For the last 25 years I have curated the premise that you don’t need to have a world-class supply chain, just one better than your competitors. In today’s world, and particularly in times of disruption, it’s not just the products and the pricing that compete, but your supply chain that competes and differentiates. While everyone is concerned about the impact of tariffs on inputs and in turn, pricing. The arguably more painful reality is that availability and working capital management will be more important in the coming months. After all the price isn’t important if you don’t have the product to sell and ship. You can get through the Tariff Crisis Intact AND prepare yourself for the Post Tariff Crisis Future.
“Suffer now and live the rest of your life a champion.” – Muhammad Ali
When most Americans think about the current tariff crisis, their focus is on dolls, eggs, cars, and phones. But if we have learned anything from Covid, supply chain disruption has costs and implications that extend well beyond what’s in the news today. While cars are a great example of supply chains that pass across borders multiple times during manufacturing, nearly all of my clients, past and present, have raw materials, WIP or finished goods that move across borders multiple times. Slight tears or bubbles in these often delicate supply networks have substantial cost and availability implications that may not completely manifest themselves for months or years to come.
The best example is post-Covid when goods began to move through supply chains again. New product cost and pricing structures took months to ripple their way through to the products that you and I bought from the retailer. The vast majority of both consumer products and manufacturing companies in the US use some form of standard costing as a basis for their profitability and pricing analysis. This method can be slow in responding to and anticipating cost increases/fluctuations. Many companies rerun their standards on an annual basis, so in retrospect, the fact that the new cost structures took many months if not years to manifest themselves was, in my humble opinion, the primary reason for the explosive inflation of 22, 23, and early 24. It was just the delayed bill coming due. The question of if the Fed rate hikes were the appropriate reaction to that symptom is a conversation best had over a beer, so I won’t go there for now.
“It’s in your nature to destroy yourselves.” – The Terminator
Hopefully you already know that there is pain on the way, even if the tariffs are called off tomorrow. If you didn’t, then sorry to be the bearer of bad news. Shipping companies have already rerouted their vessels, containers are now out of place for the usual trade routes, inventories are beginning to build and shrink in atypical locations, and consumer/customer demand volumes are already beginning to show abnormal volatility. The port of LA is conspicuously quiet (35% YoY drop in import volume)… the lull before the storm? Once companies decide where to place their bets and restock the shelves, the same bottlenecks we saw post-Covid will re-assemble themselves like the cop in Terminator 2. Prediction – watch the container spot market blow up… going to be epic.
“When opportunity comes, it’s too late to prepare.” – John Wooden
Preparing for the Post Tariff Crisis Future.
So, not to be all doom and gloom, I’ll point you back to my previous statement about how supply-chain compete, so all you need to do is be better than your competitor. Pre-Covid I spent six years implementing Sales & Operations Planning (S&OP) and un-fucking order to ship processes at global manufacturing and CPG companies. Of the customers where I implemented S&OP, 100% (yes, every last one of them) were able to weather Covid AND substantially grow their market share during the post-Covid rebound. If you’ve worked with me in the past 10 years, you may have heard me make the comment that S&OP is not built for the status quo, but to enable an organization to react to change. And change is constant.
So what can we do during this period of uncertainty to position us best coming out of the tariff crisis? While there are many nuanced actions and activities that depend on each company’s customer segments, supply networks, operating model, and customer value proposition, there are a few consistent themes that my clients, and other better in class companies are taking regardless of their size and product complexity. Here are three good starting points and start with the first, if you have not done it already…
“You don’t HAVE to turn all your inventory, just the inventory you don’t
want to keep” – Me
Visit your Portfolio Hygienist
In my quarter of a century in supply chain (centuries UOM is back), I have never walked into a client or a company where there wasn’t serious product portfolio and inventory hygiene and rationalization that needed to be performed. I’ll save the underlying causes for another post, but typically somewhere around 50-80% of their SKUs by count and 15-40% by cost are under performing by a relevant measure (turns, DIO, sales, volume, Margin, etc.). In a good S&OP process this hygiene is typically performed during the product review cycle, however, most companies spinning up a product review cycle go through a fairly bloody dentist visit just to get things tidied up. For companies that have raw materials, WIP, or resale finished goods that come from overseas and may need to be re-sourced from another location, why would you want to go through all the bother of moving that unless you were 1000% sure that the product you sell isn’t a critical part
of your go forward portfolio? So, my advice is to cut deep. Much deeper than you think.
