As recently as January 2019, a U.S.-based survey of over 300 corporate and banking professionals (1) revealed that trade conflict was not a top concern domestically. At the time, there was still uncertainty over various U.S. trade agreements, but efforts between all involved parties looked to be progressing in a favorable manner. However, the climate can change without warning, and the past several months have seen a sudden escalation in several major trade disputes.
In early May, The Trump administration responded to a breakdown in talks with Chinese officials by increasing U.S. tariffs from 10% to 25% on $200 billion worth of Chinese goods (2). These actions were met by additional Chinese tariffs on $60 billion worth of U.S. products. China also announced an investigation into shipping providers like FedEx for allegedly diverting certain inbound shipments, which has raised further fears over supply chain disruptions. Given that 20% of the world’s manufacturing output is driven through China (3), the impact of these developments has been severe.
With U.S. tariffs now covering $250 billion of Chinese goods and Chinese tariffs reaching $110 billion worth of U.S. products, research estimates that the Chinese and U.S. trade conflict has already cost U.S. businesses and consumers $3 billion through higher prices, and another $1.4 billion in lost efficiency (i.e. delayed or interrupted shipments) (4). And still the conflict drags on.
The Chinese and U.S. trade conflict has already cost U.S. businesses and consumers $3 billion through higher prices, and another $1.4 billion in lost efficiency.
In conjunction with Chinese trade conflict, the U.S. just recently announced the potential for new tariffs on Mexican imports. Although the immediate threat of tariffs appears to have been staved off, there is no telling what developments will occur over the next several months. As the first half of 2019 has shown, trade disputes can escalate quickly. Now, with numerous businesses having just turned to Mexico as an alternative supply route to avoid Chinese conflict, these connections are already in jeopardy. The result? Even more costs, additional supply chain restructuring, and an utter logistics nightmare.
As trade conflicts continue to escalate, the U.S. may soon have higher tariffs on imported goods than practically any other country in the world (5). Subsequently, U.S. businesses with suppliers in China and now also in Mexico face significant challenges regarding where their inventory is developed, how much it costs, how long it takes to inbound, and where it is ultimately stored.
For large companies with the appropriate funding and personnel, the primary strategy has been to establish entirely new supply routes. It is no surprise then to find that while U.S. imports from China fell significantly in Q1 2019, U.S. imports from Vietnam rose by 38%, from Taiwan by 22%, and from Korea by 17% (6). However, while this strategy is more easily achievable for larger firms, small and mid-sized businesses rarely possess the resources to quickly restructure their supply chains in this fashion. And as time passes, the costs accrue.
As the escalation of trade conflicts continues, it is often small and mid-sized businesses that lack the capacity to cope with rising inventory costs and supply disruptions. They also lack the funding and expertise to effectively redirect their supply routes, either through new countries or entirely different regions, to circumvent tariffs. As opposed to larger businesses, it can take months or even years for smaller businesses to identify new suppliers, complete the necessary due diligence, and establish alternative shipping routes. This wastes valuable time and creates further delays. And as profit margins are sliced and costs increase, companies are forced into laying off staff, reducing inventory levels, and delaying new growth projects just to maintain daily operations. Such is the case with Roger Alves, the owner of a small, California-based consumer electronics company.
As the escalation of trade conflicts continues, it is often small and mid-sized businesses that lack the capacity to cope with rising inventory costs and supply disruptions. They also lack the funding and expertise to effectively redirect their supply routes, either through new countries or entirely different regions, to circumvent tariffs.
Roger’s company, Scosche Industries, has for decades maintained several major suppliers in China. However, the past year has seen Roger’s business directly impacted by regional trade conflicts. Just within the past 12 months, Scosche Industries has paid more than $2 million in tariffs (7). This has forced the 40-year-old company to lay off numerous workers and indefinitely delay new investment initiatives.
As the China-U.S. conflict drags on, Roger is now looking to establish supply centers in Vietnam to replace Chinese partners, a strategy many businesses are considering with Mexico’s viability in jeopardy. But rerouting supplies from Vietnam requires intensive analysis, investment, and logistics specialization. Inbound inventory must be completely redirected from new suppliers, additional compliance documentation is required, and operations are in many ways restarted from scratch. It’s a laborious process that takes time to implement, and all the while Scosche Industries continues to eat the cost of rising tariffs. But what else is there to do?
Ideally, small and mid-sized companies would not be scrambling to alter their supply lines as trade conflicts arise but would be able to quickly increase their levels of domestic inventory to account for impending disruptions. This additional inventory would be warehoused in U.S.-based facilities so that daily operations could continue uninterrupted until more about the situation becomes clear or an effective long-term solution is established. But how can this type of ad-hoc inventory management be applied in a cost-effective manner? For a growing number of businesses, the answer is on-demand warehousing.
