By Kevin J. Bonnett, CPA
Vice President & Director
There is a lot of concern among manufacturing, distribution and other business clients about tariffs. One of our distribution clients purchases the majority of their product from China and is limited by time and costs to switch manufacturers. Another client is a manufacturer that has more flexibility to procure product from China as well as other Asian markets.
Successful businesses like these are smart to assess uncertainties as well as their opportunities. As we learned during the pandemic, there are things we can do to mitigate supply chain risk and ease the pain of increased costs for the business and for customers.
Here are some ideas for understanding your supply chain and keeping your production and revenue on track.
Assess True Cost Impacts
Work with your team and your advisors. Perform scenario modeling for uncertain tariff increases and cost impact assessments for known tariffs. Calculate different tariff percentages by vendor with a model such as this one:
Unit Cost + Tariff% + Freight + Handling + Insurance / Average Units Purchased
Identify the units/products most impacted by higher tariff modeling and consider:
- Adjusting prices on high-impact SKUs where margins are tightest
- Using value-based pricing on high-demand items where price sensitivity is lower
- Offering product bundling pricing where possible
For example, if you know from your purchasing data that customers often buy certain parts or products together, determine where you can offer bundled pricing to sell more products while offsetting tariff-based price increases for your customers in the long run.
Review Your Vendor Relationships
Supply chain management is not just for times like tariff increases. As a long-term strategy, look for nearshore or reshored suppliers as well as new suppliers competing for your business.
Although there hasn’t been a huge increase in new U.S. suppliers, existing domestic suppliers and those countries less impacted by tariff uncertainty should be evaluated for their potential. One of our clients is building relationships now in lower-tariff countries such as Taiwan, Vietnam or Malaysia for alternative supply chain options.
For your trusted relationships, reinforce partnerships and efficiencies so that your business and theirs can prosper together. For example, agree to purchase excess inventory now to meet projected needs and avoid higher tariffs while negotiating on a volume discount. Other efficiencies include split shipping costs, shared storage solutions or adjusted payment terms.
Note: Securing a relationship with a US-based, bonded warehouse can delay tariff payments until you actually need product. The warehouse stores excess inventory at a US port, and related tariffs aren’t due until the product leaves the warehouse. Time shipments to coincide with your production or payment schedules.
Create Pricing Transparency
Your end customers want to know about the costs passed on to them. Communicate any pricing flexibility (per tariff modeling or cost assessments). Create transparency by including a clearly identified “tariff surcharge” in your pricing.
Other Cost-Cutting Measures
When costs rise in one area of your business, look at cost-cutting in other areas. Carefully manage inventory levels, but also modify buying habits among all departments, especially for discretionary spending. Also, evaluate the timing of large capital equipment purchases for tax benefits.
If you would like a consultation to discuss your options for managing tariffs or other business costs, talk to our team at GT Reilly & Company.
