Making the Best of the Current Environment – Living with Tariffs
By Jon and Matt Schreibfeder
Without getting into any kind of political discussion on whether they are good or not, tariffs are here and going to affect everyone, at least for now. There is nothing most of us can do to change the tariff situation, so we must make the best decisions possible with the information we currently have available.
Monitoring the latest developments and discussing the impact of the tariffs with EIM clients, we are seeing a series of challenges. These situations are difficult to deal with. But to make matters worse, we are finding that each potential solution creates even more challenges:
- Increased material costs. The direct impact of the tariffs will be to increase the cost of imported material. Even if you are not the actual importer, you will be affected by the increased costs throughout the supply chain.
- Lack of availability. Market uncertainty has caused many organizations to pause or cancel purchase orders for imported products. If supply is reduced without a corresponding reduction in demand, the result will be shortages and material scarcity.
- Inability to Pass Along Increased Costs. This factor results in reduced profitability which may result in cutbacks in production and employment.
- Uncertainty. We have seen the tariff situation changing on a daily (or even hourly) basis. There is little certainty in what the business environment will look like in a week, let alone 30 days from now. The only thing we are certain of is that things are likely to change, and we have no idea what those changes are going to look like.
So, what do you do? The most important thing to remember is to NOT PANIC or make quick “knee jerk” reactions. This is a challenging situation. You need to continually evaluate the changing circumstances and take decisive actions. But these must be informed decisions. Avoid drastic “across the board cuts” or immediately buying “six months of everything”. Remember to focus on the most important areas of your business. You have too many inventory items to micromanage all of them.
1. Determine your current inventory position for each stocked product: Calculate the number of months’ supply of your available inventory. You can use your forecast for the next several months or approximate the supply with an average usage rate with the formula: (Available Inventory Quantity ÷ Monthly Forecast).
a. If the resulting month’s supply is less than the sum of the anticipated lead time days and order/review cycle days, you probably should issue a replenishment order.
b. If you find that you have more than a year’s supply of the product, you may find yourself with a great opportunity to sell off some of your excess inventory.
2. Calculate a new item landed cost for each item you are analyzing.
a. Allocate the additional tariffs, expediting costs, demurrage costs, etc.
b. Calculate projected profit margins with these updated costs.
c. Are you comfortable with the results? If not, are increasing prices or decreasing reserve inventory viable options?
3. Review unusual activity. Review sales/usage history or disbursement reports for unusually high or low sales.
a. If you observe significantly lower sales or usage, determine if you need to revise your forecasts of future demand or liquidate some of your current inventory.
b. If sales are significantly higher, try to determine if this is a temporary or long-term increase in demand. Only if you are relatively sure that demand will remain at a higher level for an extended period of time should you buy significantly larger quantities of the product. Remember that uncertainty breeds panic! If customers overbuy now, it will take them time to work through this excess stock. The result will be lower sales in the future.
c. If panic buying results in actual or potential product shortages, be sure to limit sales of your remaining inventory to your best customers.
Be sure to consider what will happen if any of your predictions doesn’t happen as you think it will. Don’t make large bets unless you are prepared to lose! The safer, more conservative approach is usually the best course to follow in uncertain times.
Unfortunately, our crystal ball is broken and EIM does not have a one size fits all solution for dealing with the current tariff situation. If you have specific questions or concerns, or have a situation you would like to discuss, please do not hesitate to reach out to Jon or Matt.