Tariffs and Intelligently Protecting Profits

Summary: The trade wars are in full force with the Administration’s decision to impose 25 percent tariffs on $267 billion worth of Chinese goods and China’s retaliation announcement effective June 1. The short term and possibly long-term financial consequences for companies are very serious.

For some time now, many companies have been looking at alternative options for manufacturing capacity as production costs have increased in China. But when potential tariff increases were announced last year, companies immediately began to stockpile their inventory levels before the increases took effect.

Now that significant increases in tariffs are a reality, how should companies explore the options to manage these additional costs? Options include absorbing the costs, increasing selling prices, adjust discounting strategies or creating product substitution strategies. One thing is certain. Approaching this problem with a “one size fits all” strategy can be disastrous.

Points of Focus: What is essential in developing effective strategies that intelligently protect profits is to have a clear understanding of the financial importance of each customer. This means NOT just measuring net revenues but understanding the specific profits generated by the products they are purchasing.

Take a look at the following graph that segments customers based on their profit contributions. In summary, 2,843 customers provide 80% of the total profit for this company while 110,174 customers are very marginal or unprofitable.

A typical performance distribution

If the marginal and unprofitable customers are buying products that have an increased tariff, their profit contributions will only become worse. Therefore, additional strategies need to be developed to address these customers to minimize additional profit drainage.

However, to begin to protect positive profit earnings from the impact of significant tariff increases, a good place to start is on the smaller number of customers that bring the most to the bottom line. Concentrating on these high-performance (“Key”) customers is critical. If they are not handled correctly, the result could be significant issues related to their future earnings potential for your company

Immediate Action: It is important to understand the financial performance of the products that the Key customers are buying and then select the right strategies to drive the behavior needed to intelligently protect corporate earnings. Strategies that take into account overall profit performance (net earnings for all products), the specific product financial performance drivers as well as the mix of the purchased products that are impacted by the tariff increases.

Having accurate and specific customer / product financial performance visibility can then support questions like:

Which customers are buying high volumes of relatively low margin products of which many are now affected by the tariff increases? (possible strategy – pricing/discount adjustments)
Which customers are primarily buying products that have a strong margin and have a limited impact from the tariff increases? (possible strategy – do nothing approach)
Which customers are buying products that have a wide mix of margin contributions and will be impacted by the tariff increases? (strategy – dependent on the product insights)

Takeaway: Proactively handling the impact of tariff increases is a critical issue. Addressing it with generalized information is like asking a Scout Leader to lead a Troop out of a dangerous ravine without having a map or a compass.

The key is to use accurate and specific customer-product-centric financial information. Information that can be used to develop sustainable profit protection strategies which will effectively minimize the overall negative impact of significant tariff increases.

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

Hanjin: Why are today’s supply chains more at risk? Part 2

My last posting focused on the potential use of analytics and big data to protect an enterprise’s ability to generate profits and offered the following definition for Supply Chain Risk Management (SCRM);

“the development of strategies to minimize or eliminate the financial impact of supply chain disruptions through the identification and prioritization of possible disruptors at all points in the supply chain, from sources of raw materials to the final delivery to customers”.

In this posting we will address the following questions:

Why are today’s global supply chains more susceptible to significant disruptions?

The success of adopting Lean practices. Yes, the widespread adoption of Lean has provided for reduction of waste, increases in efficiencies and lower operating costs. However, it has also eliminated the access to alternative choices, if the primary resource of an operation is no longer available.

Expansion into new operating regions while also shifting production to lower cost operating areas. Today’s supply chains simply have more moving parts that go beyond the direct span of control of one company; more moving parts, more risk.

The volatility of operating in today’s world. Political uncertainties, currency fluctuations, shifts in market demands and social unrest are further factors that can throw a curve ball to any global supply chain operation. Think about how the Arab Spring impacted business throughout the region.

Who needs to be involved in creating, implementing and maintaining an effective SCRM program and What can you do that goes beyond Crisis Management?

Supply Chain Risk Mitigation strategies should always be based on three basic principals; redundancy, contingency and policy mitigation strategies. Each can involve elements of adding costs, making specific operational changes or simply changing an operational policy.

