the information from the first two steps and then prioritize risk mitigation activities. And when codified in a risk management solution, risk mitigation can be easily tracked and managed through dedicated workflows, allowing procurement organizations to watch risk reduce in real time as projects are completed.

What’s more, developing a risk mitigation playbook can help businesses prepare for not just the impact of new tariffs but also other unforeseen risks on the horizon. Consider it a long-term investment in procurement’s value contribution to the business. In Resilinc’s experience, for example, clients have found that a comprehensive supply chain resiliency program can save up to $15 million for every $1 billion in annual sales.

But if there were one lesson to take away from this guide, it would be this: start planning for trade risks today. Only by proactively identifying, analyzing and mitigating supply chain risks can procurement organizations attain the compelling value that such resiliency programs advertise.

This article was written on behalf of Resilinc by the Spend Matters Brand Studio team and not by the Spend Matters editorial or analyst teams.

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