The Perfect Manufacturing Storm: 7 Ways to Weather It
Everything from changes to foreign trade policies and new tariffs to military actions threaten to disrupt smooth operations in the manufacturing sector. Already, your company may be coping with the rising costs of raw materials and subsequent pushback from customers.
In the current political climate, just about the only thing manufacturers can be certain about is continuing uncertainty. Everything from changes in foreign trade policies to new tariffs, to military actions, threaten to disrupt smooth operations in the manufacturing sector.
To complicate matters, there's no clear timeframe for when (or if) events will transpire. Many manufacturers are already coping with the need to increase prices due to the rising costs of raw materials and the inevitable pushback from many customers. This may have resulted in your company looking for cost-effective alternatives or making certain concessions.
So what's the forecast? For most manufacturers, it's a “wait and see” approach. However, you can take several steps now to weather the storm and minimize potential economic damage. These steps can also help position your company to benefit from any favorable conditions that may arise.
Review the following to determine if they may benefit your business.
1. Find an exclusion. Your company may be eligible for an exclusion retroactive to the date a tariff becomes effective. Contact the U.S. Commerce Department to request exclusions for aluminum and steel tariffs and the U.S. Trade Representative for China tariffs. The Commerce Department has been willing to provide exemptions from the 25% tariff on steel and the 10% tariff on aluminum imposed in 2018.
2. Assess imports. Whether a product will be affected by a tariff depends on its classification. Therefore, misclassifications in borderline cases can result in unnecessarily higher costs. In addition, if imports of materials are currently subject to a low tariff or have no tariff, you might be able to stockpile those materials now.
3. Explore alternate sources. You might be able to avoid disruptions by tariffs if you can find alternative sources for materials and be prepared to move quickly when warranted. This may include modifications to existing systems and processes to accommodate new business relationships. Have your professional advisors guide you concerning the logistics and legalities.
4. Get into “the zone.” One way to cut costs may be to take advantage of free-trade zones (FTZs). These are areas where goods can be landed, stored, handled, manufactured or reconfigured, and re-exported under specific customs regulation. Generally, these goods aren't subject to customs duty.
In a free-trade zone, which is generally organized around major seaports, international airports, and national frontiers, your business can produce products and export them to a U.S. customs territory or foreign destination, thus bypassing potential tariffs.
5. Join the club. Be aware that you're not facing these complex issues alone. To share thoughts and possible solutions, participate in trade compliance groups that focus on issues such as inventory and supply chain strategies, resource alternatives, and multiple data sources. Consider how your association can present a united front.
6. Negotiate and renegotiate. Even if the goods your company produces aren't directly affected by tariffs, you may be hurt indirectly by extra costs associated with materials like steel and aluminum. Take this into account when negotiating sales contracts. For instance, build higher supplier costs into new customer agreements.
For agreements already in place, see if the other party is willing to renegotiate Then consider a long-term arrangement that provides pricing you think you can live with. Incorporate clauses into the contract that provide protection if additional tariffs are imposed.
7. Analyze profit margins. A thorough analysis is necessary to help prepare your company for possible tariffs and rising materials cost. This involves deciding which costs your firm can absorb and which ones you can pass along to customers.
To help offset unexpected expenses, locate opportunities for efficiencies or cost rationalizations that customers will be able to tolerate. If a customer has an existing contract which provides price escalation clauses or limits, further renegotiation may be required.
In any event, it doesn't make much sense to just sit back and wait for the other shoe to drop. Be proactive about protecting your manufacturing company's interests.
Regardless of what actions you choose to take, it always pays to be proactive rather than sitting idly by and trying to cope after the fact.