Supply Chain Optimization: 5 Ways to Navigate Tariffs and the Trade Wars

August 19, 2019

Tariffs are creating a lot of uncertainty for businesses, and their customers.

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Here are five things you can do to offset impending tariff costs.

The news on tariffs has overtaken most of our inboxes and news notifications. Information seems to change every day—making it difficult to keep up, and even more difficult to know what to really expect … especially if you’re a retailer.

Just a few days ago, the looming September 1st deadline was delayed to December 15 for some of the categories—an attempt to mitigate the impact on businesses and consumers during upcoming sales events like Back-to-School (BTS) and Q4 peak (Black Friday and Cyber Monday (BFCM)).

But not all were spared. According to the Wall Street Journal, apparel, electronics, watches, and sporting goods from China will still be hit with 10% levies in a couple of weeks.

Managing director of the Cowen Washington Research Group, Chris Krueger, stated, “It is not entirely accurate to label [the delay in tariffs] a de-escalation,” likening it to saying, “I was going to break both of your arms on Sept. 1—now I’m only going to break your elbow.”

What we know about tariffs so far #

The current trade wars are the largest multi-pronged trade action since the Great Depression during the 1930’s Smoot-Hawley Tariff Act, which sought to protect the American manufacturing industry.

This time, the tariffs are meant to protect American jobs, and improve the trade relationship between American and China. However, in 2018, the U.S. imported $539.5 billion in goods from China; the U.S. exported only $120.3 billion in goods to China.

The new tariffs appear to have created a slowdown in trade—weakening exports for American manufacturers. Both American businesses that rely on imports and global businesses that rely on American exports are faced with figuring out how to keep operations moving while also keeping costs as low as possible.

Originally, the tariffs aimed at protecting American jobs. But so far, the benefits that were promised do not outweigh the implications of implementing more tariffs—especially for businesses outside the agricultural industry.

In the last 12 months, additional tariffs have been added to solar panel and washing machine imports, steel and aluminum, and now consumer goods, such as toys, technology, footwear, and apparel. For the September round of tariffs, $111 billion worth of imports are included, though less than 25% of those imports come from China. However, of the categories that were delayed to December, 87% of that round are produced in China.

The latest round (consumer goods) is the first round to directly impact buyers at the consumer-level. The China 301 List 4 import tariffs were released and can be found below.

  • List 4A: Set to go into effect on Sept 1, an additional 10% tariff will be applied to items that fall into these categories
  • List 4B: Products that fall into this second list will have an additional 10% added to tariffs on December 15
  • Chinese exports that are NOT covered in the September or December round of tariffs: Pharmaceuticals, some medical equipment and organic chemicals, and items unders special provisions (roughly only $19.8 billion of Chinese goods)

For many retailers and brands, that means rethinking their supply chain. More and more, we’re hearing about how companies are actively trying to shift their supply chain operations to different countries to avoid the fees on imports from China. But, reconfiguring your supply chain is no small feat.

So, as businesses face another round of additional fees for imports, how can retailers and brands stay confident and profitable, even in the face of uncertainty? A few ideas below.

Offsetting impact of tariffs in supply chain, distribution, and merchandising #

There’s no way to know if, how, and when more tariffs will be announced and implemented, but there are things businesses can do to prepare for the unknown.

  1. Identify best-selling inventory and prioritize those sales
  2. Forward buy popular imports and store those ahead of demand
  3. Perform a network analysis to determine the most cost-effective network
  4. Look to expand partnerships
  5. Embed increases into product pricing

1. Prioritize best-selling inventory and "hero" products #

For many businesses, avoiding tariffs on Chinese imports isn’t an option. Take shoes for example. Seventy percent of shoes sold in the U.S. come from China. Even though Nike has gradually been moving its manufacturing to Vietnam and Indonesia, not even it is immune. In fiscal 2018, 26% of its shoes were still produced in China. If Nike isn’t able to fully avoid China, can anyone?

One way to reduce costs is to focus on your best sellers. Identifying your top-performers for the upcoming season enables businesses to optimize for importing their fast-moving SKUs for the high-volume holiday season.

Using last year’s data, or data from new releases, buyers can prioritize their best sellers for the short term—focusing on a certain set of products and importing them, while building a longer-term strategy to better manage the cost of producing and importing everything.

The upside

By focusing on your best sellers, you can add a little more certainty to sales forecasts around consumer demands for holiday shopping.

The downside

Optimizing for only your best sellers could alienate sales and the amount of selection to deliver to your shoppers.

2. Forward-buying popular inventory to store ahead of demand #

Retailers and brands can offset tariff costs by forward-buying inventory ahead of tariffs being implemented. Once tariffs are in place, forward buying can also help consolidate shipments and costs.

Retailers and brands that are expecting tariffs in the coming months, can stock up on inventory before costs are impacted. This requires having enough capacity, or using solutions like on-demand warehousing to add capacity to their networks, to store larger shipments of goods.

One Flexe customer looking to avoid the 30% tariff on solar panels, was able to forward buy a large quantity of materials and store them within the Flexe network. Not having an adequate U.S. warehousing network, they turned to Flexe for a solution. Not only was Flexe able to procure capacity for 1,500 pallets on short notice, we were also able to source three locations in competitive markets that helped this company strategically position their inventory for outbound shipments.

Ace Hardware had a similar issue when the impending 25% tariff on steel was announced. Ace has worked with Flexe on various distribution projects for years, making it incredibly easy to get started when inventory challenges arise. Once the tariffs were announced, Ace reached out to Flexe to help manage the inventory they were forward-buying. Not only were we able to secure capacity for Ace, we provided a facility that provided value-add services based on the context of the project: The inbound shipments were floor-loaded containers. The Flexe warehouse provider then sorted the shipments into thousands of pallets for Ace, enabling them to reduce costs, save time, and better manage smaller outbounds from the facility into their distribution network.

