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  May 23rd, 2018 | Written by

The Chief Procurement Officer’s Playbook…

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  • Many subcomponents and finished goods made in China have Chinese aluminum.
  • Steel and aluminum tariffs cost billions to consumers and companies.
  • The Department of Commerce banned American companies from selling parts and services to ZTE.

When President Trump made good on his campaign promise to impose tariffs on steel and aluminum imports back in March, he did so with a call for free, fair and smart trade. Many of us working in the strategic sourcing and supply chain industry mused that the policy would do little to correct trade imbalances with China and other competitors, but instead, mostly impact our NAFTA trading partners, Canada and Mexico.

While the landscape continues to change every day, the biggest impact, so far, was the initiation of a trade war. In early April, China released a list of retaliatory tariffs that would impact $50 billion in American products ranging from soybeans to pork. Trump responded that the administration would consider an additional $100 billion in tariffs and restrictions on Chinese goods.

Although mainstream Chinese media claims that Trump’s steel and aluminum tariffs won’t hurt businesses after the initial anti-dumping and anti-subsidy squeeze, sources in the country say Chinese business leaders worry about the ripple effects of a potential trade war. Will other countries, especially European countries, impose their own tariffs in exchange for exemption from Trump’s policies or as a protective measure against extra Chinese capacity flooding their markets? While the US imports only a small amount of raw aluminum from China, many subcomponents and finished goods made in China have Chinese aluminum.

The steel and aluminum tariffs, alone, will result in billions of dollars in additional cost for consumers and stand to impact many core industries here and abroad. And with each escalation, we can expect more tariffs and restrictions signed into effect. In order to meaningfully address the trade imbalance with China, the Trump administration will need to focus on a broad range of corporate and consumer goods.

For example, last month the Department of Commerce banned American companies from selling parts and services to ZTE, a Chinese cell phone manufacturer, for the next seven years. As a result, ZTE, which currently ranks seventh among Android-based manufacturers, may no longer be able to use Google’s Android operating system in its mobile devices moving forward.

In stark contrast to minor grumblings about the initial tariff announcements, the ZTE sanctions triggered huge waves of patriotic rhetoric among the Chinese public and on social media. Much of the heated discussion centers on how reliant the Chinese are on US chips, calling into question their prosperous semiconductor industry.

Some opinion leaders even suggested nationalization, calling on the Chinese to “nationalize chips design and production AT ALL COST.” Despite the zealous call for independent development, most business leaders in China instead focused on more immediate and pragmatic actions needed to address the ZTE ban – for example, reviewing supply chain risks, diversification, compliance (especially with US laws) and sustainability while also considering the need to rethink R&D and other core competencies.

While a potential agreement to relax sanctions and tariffs on both sides is on the table, most agree that it is far from a done deal, with many in the administration sharply divided on the best path forward.

Supply Chain veterans will remind you that we have been here before. In 2002, President Bush placed temporary tariffs of between eight and 30 percent on imported steel. Chief procurement and supply chain officers rallied then to manage the costs and transformation that would eventually cost the US economy 200,000 jobs. Today’s leaders will need to do the same, but in an economy that is more interdependent and with different regional supply positions than early 2000.

Our team of supply chain thought leaders, many of whom are former CPOs, have developed a process for supply chain officers to act on, immediately, to mitigate cost increases and job loss, and manage the overall impact of the tariffs on their organization.

First, review contracts with a keen eye towards timing, trade terms and country of origin. Note that tier 2 and tier 3 suppliers will be important for major components in product companies. Based on this evaluation, supplier action plans can be developed. This will seem familiar to many colleagues who completed similar activities during the Fukushima Daiichi nuclear disaster of 2011 and the Indonesian tsunamis of 2004.

Evaluate current forecasts for future demand, and make sure suppliers have purchase visibility. Make sure to identify any foreseeable demand increases. As the impacts of the tariffs take effect, markets will get tight where local supply exists. This will require taking a longer term view that goes beyond the 12 month deal. The more accurate and more effectively communicated the company’s needs are, the higher likelihood its purchase requirements will be moved to the front of the line.

Consider manufacturing levers to reduce exposure. Shift production of finished goods to low cost countries where possible, or import higher value finished goods (e.g., assemblies). Evaluate the current percentage of US base versus foreign production to help mitigate risk of supply shortage.

Align top leaders inside and outside of strategic sourcing with leaders from key suppliers. It is never too late for supplier engagement. Take this as an opportunity to create open communication and expand the company’s opportunities. If supplier engagement has not historically been the company’s strength, it is unlikely this tact will help in the short term, but it will absolutely support future strategic relationships. For multi-nationals, begin warming up supplier relationships in other countries should you need to shift production offshore.

Evaluate the risk to the company’s products and services. Develop “what-if” models. Build a risk matrix. Truly understand the financial risk associated with existing and potential future trade policies. It is increasingly important to understand the laws of the land for your supply base to complete this activity.

Communicate to leadership and take action. Identify risks that can be mitigated, and build plans and cross-functional teams to execute required changes.

Acting with urgency and with the required fact-base will be key to success. Strategic sourcing will be relied upon to understand the financial risk and to recommend the proper levers to adjust in what promises to be the “new normal” in global trade.

Geoff Pollak is a managing director with Alvarez & Marsal with more than 25 years of experience leading operations, sourcing, purchasing, and sales and demand planning for global companies. Eric Wang, a managing director with Alvarez & Marsal, leads the firm’s China restructuring and performance improvement practices. Matt Stanfield, a senior director with Alvarez & Marsal Corporate Performance Improvement, also contributed to this article.