Mid-Market Manufacturers: 10 Steps to Reduce Tariff Exposure

Tariffs through the ages

Since the founding of the USA, tariffs have played a key role in “protecting” industries from more established global competitors. In 1789, George Washington signed into a law a first-ever tariff of 5% on all imports. Since that time, revenue from tariffs has historically hovered around 2.5 to 5% and has been imposed on everything from nickel to nets to Nintendo.

For the past 250 years, tariffs were utilized largely for industrial protection. That changed during the first Trump administration as tariffs were tailored to advance a policy agenda.

Strategic measures to mitigate tariffs

For coming months, while the percentage and timing may not be clear, it’s clear tariffs will play a strategic role for Americans at the negotiating table. Those responsible for driving strategy in mid-market manufacturing are understandably finding it hard to read between the headlines and avoid distractions as announcements roll out by geography and by commodity.

Larger manufacturing companies serving global customers fed by global and local supply chains have teams focused on mitigating risk and exposure. They have a complex network of options. This is not typically the case for mid-market manufacturers, who may lack the sophisticated resources of larger entities.

In this environment of uncertainty, there are steps mid-market manufacturers can take to mitigate tariffs.

First, demand side

1. Map out where your customers are located. What percentage are outside the USA?

2. Consider if an “in country for country” strategy makes economic sense.

3. Consider if production for international customers could be configured locally, to free up capacity to keep production for domestic customers inside the USA.

4. If speed is key, explore if partnerships for serving international customers offers attractive return on investment.

Next, supply side

5. Determine what percent of your revenue is dependent on goods coming from tariffed countries. If you are dependent on one supplier, consider immediate action to find a minimum of three alternate sources in different geographies, including domestic.

6. Break down imports by raw material, component, sub-assemblies, and finished goods. Be ready to manage different tariff levels for each, and renegotiate contracts if changes in pricing, terms, and deliveries make sense.

7. Break out costs by material goods and services. Services are typically not tariffed. A trade attorney can sort through details.

8. Map out global workflow. If a sub-assembly has a stop in Mexico on its way from China to your USA dock, confirm it meets the USA’s definition of “significant transformation” before crossing our southern border and being subject to an additional tariff. Relatedly, evaluate the number of times each build crosses a border. Some complex assemblies, for example, can cross a border 5 – 6 times prior to completion of a finished good. Can steps be eliminated? Finally, consider if Free Trade Zones — where items can be processed/stored, etc. — offer potential benefits. Again, trade attorneys can be helpful with details.

9. Scrutinize inventory management. When was the last time you did an ABC analysis? In this environment where costs can change overnight, getting back to basics is critical. For A items, it may make sense to stock up before tariffs hit, or quickly burn off stock of C items.

10. Consider where and how it makes economic sense to move production as close to the customer as possible.

Manufacturers facing tariff pressures

For those who depend on imports, tariffs will lead to higher costs, margin erosion, and pressure to address pricing. Conversely, tariffs may open opportunities for those with capacity to develop into local sources for their own companies and others.

Diversifying supply chains takes time. Many manufacturers who started the process back in 2016 as the first wave of policy-driven tariffs surfaced are having to completely rethink supply chains as new waves of tariffs loom on the horizon. It’s a moving target.

Need help getting started? Professionals at CLA are ready to help with data-driven approaches for discovering opportunity.