The upside

With forward-buying, retailers can ensure they have more of their inventory stateside without being impacted by tariffs.

An additional upside to forward-buying popular SKU sets is consolidating freight costs with larger, but fewer shipments. Importing more inventory less frequently, and using on-demand warehousing to help offset the burden of storage, reduces costs spent on recurring shipments.

The downside

With forward buying, there’s less opportunity to amortize the costs of goods over time and across multiple shipments since you’re buying more goods at once. However, there are other opportunities to offset costs down the supply chain if tariffs are the biggest concern.

3. Perform a network analysis to identify the most cost-effective network #

Another option for optimizing your supply chain for upcoming tariffs is to take a step back and conduct a network analysis. A network analysis provides detailed scenarios around network potential and outcomes; for example, determining the right-sized network if your goal is to add more variable capacity across North America, improve delivery times for eCommerce orders, or both.

With a network analysis, you can expose more opportunities to store and manage your goods. You can identify key markets in which you can place goods closer to customers, so you’re better able to store and distribute orders—with lower transportation costs— without incurring long-term fees or contracts.

Expanding your network with on-demand warehousing doesn’t mean you’re entering into long-term fixed cost investments that leave you with too much space. It’s the opposite.

After conducting a network analysis, Flexe can help you identify in which key markets you can add locations and help you find the exact amount of capacity you need. Because it’s a transactional model, you won’t be stuck paying for space and resources you don’t use.

The upside

You can create a flexible network that makes it easier to store goods in the U.S. and avoid import tariffs, without having to use complicated, traditional methods for procuring warehousing and fulfillment resources.

The downside

If this is a viable option for your business, you have to act fast. Getting up and running with Flexe takes only a couple of weeks, but the runway for the holiday season and tariffs is getting shorter every day. Get in touch.

4. Look to expand partnerships #

If you’re a retailer or a brand that has established wholesale partnerships with retailers, now might be the time to leverage those relationships to take on more inventory. Retailers that buy from brands that import goods are typically responsible for covering import costs and/or sharing the burden.

If you do not have established partnerships, pitching pop-up shops within retail stores could offset some of the burden of getting your goods into the U.S. and in front of your ideal customers.

The upside

Larger retailers will feel less squeezed by tariffs and can help alleviate some of the economic burden.

The downside

It may be too late to negotiate new terms with retailers this close to the holidays. Additionally, because retail buyers typically absorb the burden of import fees and because no one seems to know when that’s going to happen and how much it’s going to be, it will be hard to accurately forecast terms with retailers this far in advance.

5. Embed increases into product pricing #

Our least favorite option, but certainly a reality we’re all going to face. Most news covering this round of tariffs positions it as the one that’s supposed to hit closest to home: Our own wallets. Because this round of tariffs is on everyday consumer goods, it’s very likely that some duties will have to be embedded into the cost of goods for retailers and brands to stay afloat.

In footwear, there are estimates that canvas shoes could jump from $49.99 to $58.69, hunting boots from $190 to $222.27, and running shoes (think New Years’ Resolutions) from $150 to $187.50.

The upside

By offsetting costs to consumers, businesses won’t impact their margins as drastically as if they were to absorb the costs themselves. Additionally, by using on-demand warehousing, retailers and brands can offset costs by adding capacity to their distribution networks that ensure there’s a location for goods to land once they are imported and also reduce last-mile transportation costs.

The downside

There’s a lot at stake here for both American businesses and consumers. For consumers, the obvious one is that we’re going to have to pay more for both the goods we want and the ones we need.

For retailers and brands, customer loyalty could definitely be jeopardized as more customers become willing to abandon a brand for a more affordable option (think Amazon, Walmart, and Target).

It’s unclear how the megaretailers are thinking about tariffs, but some assume it will be easier for them to manage because of their global reach and access to resources—they have what it takes to keep operations moving forward. On the other hand, others note that many of the purchases on Amazon, for example, are discretionary and not necessarily everyday essentials. If there is an economic downturn as a result of these trade wars, it’s likely all will feel it—even the giants.

What’s next? #

No matter what your strategy is for managing (and hopefully mitigating) the impact of tariffs on your business, keep on-demand warehousing in your back pocket.

Tariffs are the kind of supply chain disruption that can introduce a lot of problems for your business. With Flexe, not only do you get access to a simple, but powerful technology platform that connects you to one of the largest networks of warehouse providers in North America, but you also get a bevy of logistics experts that are ready, prepared, and willing to help.

Whether it’s truly an “Oh-sh*t” moment or a more strategic play, get in touch and we’ll see how we can help you excel, even amidst all this uncertainty.

And if you’re interested, here are a couple of additional considerations to avoid tariffs:

  1. Look to Foreign Trade Zones for assistance. FTZs were established in 1934 to help encourage international trade. These regions are exempt from tariffs. Though space is extremely limited, especially now, you can find out more information here.
  2. Apply for an exclusion or exemption. Again, the outlook here is long. Not many have reported having success with exemptions, unless you can prove the tariffs will create significant economic harm to your business. More information available here.
  3. Get creative. Columbia Sportswear has an entire department and strategy dedicated to avoiding arbitrary tariffs on apparel. Learn more about how putting a pocket at the bottom of a women’s shirt adjusted their tariffs from 26.8% to 16%. It’s a whole thing.

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