Jose-Paez-Pricefx

Reducing the impact of tariffs with automation

Jan. 5, 2022

"To better prepare for and manage tariffs, manufacturers needed to employ analytics and automation to quickly adjust strategies."

Pricefx's Jose Paez

By Jose Paez, manufacturing solution strategist at Pricefx

In 2017, most organizations were focused on expanding their market presence, increasing the value of the products and offerings they marketed, or streamlining their operations. By today’s standards, this sounds almost boring. The market was unprepared for the kind of uncertainty that was to come in just a few short years.

The first jolt occurred long before COVID became the biggest challenge the world would address in the last 20 years. In January 2018, the Trump administration began setting tariffs on imports from China as a response to what was deemed “unfair trade practices.” These actions triggered what we now call the US-China Trade War, an ongoing economic conflict between two of the world’s economic superpowers that brought significant headaches to businesses and organizations around the world.

In 2019, a study by Moody’s Analytics showed that the trade war had already cost the US about 300,000 jobs and impacted about 0.3% of their real GDP.

Tariffs are nothing new; they have been in place even before the concept of income taxes was implemented in the US in 1913. For a long time, tariffs were the main source of revenue for the US government. Organizations became used to managing tariffs under the belief that there were semi-static, and that free-trade agreements could create a safeguard from tariffs for many businesses. 

Within a matter of weeks after the China tariffs were enacted, thousands of domestic manufacturers found themselves scrambling to understand what these new tariffs would represent for their businesses and how they needed to react to the potential impact to their revenue. Companies put together teams and, suddenly, the one or two people that were responsible for keeping track of this information found themselves at the heart of leadership discussions and strategic plans to overcome these threats.

As a result, many manufacturers discovered that their understanding of tariffs and how they affected their business was minimal at best. What was historically thought of as just another component of the cost of doing business and tagged on as overhead cost now needed to be understood at the most granular level across all products and processes. In a matter of months, organizations found themselves struggling to keep up with what seemed a never-ending new set of tariffs being imposed (often in retaliatory ways) across all sorts of goods and industries.

To better prepare for and manage tariffs, manufacturers needed to employ analytics and automation to quickly adjust strategies. The most successful organizations have a clear understanding of these three key elements:

Tariffs impact on materials

First, businesses need to know what materials go into the manufacturing of their products and then ascertain how much of that material is impacted by tariffs. If the manufacturer is going to be affected, it then needs to understand if it’s possible to offset the impact of tariffs through cost-reduction measures. Also, it is a good practice to review if there any protections set in existing customer contracts that will enable the manufacturer to find cover—even temporarily—due to rising costs from their vendors or suppliers.

Tariffs affect on margins

Next, manufacturers should evaluate their margin level. Raising prices as a result of a tariff can hurt business, therefore it is worth knowing how much the company can absorb against their margin to maintain their market share. Companies can also look for opportunities to drive price-differentiation that will allow offsetting these tariffs with higher prices while offering higher value to another segment in the market.

Knowing when to buy

At a time of great uncertainty, it is paramount to know your sales trends. Manufacturers may find there is an opportunity to drive lower costs in inventory when there are no tariffs or they are reduced due to a government program, which then offset future tariffs. Visibility into the sales trends of your products is important at any time, but having the tools to analyze trends over time can be critical to prepare (in advance) for changing tariffs.

It is also vitally important that both the buy and the sell side of the business have clear visibility of each other’s activities. Knowing what the organization is buying and selling has to be balanced to ensure the impact of the tariffs—sometimes managed on a daily basis—is minimal and non-disruptive, not only to the operation of the organization but also to customers down the line.

Joseph Foudy, a professor of economics at New York University's Leonard N. Stern School of Business, said the main characteristic of the global trade environment now is uncertainty. Organizations are having to evaluate their ability to be agile, anticipate and plan ahead in the midst of unpredictability. Those still working with manual processes cannot cope with the stress, volatility and speed of these changes, and will find they are investing a lot of their time reacting. As a result, revenue and profits are getting hit and manufacturers are finding it difficult to grow or protect their business and plan for what is to come.

Pricing is still one of the main areas of opportunity to ditch the manual approaches of yesterday, and in this respect, manufacturers are employing automation in several ways. Waterfall analysis is probably the easiest place to start identifying areas of opportunity for price realization and the impact of cost, tariffs and out-of-control discounts on margins. Once key market segments have been identified and defined, differentiation strategies can be automated to determine the value each segment is willing to pay for. With quoting and order management, companies are using systems that streamline the flow of prices from management to quotes to orders, eliminating the possibility of blocks and holds.

In this complex global trade environment, manufacturers can rely on this: unpredictable events will continue to happen and agility is the key to success. Adjusting to changes in the supply chain without the right systems and tools in place is time-consuming, unprofitable and ineffective. Although many were unprepared for recent events, now is the time to take control and get a handle on your pricing strategies.