Coupa's Five Steps for Responding to Tariffs

Tariffs and global trade uncertainties are creating major concerns for supply chain professionals.

In the face of these challenges, adopting a calculated and informed approach is vital. Instead of succumbing to panic, supply chain leaders are advised to plan, model and communicate effectively, thereby setting the stage for potential tariff scenarios.

In an industry environment where protectionist measures are on the rise, Coupa has identified five strategic steps to help organisations prepare for tariffs.

1. Identify tariff vulnerabilities

The initial step involves recognising how tariffs might impact various operations, as each element within a supply chain presents unique challenges.

For instance, tariffs on raw materials like metals, lumber, minerals and agricultural goods can inflate manufacturing costs. It is crucial to understand both direct suppliers and their sourcing routes.

Intermediate goods, such as semi-finished components like computer chips, engines, or steel, are especially susceptible to shifting trade regulations due to their multinational origins.

Finished goods, which are the end products for consumers like cars, electronics or clothing, may also face tariffs when crossing borders unless certain trade conditions are met.

Mapping these stages, from raw materials to finished products, helps pinpoint potential cost increases or disruptions.

2. Navigate rules of origin

Understanding rules of origin is key, as these trade rules determine a product's 'origin' which can impact tariff eligibility. As defined by the World Trade Organization, these rules are "criteria used to define where a product was made." They are crucial in areas like anti-dumping duties, quotas and preferential treatment policies.

Coupa highlights several nuances within these regulations:

• Substantial transformation applies when a product's components hail from various nations. If assembly in one country results in a product with a new identity, this country can be deemed its origin. For instance, an engine assembled in the US from parts originating in Germany, Japan and Mexico could classify the US as its product origin, potentially qualifying it under certain trade agreements and avoiding tariffs.
• Regional value content: A vehicle manufactured in Mexico with parts from the US and Canada must derive 75% of its value from these regions to qualify under the United States-Mexico-Canada Agreement (USMCA). For a truck valued at $30,000, $22,500 must originate from the USMCA region to elude tariffs.
• Domestic value addition measures how much of a product’s value is produced within a country through labour, materials, or production inputs, which could help in mitigating tariff exposure.

3. Adapt strategies to limit risk

Following the identification of risks and understanding of trade rules, supply chain strategies play a pivotal role.

Adjusting sourcing or manufacturing models can alleviate tariff impacts. This includes diversifying suppliers, relocating production to regional partners, or considering nearshoring processes to minimise high-tariff imports. Options also encompass boosting domestic production or changing country mixes in sourcing intermediate goods.

Trade strategies such as tariff engineering, which involves the reclassification of products, can help in lowering duties. Utilising bonded warehouses to store goods without incurring immediate tariffs and Free Trade Zones (FTZs) that offer deferred or reduced tariffs are also viable tactics.

Additionally, digital compliance solutions, along with close collaboration with customs brokers and trade compliance teams, can identify potential savings, bolstering negotiations and maintaining predictability.

4. Implement scenario modelling

It is crucial to anticipate the full impact of changes on supply chain processes.

Digital scenario modelling allows businesses to simulate various adjustments to gauge their effects on earnings, services and continuity. This incorporates simulating new supplier combinations, altering transport modes and exploring alternative sourcing regions. It even enables the analysis of cost-to-serve, revenue outcomes and carbon emissions.

Moreover, AI-powered tools provide rapid evaluation of these elements, allowing teams to fine-tune their strategies effectively.

5. Communicate effectively with stakeholders

Once strategies are crafted, it is crucial to communicate them clearly to all stakeholders.

Instead of overwhelming colleagues with multiple options, focus on a few key actions underpinned by data. Utilise visual dashboards and quantifiable metrics to illustrate how a potential supplier change affects total cost-to-serve, emissions, or profit margin.

Tailor communication according to your audience's needs; the information required by a finance director may differ from what a procurement manager seeks. Employ business-aligned language to elucidate how proposed changes can control expenses or diminish risks amidst volatile trade conditions.

By segmenting the challenge into stages—identifying risks, comprehending origin rules, developing strategies, conducting models and communicating clearly—supply chain leaders can confidently navigate the dynamic trade landscape.

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