Econometrics and Infonomics: A Tariff Story
A recent call from a sales colleague prompted me to write this post. His client asked us to give them guidance on how our solutions and data management practices in general can help combat the effect on their prices resulting from the U.S. tariffs recently imposed. The current state of uncertainty apparently had them question if they should proceed with their investment in our solutions.
My answer: “Wrong question.” This is not the time to question the investment in data but to double down and accelerate it. The reason is quite simply that you are already late to the game if you don’t have general plans for situations like this, largely drawn up from your use of data and analytics (maybe even Ai).
U.S. import tariffs on auto imports (20%), imported steel (25%), aluminum (10%) and hundreds of other products from China and the EU are in the news every day. And, the EU threatens import tariffs on $3B worth of US goods, primarily targeted at Rust Belt states with a tradition in manufacturing.
Well, if you were hoping that this is a political post where I render my opinion, guess again. What I am trying to outline here is what manufacturers and their customers can do with their data to counteract the tariffs negative consequences.
The good news first – most tariffs, which have been contested at international bodies such as the WTO have not stayed in place for more than four years.
Then again, four years still sounds like a long time. Many supply chains get planned out and committed to for years in advance, e.g. automotive OEM. Shipping volumes, pricing and penalties are agreed upon years in advance to allow for more certainty as, for example car models, take years before they get released to the consumer market.
Consequently, sometimes whole factories or at least new assembly lines must be designed and built; casting machines purchased, shipped, installed; operational control systems purchased and set up; inventory space allocated; workers hired and trained; shipping and maintenance contracts set up, etc.
While the focus is on the resulting domestic spike in metal prices and the impact on consuming organizations, such as construction, petrochemical, automotive and aerospace, even industries like healthcare, communications, robotics and IT will be impacted as hundreds of line items have been put on the ever-expanding tariff list by the US Trade Representative (USTR). Anything from a microprocessor to an MRI machine will be affected. Guess what; healthcare cost, the price of consumer electronics as well as hosting cost in your AWS cloud will likely go up.
In addition, unemployment will most likely increase, especially in sectors directly and also indirectly affected by these price hikes and resulting slump in demand, and there is renewed pressure to make up the tax revenue shortfall with new taxes. It will also affect smaller, indirectly related businesses more than Fortune 500 companies.
Even if these tariffs do not become implemented in full force or long term, the uncertainty attached to them creates planning nightmares for decision makers.
What can be done?
If you do not know where your known (and currently unknown) customers and suppliers produce, stock, ship from and bill to locations are, master those locations and govern them to ascertain potential mitigation options. The same is true if you don’ t know who currently owns them and what they make.
If your cost rolling is highly dynamic, spans multiple departments and applications from product inception to first shipment, catalog these systems and ensure that not only A movers or 10% plus/minus outliers are detected and remediated.
If you are trying to assess and duty implications on buying (and selling) from outside your domestic market, ensure that your global and national HS codes are properly structured and aligned with your catalog and supplier files.
Ensure you are 99.99% certain what items in your catalog you make vs buy because these things tend to change when regional planning teams take advantage of cost deltas. Also, it may open the opportunity to become an arbitrator.
If you do not have access to commodity trading and shipping data to forecast prices allowing you to improve your negotiating position when considering M&A or just another order with customers and suppliers, invest in big data and analytics.
The same is true if you are looking at selling into new markets. Rather than relying on the usual go-to tactic of working through distributors to understand historical prices, investing into a data analyst team complemented by a local research firm may be a more cost-effective option long term.
This is by no means an authoritative and exhaustive list but intended to get you thinking on what you can do with minimal effort, when compared to shutting down lines, reducing your workforce, or dropping prices.
In general, your options can be categorized into two areas: defensive and offensive moves.
Let’s look at defensive moves first as they are often the first, knee-jerk reaction:
- Buy local, pay more for it and pass on the cost increase
- Continue to make and buy from overseas and raise prices to pass on tariff cost
- Reduce production, SG&A to accommodate the slow-down in demand
- Find suppliers outside of the geographic tariff scope (note: the same interest by your competitors just lifted their price level)
Here are the offensive moves in increasing order of complexity:
- Reformulate your affected products’ composition to soften the impact of the tariff
- Work with suppliers to open/shift more production to geographic unaffected areas
- Move domestic production overseas to compensate for tariff impact
- Stay/go overseas for production and sell to unaffected markets
- Become an arbitrator for the tariff-(in)directly affected products
- Acquire a competitor to soften the impact of the tariff with economies of scale
- Become a raw material supplier (vertically integrate) to take advantage of being outside of the geographic tariff scope
Naturally, these options may not be available to all organizations as they are financially and skills-constrained, their product composition is highly regulated or cannot be easily reformulated due to performance deterioration affecting operations or safety.
However, to have these options even available, you should invest in your data management and analytics technical capabilities and practices. To evaluate the cost-benefit of buying local instead of overseas you should have a clean, unambiguous raw material and finished goods catalog attached to a high-pedigree supplier catalog. This means, no frequent one-time supplier accounts, a well-understood and formulated SKU encoding system with like-for-like and lower-grade alternatives across the globe using 1WorldSync GDSN. If not, get one.
What is your company doing today to deal with the tariff implications? What are your strategies? Is using your data part of this equation and if so, do you have confidence you have all the data you require, its pedigree and a way to leverage it? Our research underpinned by third party benchmarks from the likes of Aberdeen Research shows that any organization has about a 50/50 chance that at best 34 percent of their item data has no data quality issues. Imagine using this data pool to make predictions and decisions on tariff impact.