It’s May 2020 (flash forward). As in every May in the Northern Hemisphere, flowers bloom, trees bud, and warm breezes predict the coming summer. But the global trade regime is anything but routine, as it’s been for several years now. The recent Phase One trade deal between the US and China, touted so optimistically by US and Chinese leadership a few months earlier, has fallen through, tripped up by China’s unwillingness to seriously discuss intellectual property issues, not contracting for US farm products quickly enough for the US president’s liking, and Trump’s unwillingness to appear weak to his base voters during an election year. Underpinning all of this, of course: Supply chain disruptions caused by the coronavirus outbreak.
In the words of Supply Chain Dive’s editor Shefali Kapadia, “if the tariffs are still going the trade war’s still going”, and many of the 2018 tariffs had remained. Now the trade conflict has boiled over. So, former tariffs on a variety of goods were reapplied, the suspended tariffs on Chinese consumer product exports finally imposed, and existing tariffs on components tripled to 75% of value by the president. And this time, he also included six Southeast Asian countries because importers had been reacting to earlier phases of the trade war by shifting orders to them.
The Transvexor Division of mid-market manufacturer Superior Thermodynamics (ST) sources twelve key components from a mix of suppliers in the region. Collectively these assemblies comprise nearly sixty percent of product material costs for finished goods with falling margins in a competitive market. If ST is not able to adapt its supply chain accordingly it will finally need to stop absorbing tariff costs and pass them on to customers – 75% is too dramatic of a change to do otherwise.
Sales and Operations Planning No Longer Optional
This is when Sales and Operations Planning (S&OP) displays its tremendous value. First, ST must make decisions regarding size and location of inventories. Should the company front load supplier orders before tariffs hit, and if so, by how much? Are there tariff-free alternative inputs that ST can consider for their products? To what extent does the company need suppliers in the tariff countries, and how much should it onshore orders or shift to non-tariff countries?
Though the coronavirus outbreak may be running its course, trade-related issues will continue, and being able to react to them and succeed within a turbulent environment, whatever the cause, is imperative.
When tariffs increase dramatically, on top of straightforward cost increases that impact a company’s margins, otherwise reliable suppliers with weak financials or reserves in tariff countries can fold, as their own export accounts diminish. How to plan for this? How to ensure the supply base is diversified yet oriented towards strong suppliers? How many onshore suppliers are available, and how much sourcing can and should be brought to domestic sources? Pierre Mitchell, Chief Research Officer of Azul Consulting, considers reshoring and onshoring to be risk management moves. Risk management is a typical goal of sales and operations planning, in addition to revenue and cash flow maximization and more.
Importantly, a quality S&OP system enables effective scenario planning, which provides management teams with the ability to understand all realistic options and make decisions ahead of its competition.
Regarding production planning, a key part of sales and operations planning, how should ST manage shifts in its assembly centers? Should they consider replacing potential lost supplier capacity with onshore greenfield operations to provide necessary components themselves? Should ST even shift some production operations to different countries? Harley-Davidson is a high profile example of a company shifting production to low cost manufacturing countries from the US in response to a tariff battle when it moved production from Kansas to India & Brazil to continue to be able to sell competitively into the EU after that market’s retaliatory tariffs.
More tactically, how to adjust inventory stocks across distribution centers? Whether it adheres to sales and operations planning principles or not, an affected manufacturer needs to attend to this quickly upon receipt of market-shocking news. ST’s annual distribution plan, based on pipeline and customer expectations, requires product availability for maintaining superior service levels.
In tandem with these concerns, a global trade disruption of this magnitude will affect carrier schedules. Anticipating half empty Asia route vessels going forward, ocean carriers will cut voyages and routes to maintain profitability. ST should adjust short-term supply plans and schedules accordingly. How large should buffer stocks now be maintained? Which carrier mix should ST go with, to ensure reliable delivery and to protect against certain carriers possibly going out of business?
All of this occurs more quickly nowadays than in years past. Reaction time is key. If ST is not able to adjust quickly margins will erode and its most nimble competitors will take market share.
Demand Planning and Forecasting
While ST hustles to readjust its supply side, for the longer term demand planning, a key aspect of sales and operations planning, is also critical. Will these dramatically heightened tariff levels push the global economy, already disrupted by the coronavirus, into recession, and if so, how should ST plan for reduced revenue estimates? And regarding its standardized, non-custom products, how should ST adjust SKU assortment?
This is one of those situations where, traditionally, management must throw out the original plan and improvise. A planning team relying on spreadsheet-based plans may scramble to update them to attempt to provide optimal recommendations for management. Would these be able to clearly reflect all relevant alternatives, the most impactful scenarios, and the most likely?
And, as already noted, the company’s timeframe for improvisation nowadays may now be measured in scant weeks rather than months or years.
Management’s Overriding Needs
- How can ST maintain service levels and therefore retain accounts?
- How can ST maintain necessary cash flow?
- How can ST still maximize revenues, however the forecast evolves?
- Ultimately, given the new and different playing field, how can ST still hit profit goals?
Tune in to next week’s blog post to learn how ST, taking advantage of its scenario planning capabilities, fared in the 2020 Trade War.