Strategies for a Tariff Resistant Supply Chain
The trade war with China has introduced higher and more tariffs to products entering the United States. US companies that once depended on manufacturing and product assembly in China have had to reassess their strategies. In the initial days of the trade dispute, companies were able to reclassify products under alternative HTS (Harmonized Tariff Schedule) codes to avoid higher tariffs, but those loopholes have been closed.
The biggest takeaway from a recent program sponsored by Product Realization Group (PRG) is that building a tariff resistant supply chain for your product is not simple. The answer is not as simple as a complete relocation of your operations away from China to Vietnam, Malaysia, or any other Asian country. Nor does it necessarily mean a move to Europe, South America or back to the US. As supply chain expert Shirish Joshi explained, you need to look at your supply chain strategy “holistically.”
The following are other takeaways from the tariff resistant supply chain program featuring Shirish Joshi, VP of Operations at Kaptivo and Supply Chain & Ops Practice Lead at PRG, and Wayne Miller, VP Hardware Engineering & Mfg. Ops. at Bossa Nova Robotics.
- It takes a holistic approach:
- Understand YOUR product
- Understand YOUR costs
- Evaluate other countries and what infrastructure they have
- Evaluate other countries and what “techno-competencies” they have
- What kind of work do you need? Components? Subassembly?
- Where are the resources?
- Where are the qualified labor pools? (and what is the labor cost?)
- To manage risk, minimize distance while changes are happening. When your product is undergoing a lot of development or change, you want engineers located close to where the product is being assembled or built, so you can react quickly. When processes are more stable, you can consider moving away from the central location. Once the product is tooled for manufacturing you can move production activities even further away.
- When moving out of China, look for countries that have the technical competencies that you need. These competencies should be for similar types of products in the area that match your product’s needs, for example:
- Taiwan is known for its wireless industry
- Korea and Japan do component and systems manufacturing
- Thailand is a major producer of disk drives
- India and Vietnam are emerging tech centers. However, India has transportation and logistics gaps which should be considered for manufacturing
- Vietnam is still short on “right-skilled” labor (a level of skilled labor that’s often needed); many companies in Vietnam are actually bringing labor in from Malaysia
- Malaysia and Hong Kong are also alternatives to China
- Europe also should not be ignored
- Look for contract manufacturers that have a global footprint. A contract manufacturer with a global footprint can help you move worldwide. Many are already located in Mexico, for example. There are many opportunities to do component and subassembly work in dispersed locations and then bring everything together (closer to the US) for final assembly.
- It is expensive, risky, time consuming, and resource intensive to move a supply chain. Balance all factors before you do it.
- Have a really good transition plan for moving your supply chain out of China. This should ensure that resources are available not only where you currently are located, but also where you are headed. It is a major undertaking to move a supply chain, and it can take a long time to establish. You are not only building infrastructure and logistics, but you are building new relationships. You may only move part of your operations, or maybe your move it in stages, so you will likely still need resources in the current country you’re working in. What is important is that a good transition plan includes resources planned out on both sides of the move. Do you have an assurance of supply continuity? If you are moving to another supplier, do you have buffer stock of supplies and inventory so you don’t run out of product during the change over? Interruptions to production during the transition can mean a critical interruption to your sales and revenue. A good transition plan will protect your investment!
- Be aware you have sunk costs in China, even if you shift your manufacturing.
- Chinese employees have employment contracts that you may have to continue to pay
- You probably won’t get your tooling out of China
- You will likely lose your IP to your Chinese contract manufacturer; they will continue to build and sell your product
- China still has the expertise in some areas, for example, battery technology. Creating a tariff resistant supply chain doesn’t necessarily mean moving out of China completely. Go back to #1. It takes a holistic approach.