From the global financial crisis to a once-in-a century pandemic, war in Ukraine, a boat stuck in the Suez Canal, drought-induced shipping delays in the Panama Canal and a string of natural disasters, food procurement teams have become accustomed to managing supply chain volatility in recent years.
So how are firms preparing for the prospect of across-the-board tariffs, a key platform of the incoming Republican administration should it follow through on Trump’s campaign promises?
Should firms put in an advance order for that large piece of processing kit from Germany now before prices go up? Should they stockpile high-intensity sweeteners from China or make a longer-term plan to invest in automation in anticipation of tighter controls on immigration?
Building flexibility into supply chain and procurement planning
Matt Lekstutis is director, North America, at global procurement and supply chain consultancy Efficio, which works with scores of large consumer packaged goods companies.
Speaking to AgFunderNews about the prospect of 10-20% tariffs on all goods coming into the US, 60% tariffs on goods from China, and 25-200% tariffs on goods from Mexico, he said: “There was a feeling that supply chains seemed to work reasonably well until around 2010. And then things start getting really messy, and since then, it’s been a pretty unpredictable world.
“So most organizations are, I wouldn’t say, numb to it, but they’re designed for it. They’re expecting volatility, so there’s anxiety, but not panic.”
Overall, he added, there is a sense of “uneasiness” as supply chain and procurement teams try and anticipate what the administration might do. “Tariffs are front and center, but so is economic policy more generally, plus questions about whether there is going to be continued support and investment for renewable sources of energy, which may play into the ag industry for example.”
As for short term planning, he said, “there are behaviors that we’re seeing around timing for folks thinking of making a large capital investment, hedging of currencies, raw materials and so on.
“There has been a general trend over the last couple of years towards increasing inventory in anticipation of shocks, so hedging your bets through inventory is an increasing part of the general mechanism folks are using,” he noted. “But I haven’t seen any kind of exponential increase in orders for products from certain regions around the world yet.”
‘Manufacturers don’t want to be caught short or to be out over their skis on these topics’
While some commentators believe the threat of across-the-board tariffs will be used as a negotiating tool or a warning to US companies considering offshoring, rather than firm policy, the expectation from companies Efficio is working with “is that, hey, you know, we’ve seen this before [in the previous Trump administration], so it’s completely possible that we will see it again,” said Lekstutis.
In many ways, he claimed, companies are already well-positioned for the potential disruptions that could be triggered by tariffs, having adapted their supply chain and procurement strategies to cope with recent disruptions from the pandemic to increasingly volatile weather.
This might be through diversifying their supply base and their customer base, trying to build more domestic supply chains in the wake of more protectionist policies enacted by governments across the world, or investing in software or financial tools to help them manage uncertainty, he added.
“The pandemic accelerated some of these trends and made companies realize they should look at their exposure to single markets. So back in 2017 there was heavy exposure to China from an export perspective, and since then, a fair amount has been done to diversify customer markets. On incoming sources we’ve also seen companies diversify their supply base after what happened in Ukraine, covid, drought, disruption to shipping lanes and so on.”
In general, said Lekstutis, “Companies are paying very close attention to what others are doing as they don’t want to be caught short or to be out over their skis on these topics. So what’s key now is understanding where your exposure is with China, for example. If you’re more exposed than your competitors, you might need to think about taking different actions. If the exposure is equal, you can be a little bit more cautious and strategic about it.”
Labor shortages ‘could drive greater automation into food manufacturing and processing facilities’
As for access to labor, he predicted, “We could see pressure on labor both through the inflationary pressures that come in general with tariffs [which could raise COGs for some companies] and if a more conservative immigration policy further constricts the labor force. So this could drive greater automation into food manufacturing and processing facilities.”
As to whether the tariffs will stimulate a renaissance in domestic manufacturing, he says, “It all depends on the numbers. At 10% I do not see it. Would a 100% tariff put enough shock into the system to accelerate some of this? Absolutely.”
Mitigate risks by investing in supply chain planning, data and analytical tools, and automation
“I’m not ruling out the possibility of companies making some strategic decisions to effectively pre-empt expected tariffs,” added Tom Madrecki, VP campaigns and special projects at the Consumer Brands Association (CBA), which represents leading consumer packaged goods (CPG) companies.
“Especially if we’re talking about a singular shipment like for a manufacturing investment, many of which are for specialty machinery that is often only available from a certain supplier or country simply because there aren’t that many people or companies that make those types of technologies and tools.”
For recurring shipments of perishable ingredients or other inputs that are sourced internationally for reasons of minimal domestic availability or specific quality considerations or unique characteristics, however, it’s unlikely companies will significantly shift supply chain models, he predicted.
“There is always a relative balancing of efficiency and resiliency, wherein companies want to have adequate flexibility and ability to pull from different suppliers, but they’re less willing to hold inventory at substantially higher cost or to run the risk of wasting those inputs.”
Overall, he claimed, “CPGs will be doing everything they can to mitigate and manage those new cost pressures, including investments in supply chain planning, data and analytical tools, and automation.”
Further reading:
How would Trump’s tariffs impact large food & beverage firms? And what about USCMA?
How will Trump and Harris’ diverging agendas impact food, trade, and public health?
Read the orginal article: https://agfundernews.com/theres-anxiety-but-not-panic-how-supply-chain-and-procurement-teams-are-preparing-for-tariffs
