Tariff Preparedness & Response

Checklist

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The uncertainty around tariffs and potential trade wars is anxiety-inducing for anyone with a physical supply chain. But supply chain leaders should take a calm, analytical approach and prepare as much as they can for any likely tariff scenario. This preparation can take a variety of shapes: running risk scenarios, developing contingency plans, and prioritizing resilience and agility.

To help you get started, we’ve compiled a checklist to ensure you’re ready for the ups and downs of tariffs and global trade in an increasingly protectionist environment.

Raw materials like agricultural products, lumber, metals, minerals increase manufacturing input costs and overall production costs. Know where your raw materials come from and/or where your suppliers source their raw materials.

Intermediate goods, also known as components or semi-finished products. Examples include computer chips, car engines, steel, sugar, and more.

Finished goods such as the completed cars that show up in dealership parking lots, packaged goods on shelves, clothing on store racks, or anything that’s completed the manufacturing or production process and is ready for the consumer.

5 Steps to Prepare Your Response to Tariffs

1. Identify which components in your supply chain might be subject to tariffs

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According to the World Trade Organization, rules of origin are, “Criteria used to define where a product was made and are important for implementing other trade policy measures, including trade preferences (preferential rules of origin), quotas, anti-dumping measures, and countervailing duties (non-preferential rules of origin).” These can be quite complicated and vary by commodity, state, territory, or country.

Here are some important nuances in rules of origin regulations to make sure you understand as you prepare your strategy:

Substantial transformation: According to the International Trade Administration, when a good does NOT come entirely from a single country – as is often the case with global supply chains – the principle of substantial transformation is used to determine the good’s origin. If a good is significantly and substantially changed in a country – essentially made into a new product with a new name, character, and use – then it could be said to originate in that country and potentially avoid a tariff.

Suppose a manufacturer imports engine components from multiple countries—cylinder heads from Germany, crankshafts from Japan, and pistons from Mexico. These individual parts are then assembled in the United States into a fully functional automobile engine.

Because the assembly process substantially transforms these components into a new and distinct product (a complete engine), the U.S. may be considered the country of origin. This could allow the engine to qualify under trade agreements or avoid certain tariffs, even though its individual components came from different countries.

Regional value content is the proportion of a product’s final value that comes from a particular country or region. It’s an important part of calculating how much local sourcing and production goes into making traded goods.

For example, if a pickup truck is assembled in Mexico using parts from the U.S. and Canada, it needs to meet the USMCA rule that says 75% of the truck’s value must come from the USMCA region (U.S., Mexico, and Canada) in order to avoid tariffs under USMCA. So, if the truck is worth $30,000, at least $22,500 of its value must come from the USMCA region to qualify for tariff-free treatment.

Domestic value addition refers to the value a country adds to the goods and services it makes and sells. It represents the portion of a product’s price that comes from domestic labor, materials, and other inputs used to make it. Companies can increase their domestic value addition to reduce the impact of tariffs on the imported components.

Understanding the nuances of rules of origin can help you understand changes in tariff classification and shift the impact of tariffs.

2. Understand rules of origin and value addition

https://www.wto.org/english/tratop_e/roi_e/roi_e.htm

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Knowing which strategies and tactics to embrace at different points in the supply chain will help you identify some potential ways to limit tariff exposure, which will help you in the next step.

Some options include:

Diversify raw materials sources

Explore alternative materials sourcing

Domesticate certain elements of production

Identify regional partners to whom you can shift production

Identify alternative suppliers for intermediate goods

Consider value-add manufacturing for finished goods

Establish Free Trade Zone (FTZ) operations to defer, reduce, or eliminate tariffs

Utilize tariff engineering by modifying product classifications to qualify for lower duties

Reshore or nearshore production to avoid high-duty imports

Leverage trade agreements (e.g., USMCA, ASEAN) to optimize sourcing and manufacturing locations

Implement bonded warehousing to delay tariff payments until goods enter the domestic market

Optimize supply chain routing to move goods through lower-tariff jurisdictions

Invest in automation to offset higher domestic production costs and reduce dependency on imports

Conduct regular tariff classification audits to ensure compliance and take advantage of lower-duty classifications

Work with customs brokers and trade compliance specialists to identify duty-saving opportunities

Negotiate long-term supplier agreements to stabilize costs amid shifting tariff policies

3. Outline potential strategies in line with business priorities

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Optimize your manufacturing footprint

Test export-import offsets

Test nearshoring and onshoring options

Model scenarios sourcing from regional suppliers

Test different supplier mixes

Test product-production mixes

Test different transport modes, nodes, and flows

Run incremental costing analyses

Run cost-revenue analyses

Reducing tariff impact without considering all the interconnected parts of your end-to-end supply chain could have an adverse impact on your margins, cost, and service. Using scenario- modeling technology, you can understand the full impact of changes in your raw material, intermediate, and finished goods strategies. Here are a few areas to focus on:

Pro tip: embrace AI-driven tools to make these analyses faster, easier, and more effective. Tools like Supply Chain Prescriptions can find solutions and recommend options within minutes, freeing up your modelers to focus on evaluating and fine-tuning the best options.

4. Digitally run scenarios to understand the full impact of supply chain shifts

5. Communicate recommendations to key stakeholders

After you’ve weeded through the options and found next-best solutions, contingency plans, or clear tactics to reduce tariff impact, you need to present the information to key decision-makers in a way that’s easy to understand. Here are some recommendations for how to communicate your recommendations effectively:

Present your top 1-3 recommendations. Don’t overwhelm people with every single potential alternative.

Use a dashboard to visually convey results clearly and concisely.

Show quantifiable impact aligned with key business metrics, such as how changes will impact the total cost-to-serve, carbon emissions, margins, etc.

Speak in terms your audience will understand. Speaking to a CFO? Communicate your recommendations in terms a CFO will understand. Talking to your procurement counterparts? Know what metrics they care about and help them understand how changes to the supply chain design will not only reduce tariff impact, but also reduce things like overall spend.

https://www.coupa.com/resources/maximize-margins-and-minimize-risks-in-your-supply-chain/ http://www.coupa.com/benchmark

Preparation in the face of uncertainty

Tariffs can be stressful and complicated. But with the right technology, people, and processes, you

can plan ahead to navigate them more effectively. Coupa Supply Chain Solutions helps you build the

Adaptive Supply Chain through world-leading scenario-based supply chain decision-making, so you

can respond proactively to disruptions like tariffs and rapid changes in global trade.

Start mitigating tariff impact now

https://www.coupa.com/contact-us/