To be effective, the identification, selection, justification and internal socialization of the mitigation strategy must be cross-functional and this often means involving Sales, Marketing, Finance, Supply Chain as well as other appropriate functions. If these types of decisions are made in a vacuum (siloed) they will never survive the organization resistance to change or the next set of budget cuts.

How do you determine that your SCRM strategies are working?

Your company must have a consensus based “measuring stick” that is cross-functionally agreed upon. An agreed upon set of measurements that are aligned with the organization’s priorities and that allows for an organizational consensus on how to identify, measure and prioritize significant, potentially disruptive risks.

There is no better way to do this than to understand the specific financial impact of each potential disruption, e.g. how much it would hurt the bottom line. Once created, the same set of measurements should be used to monitor the mitigation impact of each implemented strategy.

I would love to hear your comments.

All the best,
Richard

Hanjin: A Wake-Up Call

Is this affecting your operation?

From the Wall Street Journal Logistics Report, September 8, 2016:

“The owners of some $14 billion in cargo stranded on Hanjin Shipping Co. vessels are considering desperate measures to recover their goods. Courts in Korea and the U.S. have said the company’s ships can enter ports without being seized by creditors, but it’s unclear who will pay to unload them if they dock, the WSJ’s Erica E. Phillips and Costas Paris write. Some shippers aren’t waiting to find out. Samsung Electronics, which has $38 million in cargo on Hanjin ships, is considering chartering 16 cargo planes. Others say they don’t even know where their freight is, let alone have a plan to rescue it. Trans-Pacific shipping rates have spiked as much as 50% amid the uncertainty, with brokers describing the situation as ‘a total mess.’ ”

Too busy to read this blog trying to find a fix? Then this blog is for you!

The majority of my postings have centered on the use of analytics on big data to directly increase profitable performance. However, the smart use of analytics goes beyond the need to find opportunities to generate more profit. It should also include the capability to support the mitigation of significant supply chain disruptions. The ROI for using analytics on big data to enhance profits is more than enough to justify the investment. The ROI is multiple times larger when you leverage the same data with additional analytics to protect profits. Therefore, the next four postings will now focus on the protection of an enterprise’s ability to generate profits.

Today’s supply chain executives are constantly dealing with disruptions to their supply chain operations. According to British Standards Institute, in 2015 global supply chains incurred a combined $56 billion in extra costs due to crime, extreme weather, terrorist threats and the migrant crisis that swept across Europe. One of the most insightful research efforts was done by Vinod Singhal from Georgia Institute of Technology and Kevin Hendricks from University of Western Ontario with the following results:

As depicted in the top section of the visual below, most disruptions are managed through a Supply Chain Crisis Management process. This often involves activating a “Situation War Room”, gathering the right people and beginning to process information about the situation in order to determine how to get the operation back up and running. This is a reactionary approach to handle supply chain disruptions. This approach uses valuable time in putting a game plan together while being unable to meet specific customer orders.

Using the insights gained from supply chain analytics, the right approach is to focus on Supply Chain RiskMitigation activities that minimize the financial impact of a disruption before it actually occurs. Mission Impossible you say? Not so. The use of analytics to increase the profitable performance of an operation can also be used to create another set of operational lenses. Lenses that offer insights that empower the organization to mitigate the financial impact of prioritized, potential disruptions.

In addition to being a founding member of the American Logistics Aid Network (ALAN)(www.alanaid.org), Competitive Insights has been studying Supply Chain Risk Management best practices for 11 years. During that time, we have participated in creating the first Industry Standard of the subject, ASIS’s Supply Chain Risk Management: A Compilation of Best Practices, published numerous industry articles as well as offered executive education in both conference and university settings.

Therefore, I offer the following definition for Supply Chain Risk Management (SCRM); “the development of strategies to minimize or eliminate the financial impact of supply chain disruptions through the identification and prioritization of possible disruptors at all points in the supply chain, from sources of raw materials to the final delivery to customers”.

The continuation of this blog series will address the following SCRM points:

Why are today’s global supply chains more susceptible to significant disruptions?

Who needs to be involved in creating, implementing and maintaining an effective SCRM program?

What can you do that goes beyond Crisis Management activities?

How do you determine that your SCRM strategies are working?

Tag Archives: SCRM

Tariffs and Intelligently Protecting Profits