For those that may be unfamiliar, on-demand warehousing is a logistics model that provides businesses with complete flexibility to increase or decrease the levels of inventory they maintain at their warehouses without requiring any minimums or long-term contracts. A benefit here is that, as trade conflicts arise and the risk of supply chain disruption increases, businesses can quickly forward-stock their levels of domestic inventory so that future tariffs, restrictions, and delays don’t result in product shortages. The idea is to create a safety supply of domestic inventory that won’t be impacted by an escalation of trade conflict down the road. This can buy companies valuable time to either wait out a trade conflict or establish alternative supply routes. And while this strategy involves additional inventory investments on the front end, if the alternative is paying millions in tariffs and experiencing frequent inbound delays, the costs may be justified.
As trade conflicts arise and the risk of supply chain disruption increases, businesses can quickly forward-stock their levels of domestic inventory so that future tariffs, restrictions, and delays don’t result in product shortages. This can buy companies valuable time to either wait out a trade conflict or establish alternative supply routes.
To further illustrate how on-demand warehousing can alleviate the burden of trade conflict, consider some of the caveats currently associated with the warehousing industry. First, the price of owning a U.S. warehouse is beyond the reach of many small and mid-sized companies. At the same time, outsourced warehousing typically requires either a long-term contract or high inventory minimums. These warehousing arrangements rarely allow for quick or immediate adjustments to the level of inventory maintained. Instead, there is a pre-established parameter that must be contractually adhered to.
So, even in the event that a company recognized the need to quickly inbound additional inventory, how and where would they store it? The strategy only works if warehouse space is available immediately and without contractual inventory parameters. This is the advantage on-demand warehousing provides.
With the arrival of on-demand solutions to the supply chain landscape, businesses of all sizes are afforded with an additional option for mitigating trade conflict disruptions. Looking ahead, if further tariff hikes on Chinese and Mexican products are expected, businesses could inbound extra inventory from their foreign suppliers now and store it in U.S. warehouses. This effectively creates a safety supply of inventory that is unimpeded by future tariffs and shipment delays. And, because on-demand warehousing does not require inventory minimums or contracts, these inventory levels could be scaled back down at the conclusion of the trade conflict as business returns to normal.
As the Chinese and U.S. conflict shows no signs of slowing down and additional conflicts with Mexico and other nations remain on the horizon, domestic businesses with global supply chains face a growing number of risks. And without the technology, expertise, or funding to quickly restructure their supply lines as disruptions occur, growth for small and medium-sized businesses can rapidly deteriorate.
The all-too-common reality for small and mid-sized businesses, just like the one owned by Roger Alves, is that as the cost of inventory increases and margins are reduced, salary and budget cuts have to be made across other business areas. Added inventory costs may also push businesses to increase the price of their goods, which can negatively impact their ability to remain competitive in the marketplace. These factors can cause a severe drain on working capital, limit the capacity for expansion, and eliminate opportunities to invest in new ventures. But on-demand warehousing can help.
Although the cost of purchasing surplus inventory up-front may sound daunting, on-demand warehousing provides an effective avenue to avoid rising tariffs and other supply chain disruptions without overpaying for extra storage space. Compared to the cost of dealing with constantly rising tariffs and frequent delivery delays, this strategy is worth a serious examination by businesses. As trade conflicts continue to escalate, small and mid-sized businesses struggling to cope with supply chain disruptions owe it to themselves to consider an alternative warehousing strategy. The on-demand service structure could make all the difference.
1 – Strategic Treasurer & TD Bank. 2019 Treasury Perspectives Survey Report. Web. https://strategictreasurer.com/2019-treasury-perspectives/
2 – The US-China Trade War: A Timeline. Dezan Shira & Associates. 2019. Web. https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/
3 – Global Manufacturing Scorecard: How the US Compares to 18 Other Nations. Brookings. 2019. Web. https://www.brookings.edu/research/global-manufacturing-scorecard-how-the-us-compares-to-18-other-nations/
4 – The Impact of the 2018 Trade War on U.S. Prices & Welfare. Amiti, Mary; Redding, J. Stephen; Weinstein, David. The National Bureau of Economic Research. 2019. Web. https://www.nber.org/papers/w25672
5 – The US-China Conflict Challenges the World. Financial Times. 2019. Web. https://www.ft.com/content/870c895c-7b11-11e9-81d2-f785092ab560
6 – Trump’s Trade War is Here to Stay. Companies Like Mine Will Pay the Price. Eberhard, Dan K. CNN Business. 2019. Web. https://www.cnn.com/2019/06/11/perspectives/trade-war-china-mexico-tariffs/index.html
7 – US Businesses Count the Cost of Trump’s Trade War Escalation. Financial Times. 2019. Web. https://www.ft.com/content/def5f720-8363-11e9-b592-5fe435b57a3b