Solve tariff challenges: How to maintain margins while containing supply chain expenses

Rainbow over road

Organizations affected by the tariffs seek solutions that maintain margins, increase cash flow and offset cost increases without increasing prices. One solution that offers certainty amidst a volatile situation is dynamic discounting. Here are three ways this solution works to protect your margins and your supply chain.

As politicians continue to up the ante in global trade wars, the disruption for organizations dependent upon global supply chains rises. In a volatile environment, there’s no certainty on where anti-globalization sentiment will take trade relations.

The escalation of tariffs is moving in the direction of impacting all goods imported from China, which translates to tariffs on $267 billion in products. In retaliation, China imposed new tariffs of 5 percent to 10 percent on $60 billion of products imported from the U.S., including meat, chemicals, clothing and auto parts.

The effect of tariffs on organizations is widespread. Nearly half of the about 200 U.S. companies that mentioned tariffs in their recent earnings calls stated they plan to raise prices for consumers, according to Panjiva, a division of S&P Global, the financial information group. Sectors impacted most heavily include the retail, gas, automotive, building, machinery and consumer appliance sectors.

Tariff challenges

To counter impact from tariffs, organizations are considering several options, including:

Moving production away from China: Barriers to offshoring production away from China include achieving stable production and supplier cash flow. It can take up to two years for production in a new location to produce at previous levels. In addition, many manufacturers in developing countries lack capital access to meet increased demands.

Reshoring production back to the U.S.: As attractive as reshoring production is, such a move isn’t feasible for many industries, especially technology. Tech supply chains won’t return to the U.S. because of a lack of supply chain efficiency and ability to meet high global demand quickly. The U.S. simply cannot compete with China in volume and flexibility of production workers and mid-level engineers.

Moving production away from the U.S.: With the U.S. and China locked into a major trade war, some companies are getting out of the way.  Some companies are moving production outside of the U.S., such as Harley Davidson, or choosing to limit job growth, such as Volvo’s decision to cut the number of jobs at their new Charleston, S.C. plant. [1]

Increasing customer costs: Passing costs onto consumers is under consideration by executives in any affected companies. Because tariffs are charged on wholesale import prices before retail mark-ups, end-consumer price increases wouldn’t have to rise by the same percentage as the tariff to recoup those costs. However, increasing prices is easier said than done as end consumers remain highly price sensitive, a situation that is already challenging retailers.

3 Strategies to offset tariffs

All of these solutions are complex and offer significant challenges. When raising prices and moving production are unpalatable options for organizations, there are other solutions to improve margins, contain supply chain expenses, and increase cash flow. These solutions include dynamic discounting which, unlike moving your supply chain, can be implemented in months.

For those in procurement dealing with decreased margins and the pain of trying to move supply chains, early payment, such as C2FO offers, can improve margins and support new suppliers that need cash flow to ramp up production.

Strategy #1: Generate margin increases

A dynamic discounting option improves margins through discounts suppliers offer to increase their cash flow on demand. Both you and your suppliers benefit, and this direct relationship provides a better alternative to increasing pricing on consumers and can offset some of the increased costs from tariffs.

Dynamic discounting can be launched in months. It can also be paired with cost savings efforts including automating AP. Launched first, dynamic discounting can reduce the burden of increased ad hoc requests for early payment and the cost savings from these additional discounts can fund your AP automation efforts. The improved process prevents your finance team from getting bogged down in manual reconciliation rather than value-added tasks.

Strategy #2: Accelerate AR to fund inventory

Accelerating AR to fund inventory ahead of price increases will cost companies less and improve cash management. This strategy works for enterprises as well as small and midsize suppliers with a supply chain or materials cost impacted by the tariffs.

Even suppliers who benefit from the tariffs with increased orders face financial pressure. These entities need cash flow to increase production or buy materials to scale for new or increased demand.

 Companies of all sizes can leverage the C2FO platform to accelerate accounts receivable now and purchase inventory and materials ahead of price increases.

 Strategy #3: Collaborate with suppliers to reduce risk

 With globalization under pressure, organizations must collaborate with their suppliers even more closely to ensure the uninterrupted flow of materials and goods. Dynamic discounting allows organizations and their suppliers to meet their needs for swift access to the cash flow necessary to reduce risks these tariffs pose for the supply chain.

 Many suppliers are willing to offer a discount on an invoice to receive faster payment so that they can proactively manage their cash flow, and negotiate increasing costs of materials and inventory. Providing suppliers with affordable options at a point of critical need reduces your shared risk and improves your relationship as you navigate tariff issues together.

[1] How Tariff-Proof Is Your Supply Chain Strategy?, Industry Week, August 20, 2018, https://www.industryweek.com/supply-chain/how-tariff-proof-your-supply-chain-strategy