Steel Tariffs, Trade Wars And The Coming Supply Chain Disruptions

How domestic manufacturers will prepare for the coming changes

3Apr

Steel and aluminum tariffs have taken analysts and observers by surprise due to their sweeping and sudden nature, and the long-term impact – and what exclusions may eventually be put into place – remains to be seen. Most economists agree that in today's global economy, punitive tariffs and the trade war that will ensue will come to no good end.

Outside of the political question and the macroeconomic repercussions, the more pressing issue to domestic corporations is how they will cope with the disruptions in supply chain that will inevitably follow. Influencing politics is a tricky business for corporations, and success is usually very limited. The bulk of their attention will go towards creating new strategies and tactics for dealing with the fallout – limited access to raw materials from overseas sources and higher costs from domestic sources, decreased access to foreign markets, and decreased demand overall for finished goods. Dramatic upheavals in global supply chains will pose problems, as relationships will have to be re-thought, pricing re-negotiated, and new shipping and transportation deals forged. The latter point will be especially difficult, as we are already seeing a critical shortage of over-the-road transportation, which is likely to get worse over the next few years.

A challenge and an opportunity

Whenever a singular event – in this case new tariffs – cuts off supply to the product needed to build, the results can be devastating without the right planning and relationship-building. "The concept of risk comes into play in wanting to have an appropriate spread, yet with an appropriate concentration of suppliers," said Steve Bowen, Chairman and CEO of Maine Pointe, a global, implementation-focused consultancy specializing in procurement, operations and logistics. "In many cases, part of the reason I say they have an opportunity to mitigate costs is because in many cases companies haven't done as excellent of a job as they could have in partnering with the supply base, and having a risk-managed supply base." In his book, "Total Value Optimization: Transforming Your Global Supply Chain Into a Competitive Weapon," Steve describes how corporate leaders are under pressure to deliver lasting performance in an environment where competitors are global, and profitability is at risk as supply chains undergo massive shifts.

"It's going to take time," said Bowen. "Tariffs can affect the cost structure of companies, especially companies who have shifted their mode of sourcing steel and aluminum to build whatever they build heavily to foreign entities. That's a shift that will be very difficult to unwind, and it will be difficult to mitigate the immediate cost impact from the tariffs."

Those heavier costs that domestic, steel- and aluminum-consuming manufacturers will face present enormous challenges, but may trigger some opportunities as well, if they are willing to re-evaluate their business models and existing relationships. "That's the single biggest challenge they have – thinking creatively about that with the domestic supply base, who actually sees this as a potential opportunity to invest and develop, redevelop, or expand existing volumes," said Bowen. "There are opportunities in a new partnering approach where some of the cost escalation can be mitigated. But that's not going to get done by a purchasing agent talking to a sales rep from a steel company. That's going to get done at a C-suite to C-suite level, to develop a much more strategic category plan for that consuming entity which will cooperate with one or more manufacturers."

Steel consuming manufacturers face higher costs and supply chain disruptions

Two types of domestic manufacturers will bear the brunt of the tariffs: Steel producers, and steel consumers. Domestic steel mills will see an uptick in orders – but manufacturers which consume steel and aluminum far outweigh the producers, and those manufacturers are in for a hard time. "It's dependent on the type of manufacturing we're talking about," said Bowen. "It's the cost quantity of the steel or aluminum to the total product cost. In something like canned beer, the increase on a per unit basis is relatively small and insignificant. But when you start talking about things like washing machines and cars and other heavy equipment, now you will certainly start to see an escalation in cost."

It's not all gravy for steel manufacturers

While manufacturers who consume steel and aluminum are sure to face some difficult challenges, manufacturers who produce steel have been firmly behind the tariffs. But a sudden increase in business is sometimes just as difficult as a sudden decrease, and domestic steel producers may not be up to the challenge. A significant shift from offshore to domestic steel mills will cause significant disruptions to those mills, if they are not able to quickly ramp up to meet the demand. "We're talking about a process that could take a few years," said Bowen. "Some of the idled plants and capacity will take a while to get back up and running. My other concern is steel mills over-promising, which could be a real challenge for them in terms of meeting true demand with their existing capacity."

Another big issue that will face steel producers is ramping up production in a tight labor market, where some of the skill sets associated with production and maintenance of specialized production equipment are becoming more scarce as the population ages. "There will be a need to think creatively about that from a perspective of attracting younger individuals, but more importantly in the short term, how do you attract back some of the talent that has either retired or gone elsewhere, back into this arena?"

A disproportionate impact for smaller manufacturers

Larger steel- and aluminum-consuming manufacturers may feel less of an impact, as their sheer size and volume of production gives them greater ability to demand concessions and better deals, and an ability to absorb some of the additional costs. Smaller manufacturers on the other hand, are likely to feel a disproportionate impact, because they lack the purchasing power, or may be just in the early stages of building out their global supply chain and do not yet have relationships in place.

Those smaller companies may also be hampered not just from the materials costs and tariffs, but also because they have fewer dollars available to invest in things like process automation, which could help mitigate the total end cost of the product.

Those small manufacturers won't be completely left out in the cold though, according to Bowen. "Here's one thing about small companies – it is a common belief, and to some extent true, that the more you buy the more leverage you have, and the better price you pay. That is not necessarily our most common experience. In fact, I would tell you that we see just as many smaller companies who have excellent strategic procurement capability, and are buying at prices that are equal to or even less than some of the large companies, because those large companies will not take any of the risks that smaller companies will take. The price you pay is not always about the volume. It's about the strategic and tactical approach that is taken in terms of the relationship with the supply base they have. When you come to excellence in execution, that's a leveler of the playing field that is often overlooked."

It will take time, new strategies, and new relationships to make it work – but success is seldom driven by continuing to do the same thing, the same way, year after year. Success is driven by change – and politics aside, manufacturers will be called upon to innovate.

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