How Procurement Organizations Can Mitigate Risk, Manage Costs Amidst a Trade War

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It is still unclear whether the escalating rhetoric between the U.S. and China — and the ensuing “tit for tat” of billions of dollars in threatened tariffs from both sides on the other’s imports — will become reality.

Of course, to certain procurement organizations (especially industrial manufacturing firms with significant direct materials spend), the idea of a “trade war” kicking off only now is misguided. To them, it’s more like the latest battle in war that’s been dragging on for at least two decades.

Yet it is crystal clear that organizations face ever greater supply risk with each passing year and, as a result, potentially higher costs without having access to the right tools in place.

How to assess those risks and costs?

In terms of getting a handle on risk, “you need to monitor the news, the sentiment of the responses in regards to the news, crowdsource some predictions, and run some advanced analytics on all this data to determine the probability of something happening — and sticking,” writes Michael Lamoureux, lead analyst and futurist at Spend Matters.

In the second case, Lamoureux notes, “you build should cost models with current data, and projected data, to determine the impact of a tariff on the total cost of ownership of the product.

“This means that a simple RFX or Auction platform is just not enough,” he continues. “An organization needs a platform with deep should cost modelling and the ability to create what-if should-cost models based on projected and anticipated changes.”

If projected cost increases are significant, an organization will need to worry about re-allocating their global supply chain to insure more import/export to more effective locales; source from additional suppliers or re-source the entire category, he writes.

All of the above is difficult, Lamoureux contends, without an optimization-backed sourcing platform.

Why Sourcing Optimization is at the Top of the List in a Trade War

Sourcing optimization essentially allows you to overlap sourcing and supply chain network design, in effect tackling the supplier-related challenges inherent in our quickly evolving trade climate.

We caught up with Spend Matters Managing Director Jason Busch to walk us further through this.

You can actually evaluate different possibilities and costs associated with it, looking at, for example, Chinese suppliers versus suppliers in other regions. Then, you can even begin to look at various constraints you might apply against your own requirements.

“If you're really worried about a trade war and you do not believe it's just rhetoric, it's really important to think about ‘split of business,’” Busch said. For instance, “I might not want to award more than 10% of business to Chinese suppliers, because of that potential impact on total costs. Or maybe I'm comfortable with 50% or more. Sourcing optimization allows you to collect lots of data points, design a supply chain, apply your own constraints against it and look at all of this from a sourcing standpoint.”

“This is a huge one,” Busch said, in terms of the impact a trade war would have on forcing organizations to be able to mitigate different risk possibilities. Spend Matters SolutionMap ranks sourcing solution providers within the six buying personas (including “Optimizer”) that fit most procurement organizations — check out the free ranking charts here.

Two More Crucial Areas: Spend Analytics and Supplier Management

When it comes to the importance of data visibility, spend analysis is a no-brainer.

Spend analysis alone is valuable to understand what you're buying, from whom, in what quantity and all the data associated with it. Ideally, if you're buying from abroad, understanding total cost, various terms and having all the other harmonized classification data in one place is extremely valuable, according to Busch. (Linking up with the best-fit spend analysis solution and solution provider is another important piece of that puzzle.)

Being able to collect multi-tier information and having good master data on all of your suppliers — and, in some cases, good data on multi-tier suppliers is also crucial in understanding an organization’s exposure within the extended supply chain — and that’s where supplier management comes in.

“What might come back to hurt you, from a cost standpoint with China, is not your tier-one suppliers, but your multi-tier suppliers,” Busch said, if the rhetoric indeed escalates into action with President Trump’s tariffs as a result of the Section 232 investigation being implemented fully.

When they're selling to your tier-one or even tier-two suppliers, that cost is going to be factored back into the equation. Having good master data on your suppliers and good visibility into the extended supply chain via a supplier management system is therefore quite valuable.

Ultimately, no matter one’s politics on trade wars and their implications, they’re a great excuse to get budget to invest in the right procurement system.

Whether you have the corporate buy-in and sign-off in hand and are ready to go, or just beginning to explore your possibilities, Spend Matters can help you along your procurement software selection process.

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