The recent US election has brought with it the possibility of significant changes to corporate taxation, health care and trade policies with some of our largest trading partners. In this month’s Purchasing Insights we will talk about Trade.
What the new policies on trade will end up being – either NAFTA renegotiation or Border Adjustment Tax, or both, is completely unknown. However, developing multiple strategies, assuming various policies, will allow companies and purchasing groups to be able to move quickly when necessary.
To assist in providing insights this month I have engaged Charles Chesbrough, Chief Economist for OESA and Jon Gabrielsen, President & CEO at J.T. Gabrielsen Consulting, LLC. We asked ourselves what should manufacturing companies and their purchasing organizations be doing in the face of major changes to cross-border trade that are not defined, but could have significant impact?
We Believe Manufacturers Should:
- Monitor everything you can get your hands on as the situation unfolds BUT don’t panic or do anything rash.
- Form an internal team with legal, purchasing, finance, and track the negotiations closely so that there are no surprises once announced.
- Develop multiple contingency plans – assume no change, assume the worst, and assume moderate adjustments – then develop strategies under each so that the organization is ready to act as soon as necessary.
- Balance the likelihood that any law would be implemented over years against the long term decisions to be made on manufacturing footprint and sourcing decisions.
- Focus US operations on supplying US, and leverage Mexico and China for the rest of world. A strong dollar in coming years also supports this strategy.
- Talk with customers about incorporating potential cost adjustments into existing and future contracts – treat new taxes/tariffs like one would treat commodity prices and/or exchange rates.
- Look for partners/acquisitions that may mitigate some of your trade exposure.
We Believe Purchasing Organizations Should:
- Have a purchasing IT infrastructure in place that enables you to constantly monitor where purchased, where used and length of commitment for all of your spend.
- Look at the in country/out of country spend through your tiered supply chain.
- Categorize your out-of-country sourcing by ease of moving back to the US against the cost of moving back.
- Focus on minimizing out of country sourcing on new programs, especially for countries that appear on the administration’s trade/radar, Mexico and China.
- Investigate and develop contingency sources under various assumptions. Be ready to move once policies are announced. Sources, which may be capacity constrained, may be gobbled up quickly so you need to be ready to act.
- Incorporate tax/tariff exposure into contracts – treat like fluctuating commodity prices/exchange rates – both parties would likely benefit from this as uncertainty exists for everyone.
- Utilize futures contracts/options for some raw materials as prices are likely to be impacted once policies are finalized.