Tariffs’ Impact on Manufacturing and Distribution Profits

September 17, 2019 Richard Blatcher

Trade Wars and Tariffs


Tariffs are a great example of the uncertainty manufacturers and distributors face in highly complex, global supply chains and today’s political climate. With increased tariffs on manufacturing and distribution and threats of them on imports from China, Canada, Mexico, and the European Union, organizations are having to evaluate their ability to be agile, anticipate and plan ahead in midst of unpredictability. As they are still working with manual processes that cannot cope with the stress, volatility, and speed of these changes, organizations are investing a lot of their time reacting. As a result, revenue and profits are getting hit and companies are finding it difficult to grow or protect their business and plan for what is to come.
 

What’s going on?


Manufacturers and distributors of products across different industry segments including; medical devices, technology, automotive parts, building products, food, beverages, and many others have been seen on the news, either sharing praises or frustrations following messages about the trade-wars. Many have found it difficult to address supply chain adjustments that result from the political climate. Trump’s tariffs are stressing manufacturing and distribution companies that do business with China, Canada, Mexico, and the European Union as their margins, sales, and profit are impacted.
 

Tariffs Explained


With unforeseen events like imposed manufacturing and sales tariffs or natural disasters come increased costs that set off a ripple effect through the supply chain. With the trade-wars, we’re seeing spikes in costs of components, raw materials, steel, aluminum, and food, affecting manufacturers of products ranging from cars to beer (aluminum cans). Think of it this way - When playing a game of hot potato, someone ends up losing, but players of the game do their best to make sure they are agile enough for it to not be them. Likewise, those involved in the supply chain acknowledge that someone in the marketplace must absorb the cost increase. As they are likely operating at paper-thin margins, they must inevitably pass it along.
Unfortunately, passing the cost along is not easy in global supply chains.
 

Why is it so hard?


In today’s global trade environment, organizations manage multiple suppliers, SKUS, and sales channels making agility through trade-wars difficult without the current, often manual systems and tools in place.
 
Many Suppliers: Today’s global economy enables companies to supply their products from sources all around the world. With unforeseen events like manufacturing and sales tariffs, companies must first figure out which of their many suppliers are affected. With hundreds of them, this could be a timely task. Depending on where a company is on the supply chain aggregates that difficulty. For example, for someone further along in the chain, like a distributor, they not only have to identify who is affected, but wait for them to analyze the impact and inform them of the cost increase. One supplier can say they calculated a 5% increase on a certain segment and others can come back with completely different numbers; however, as the distributors are often in a reactive state, they can’t do much but to take their word for what the increase is without doing their own calculations as verification. At that point, all they can do is find a way to mitigate the cost in attempt to protect their margins.
 
Many SKUS: Increased costs from unforeseen events, like manufacturing and sales tariffs, can impact hundreds or thousands of products. Considering that, how can companies figure out what products have been affected? Afterwards, they must evaluate the right strategy to adjust the prices by considering how much of the cost should be passed along to the consumer. Then, how do they adjust their prices to reflect the new costs? The reality is that they cannot swiftly execute price adjustments because their systems weren't set up for that. Analog systems and manual processes layered with these challenges translate into a tremendous time investment.
 
Many Channels: Today’s organizations have multiple sales and distribution channels, including the sales force, e-commerce platforms, retailers, and other distributors. Therefore, once they’ve figured out what prices need to be updated and by how much, comes the next challenge: executing pricing among all those channels. Informing the sales organization and those that follow in the supply chain about the new prices can be a taunting process. Without proper pricing management tools, it is almost impossible to ensure pricing consistency, putting the customer experience and subsequent revenue at risk.


Why does it matter?

 
This time-consuming process isn't only tedious- it's detrimental to the business. From the time costs have been raised on the company, that company must pay for them, whether their own prices have been adjusted yet or not. If their own prices have not yet been updated, that company is essentially absorbing them in their entirety. Instead of passing some of the costs along to the consumer early and picking up some of the gain before the supplier comes with their own increases, margins and profit are at being directly hit.
 

Regain control and lose the stress


In this complex global trade environment, organizations know one thing is guaranteed: unpredictable events like manufacturing tariffs will happen, and they need to be agile to succeed. Adjusting changes in the supply chain without the right systems and tools in place is time consuming, unprofitable, and ineffective. Although many have been unprepared for past events, now is the time to take control and lose the stress.
 

Where to start


To start this process, companies need to ask themselves the following 5 questions:

1. Does my organization effectively track and prepare for what’s coming?
2. When costs change, can we quickly calculate the impact on our numbers?
3. Are we constantly and efficiently updating our price lists among all products and all channels?
4. Do we know what prices we could drop/increase, and what would the effects of doing that be?
5. Are my pricing decisions leveraging data and analytics instead of just our ‘gut feelings’?

 

Recommendation


If an organization answered “no” for most of the questions above, it is time to move away from manual processes and leverage artificial intelligence and machine learning for pricing and selling. Companies need an artificial intelligence-based, scalable, dynamic pricing management software and selling solution to plan for what is to come, optimize prices, and execute those prices. They need to find a partner that will join along their digital transformation journey and will grow with them regardless of what changes come next. An example of such a partner is PROS, a leader in AI and machine learning for over 30 years, who has seen their customers get a 20x return on investment from their dynamic pricing and selling platform. 
 

About the Author

Richard Blatcher

Richard Blatcher, Director, Industry Marketing & Business Intelligence at PROS, manages the global go-to-market strategy for PROS in its strategic industries. He has over 30 years’ experience in the industry originally based in Europe moving to the US in 2010. He spent the first part of his career in media, publishing and direct marketing managing the delivery of marketing and sales enablement services to many manufacturing and distribution blue-chip enterprises. He has also held EMEA and Global Marketing roles for $2Bn+ software company Autodesk including being responsible for launches of market disrupting SaaS software solutions into the market.

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