March 23, 2018
Demand planning processes across many industries are already being disrupted by new tariffs on steel & aluminum enacted today by The White House. In this post we discuss the details of the tariffs, their short term implications for manufacturers, and how as demand planners & forecasters you can respond to minimize the impact on your business.
What To Know About the New Tariffs
Today The White House officially enacted safeguard tariffs on aluminum and steel imports into the United States. Heading 9903.80.01 (iron and steel products) and heading 9903.85.01 (aluminum products) set additional duty rates of 25% and 10% respectively from all nations except Canada and Mexico. Australia has not yet been given an exception, but that is expected to happen soon.
On a technical level, specific import articles affected by the tariffs are governed by Chapter 99 of the Harmonized Tariff Schedule of the United States (HTSUS). In other words, think of chapter 99 as an addendum to the regular trade tariffs listed in chapters 1 through 98 which companies use to classify their goods. Chapter 99 contains the provisions that relate to legislation and to the executive and administrative actions pursuant to constituted authority under which additional duties or import restrictions are imposed by collateral legislation.
How Will these Tariffs Affect Your Supply Chain?
These new tariffs will affect the way your company sources materials and who they source from. They apply directly to raw materials imported to the US. These inputs in turn directly affect the cost of products made using steel, aluminum, and iron. Products sourced domestically made from imported steel, aluminum or iron will increase in price as those manufacturers will source highly taxed foreign materials or more expensive domestic ones. This could potentially create a backlash on other domestic manufacturing, making foreign goods appear cheaper.
The new tariffs are expected to depress consumer buying power globally. Ultimately, new costs associated with imported steel and aluminum or higher priced domestic materials will be passed on to the end consumers. The materials taxed are most widely used in durable goods like cars and buildings that consumers will continue to buy. The tariffs may not change consumer demand by the number of goods they purchase but could change who they purchase those goods from.
Many manufacturers will find it difficult to pass on the full difference as competitors absorb costs to keep their prices low and consumers push back by spending elsewhere.
What Can Demand Planners Do?
Consider these steps to reduce negative impacts for your business.
- Run What-If scenarios. If you haven’t done so already, forecast the effect of materials price changes in your supply chain. Decision makers at your business need to see right away how each of these what-if scenarios could affect your margins. Good supply chain analytics tools can simplify this task and speed up results.
- Tie product pricing to your sales with a regression model. If your company (or its competitors) decides to raise prices, be prepared to show how new prices will likely influence sales to customers.
- Expect a stampede and get ahead. With rising prices, manufacturers will increase orders for materials they expect to become more costly, while at the same time preparing to sharply cut orders in the future. This means volatility. Automating the data flow from your suppliers into your planning system will allow you to know first. A well-designed planning system can be quickly configured for such integrations.
- Have sales on your team. It sounds basic, but it’s true. As materials prices and order volumes continue to change, make it easy for your sales and marketing teams to contribute what they know. Use a system that enables teams to add their contributions to demand planning in Salesforce or other customer relationship management (CRM) tools. With more data from sales & marketing you can present a comprehensive picture to decision makers. This is a key element of a functional S&OP process.
What to Watch for In the Future
New tariffs often invite retaliatory action. Countries can take their case to the WTO if they believe these new tariffs violate trade laws. If their complaint is granted, the WTO will allow them to impose retaliatory tariffs or other penalties towards US exports. Many fear retaliations will create adverse effects for the US agriculture and automotive industries.
Join the upcoming supply chain risk management webinar with John Galt Solutions and John Manners-Bell to help prepare for future changes.
- Chapter 99 HTSUS: https://hts.usitc.gov/view/Chapter%2099
- Federal Register: https://www.federalregister.gov/documents/2018/03/15/2018-05478/adjusting-imports-of-steel-into-the-united-states
- The Atlantic (How the New Tariffs Will Affect Your Supply Chain and trade wars): https://www.theatlantic.com/business/archive/2018/03/trump-steel-aluminum-tariffs/554660/