As a reference point, a former consumer products client of mine who implemented S&OP pre-COVID is looking to trim their portfolio over 50%. Given that in all of my previous analysis, company portfolios are at least 50% SLOB (in count of SKUs), I don’t believe that a very heavy lift for most. Since this company implemented a product review process post-Covid, 50% is an aggressive cut. The key analysis in this process is a volume and variability segmentation analysis our team has perfected over the years and are now using AI to perform in hours/days. The result is working capital reduction (15-45% inventory $), lower OpEx inventory holding costs, improved OTIF, and fewer stockouts.
“Roads? Where we’re going, we don’t need roads!” – Doc
Improve your Forecast, and if you don’t have one, get one!
Once you have your ToBe portfolio defined, the next step is to develop a quantity forecast that can then be translated into future requirements for inventory, rough cut capacity planning, machine, capacity, purchases, headcount requirements, etc. In times of crisis, what is as important about understanding “The forecasted number” is the P-value of that number (which in non-Supply Chainese means the statistically probabilistic range in which a number could potentially fall). Old school statistical forecasting tools do not provide guidance on the P-value, so S&OP processes were built to capture assumptions, opportunities, and risks to a forecast so that planners can make adjustments to their supply and financial estimates to mitigate appropriately. This makes scenario analysis difficult as planners need to understand the range of potential outcomes in order to model its impact on supply.
Fortunately, forecasting is one area where AI has tried and tested applications that dramatically improve forecast accuracy, inventory optimization, and provide P-value ranges that consider internal and external correlators. Beware the “AI” that just allows an LLM to query a simple stat derived set of data. REAL AI forecasting is different. If you’re a supply chain nerd, it’s very very cool stuff! AI Forecasting can be run at the push of a button to consider changes in internal and external data sources in seconds, outperforming humans by a significant margin. We can also provide Forecasting as a Service and I have a very strong preference for one AI forecasting tool in particular,
but we’re not here to talk about tech, but you can to talk to me off-line. Even if you’re not ready for the leap to AI forecasting, or the ROI is not there for you, putting pen to paper that allows you to communicate expectations and model various demand scenarios will be critical in the post tariff crisis rebound. If (when) things start to turn, and you’re not primed to move with a dialed-in product portfolio and demand plan you will likely miss out on the juiciest opportunities to capture market share.
“It’s no big deal.”
– Carl Spackler
Know your doodies…
Most companies who have any impact from higher tariffs on their imported or exported goods have already begun the process of exploring alternate sources of supply or routes to their consumer markets. To effectively model the tax and duty implications of any network rewiring there are multiple data points for every product, source, and route combination that need to be considered in evaluating the most tax efficient and resilient supply network for the PTC future. Unfortunately, things are moving quickly and humans with spreadsheets and Chat GPT are still not fast enough to react any better than your competition.
Fortunately, this is an area where AI has found traction as well. Duties and custom brokerage has long been an industry resistant to technological change. Several of my partners at Chain Mountain come from the customs brokerage industry and have flattened their foreheads implementing technology as a product. Now, we are helping our clients implement Agentic AI that can look up HTS codes, duty rates, and even manage duty drawback filing. Again, I have strong preferences for several applications that are beyond the hype stage. This is extremely useful for shippers/importers, but also as a managed service or for 3PL‘s who would like to offer this as a service to their shippers/importers. In most cases, the latter two options are better for companies where this is not a core competency.
“Success occurs
when opportunity meets preparation.” – Zig Ziglar
Don’t be a squirrel stuck in the road
The above three activities may not precisely suit your business and are not the only three things that you should be working on. However, the opportunity to prepare is now, so you should be positioning yourself for the post tariff crisis future. Start with SKU Rationalization so you don’t spend time on products that don’t REALLY matter. Engagement through Town Halls
Direct engagement with employees is vital. Town halls and similar forums provide opportunities for leaders to connect with the workforce, explain the reasons for change, and emphasize the importance of each individual’s role in the process.
Managing Resistance: Strategies for Success
Resistance is natural, but it must be managed thoughtfully. Identifying and addressing concerns early on is key. Offering incentives, showcasing success stories, and clearly communicating the potential consequences of not adapting can help ease the transition.
Partnering for Success
At Chain Mountain, we’re here to not only support your strategy shift but also to work alongside you in implementing successful change. We believe in a partnership approach, ensuring that the change is both embraced and sustained throughout the organization.