As a wave of new US tariffs went into effect September 1st, industries that are directly and indirectly affected are developing and implementing strategies to mitigate the impact these geopolitical changes will have on product costs, customer pricing and profitability. The strategies that companies are using include country of origin adjustments, product exclusion requests, reclassifications, foreign trade zones and bonded warehouses, and others.
However, many companies are dealing with their supply chains asking for higher costs that cannot be passed on to customers in the short term. This presents an opportunity to take additional preemptive action in the following three areas to mitigate the impact of tariffs:
- Evaluate components of product costs and product margins.
- Review existing supplier relationships.
- Review pricing and communicate with your customers.
1. Evaluate Components of Product Costs and Product Margins
Identify those products, parts, and materials affected by the tariffs and determine its related financial impact on product costs and margins. Once you’ve modeled and understand the financial impact of the tariffs on product costs and margins, determine if there are costs that can be absorbed by the company and costs that can be offset or covered. In other words, are there efficiencies or expense reductions elsewhere that can offset the impact of the tariff increase. Also, have engineering review Bills of Material (“BOM”) of affected products to determine the feasibility of replacing those components on the tariff list with components not on the tariff list.
Engineering and manufacturing operations should also evaluate opportunities for insourcing certain processes previously outsourced, such as assembly of items it can do in its own factories.
2. Review Existing Supplier Relationships
It is always a best practice to have alternate sources of supply available. In this case, this is a prime opportunity to evaluate existing supplier relationships and establish a source of supply in more than one jurisdiction. This gives the company greater flexibility and readiness for quick sourcing changes in the event of new tariffs.
When evaluating supplier relationships, do not just take inventory costs into consideration. Include logistics costs, transfer pricing ramifications, as well as the lead time required to ramp up production with a new supplier. Another consideration is to renegotiate supplier terms to lock in any favorable pricing and engage in forward buying on essential materials before additional price increases take effect.
3. Communicate With Your Customers and Review Pricing Options
As you’re navigating through the various strategies mentioned, it’s important to maintain communication with your customers so they understand the lengths and depths of your efforts to manage the impact of these tariffs on your operations and on existing pricing. If price increases are under consideration, having an in-depth understanding of your competitive positioning in the market (premium priced vs. commodity priced product), price elasticity and the product margin impact of the tariffs, among other factors, will help inform what your customers are willing to accept. If possible, consider using a phased approach to price increases.
To summarize, a variety of strategies are currently being employed to mitigate the impact of the recent tariffs on product costs, pricing and profitability. Depending on your situation, key strategies to help mitigate this impact should include:
- Identify those products, parts, and materials affected by the tariffs and understand the financial impact of the tariffs on product costs and margins
- Determine if there are costs that can be absorbed and costs that can be offset or covered by expense reductions elsewhere
- Have engineering review the Bill of Materials of affected products to determine the feasibility of replacing those components on the tariff list with components not on the tariff list
- Have engineering and manufacturing operations evaluate opportunities for insourcing certain processes previously outsourced
- Establish a source of supply in more than one jurisdiction
- Include logistics costs, transfer pricing ramifications, as well as the lead time required to ramp up production with a new supplier
- Maintain communication with your customers throughout the process
Need Manufacturing Operations Finance Support?
If you’re interested in leveraging 8020 Consulting’s expertise in addressing these new tariffs, or if you need any additional support, we do offer manufacturing finance consulting services. You can learn more in our free service sheet:
About the Author
Steve is a CPA with more than 30 years of diverse financial leadership experience, including positions as CFO, VP of Finance, and Controller at emerging growth and middle-market companies. He is an Ernst & Young alumnus with industry experience that includes manufacturing, distribution, healthcare services, entertainment, renewable energy and precious metals. As a consultant, Steve has implemented critical financial structures and best practices for accounting and operational controls, developed fully integrated financial models, spearheaded turnaround and restructuring efforts, and lead M&A transaction support and due diligence efforts. Prior to joining 8020 Consulting, Steve’s positions included CFO for a precious metals firm and Corporate Controller for a publicly traded distributor. Steve holds a Bachelor of Science in Accounting from Loyola Marymount University.