Addressing Supply Chain Risk During Trade Wars

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How the current trade policy/tarichanges could impact the world’s supply chains, and five things procurement should be doing now to lessen the impact on their companies.

By Bridget McCrea

To say the current trade policy environment was in turmoil would be a major understatement. Of keen interest to any procurement professional who sources goods from overseas trading partners and customers, issues like renegotiated trade agreements, steeper tariffs, and the thought of a full-blown trade war could all impact those transactions.

Here’s how things may play out over the next few months:

The transportation environment may be impacted. According to Fitch Ratings’ latest U.S. Transportation Trends special report, recent trade friction between the United States and China and the prospects for higher interest rates are “not likely to affect growth for the major transportation segments for the foreseeable future,” wrote Patrick Burnson in Logistics Management.

Senior Director Emma Griffith added that renegotiated trade agreements and steeper tariffs are likely to affect import/export volumes overall, with some U.S. ports possibly feeling the effects more acutely. “Ports that handle large volumes of steel and aluminum are likely to bear the initial brunt of the new tariff policy, though the full effect of these changes will take years to fully materialize,” Griffith told Logistics Management.

Ocean freight carriers are nervous. On the transportation front, ocean shipping could feel the brunt of the impact of any trade war. Now that China and the U.S. have threatened to swap 25% tariffs on a range of goods worth a total of about $100 billion, the maritime industry is worried that shipping volume will fall along with profits.

“It’s going to hurt container lines,” JOC’s Mark Szakonyi told CNN Money ,warning that container ships sailing from the U.S. to China could get stuck

with partially empty hulls and move air back to Shanghai. Last year, for example, the U.S. shipped nearly 57,000 containers worth of soybeans to China, but with a 25% tariff looming, it’s unclear if as many soybeans will travel a well-worn route down the Mississippi and out the port of Louisiana headed for China.

Asian economies could be hit hard. In U.S./China Trade Threats Likely to Slow Global Growth , Reuters’ John Kemp wrote about how tensions between the U.S. and China are likely to have an adverse impact on global growth even if the threatened tariffs are never imposed. “Conflict between the world’s two largest economies is creating significant uncertainty for businesses that threaten their global supply chains and future investment plans,” Kemp noted.

Of particular interest to electronics buyers are the Asian economies, which could face the brunt of the impact of the trade dispute. South Korea, Taiwan, Vietnam, and Malaysia, all of which export goods used in the production of items that China then sells to the U.S.—such as machine parts and components for communications equipment—are all vulnerable, Fitch Ratings’ Steven Schwartz told the South China Morning Post.

5 Things to Do Now

Trade policies may be in flux right now, but that doesn’t mean procurement professionals can’t begin shoring up their supply chain strategies and preparing themselves for what’s around the next corner.

“In a trade war, there will be predictable direct and indirect winners and losers,” wrote CFO’s Steven Minsky. “Proactive risk assessments are essential to landing on the right side of the fence.” In How Procurement Organizations Can Mitigate Risk, Manage Costs Amidst a Trade War,Taras Berezowsky outlined some key steps that procurement can take now,

including:

1. Monitor the news (and the sentiment of the responses to that news), crowdsource some predictions, and run some advanced analytics on all this data to determine the probability of something actually happening—and sticking.

2. Utilize sourcing optimization to “overlap” your sourcing and supply chain network design, in effect tackling the supplier-related challenges inherent to this quickly evolving trade climate.

3. Evaluate different possibilities and costs associated with it. For example, look at Chinese suppliers versus suppliers in other regions. “Then, you can even begin to look at various constraints you might apply against your own requirements,” Berezowsky pointed out.

4. Use spend analysis to understand what you’re buying, from whom, in what quantity, and all the data associated with it. “Ideally,” Berezowsky wrote, “if you’re buying from abroad, understanding total cost and the various terms, and having all the other harmonized classification data in one place, is extremely valuable.”

5. Collect multi-tier information and maintain good master data on all of your suppliers. This data will help you better understand your organization’s exposure within the extended supply chain and prepare accordingly.

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