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The United States president has announced significant tariffs on imports of steel and aluminium. Although there are several countries excluded, the exact impact of this decision on global supply chains is uncharted territory. Protectionism is a murky and complex set of dominos with reactions and retaliations, some of them foreseen, some not. Some of them intentional, some not. In fear of stating the blatantly obvious, the structure of global supply chains will be impacted.

The Question, of Course, is “How?”

Naturally there is a direct impact. Manufacturers consuming imported steel and aluminium products will need to absorb (or pass on) additional material costs or secure alternative sourcing. Very easy to write, but very difficult to implement. Steel mills and extrusions plants are finely calibrated. Even a slight change to a raw material can have major quality impacts. Source and supply agreements are generally locked in many months in advance. Some agreements will have “force majeure” clauses, that may allow flexibility in contracts, that legal teams will be scrutinizing. On whiteboards globally, supply chains are being redrawn.

Opportunities and Threats

Although the direct impacts of these changes are difficult to predict and plan, it is the unknown indirect impacts that the world will be waiting to see. Many pages of speculation have been and will be written about what these indirect impacts may be. However, most analysts concur that the news is not all bleak. There will be winners as well as losers. Local manufacturers of steel and aluminium are the targeted winners. Local companies that service this sector will also have a win. The losers will be exporters to those countries likely to take a retaliatory tariff position. However, the losers will not be as obvious nor intended. Consider a seemingly “safe” local manufacturer that sources and sells locally in a market with large competitors who are focused on export markets. Once their competitors’ paths to market are hindered, they may look to relieve overstock positions domestically. With the unpredictability of when and if these tariffs will be impacted, manufacturers are being forced to create contingency plans.

What is Different?

In the context of NAFTA, Brexit, TPP and global nationalism trends, and as witnessed in recent Italian and German elections, the US announcement is not a standalone event. Disruption is now part of the new normal. When everything is disruptive, nothing is disruptive. The company that thrives in this environment will not be the biggest, the richest nor the fastest. It will be the company that is most agile, the company that can rapidly evolve and continually reinvent itself to exploit new opportunities and defend against sudden threats.

In the past, on hearing of such an event, our customers would be rushing to their supply chain design tools and performing endless what-if scenarios to identify new feasible sources of supply and capabilities to serve demand. In the short term, this remains a noble course of action. However, supply chain design tools are generally intended to be used in a strategic manner. Their designated purpose is for long term planning of network and capacity. The resultant plans are normally not time phased. The outputs of Supply Chain Design processes are static plans of where to invest infrastructure, where to source and where to serve. The “gotcha” moment is that disruption on a 2018 scale is not static, it is the new normal and changes perpetually. One cannot realistically redesign their supply chain after each trading partner’s country has elected a new government.

Solutions and Challenges

The longer term solution is to bring many of the ‘where-to-source’ and ‘where-to-serve’ decisions under the Sales and Operations Planning (S&OP) umbrella. The S&OP process is designed to digest business opportunities and threats in a time phased manner. It is designed to make collaborative decisions to achieve corporate objectives that transcend any number of current threats and opportunities. S&OP is designed to manage contingency and mitigation plans around risks and manage action plans around opportunities. There is no better place to turn in this period of disruption.

In the same manner as Supply Chain Design, this will require endless iterations of various planning S&OP scenarios. Modern S&OP technologies have advanced analytical capabilities suitable to digest and present the large volumes of data in a decision supporting manner. Supply Chain Design is usually executed infrequently, in isolation within centers of excellence. S&OP is executed monthly, collaboratively harnessing the collective intelligence of stakeholders across the supply chain. This additional intelligence will add much value to the outcome.

The challenge will be to provide the costed alternatives to the S&OP process. S&OP will require the alternative sourcing and supply paths and consider risks of competitor dumping upon having an alternative path to market closed. S&OP will also manage the opportunity of short term demand when a competitor has a path to supply closed. The S&OP model flexibility will need to extend to variable Bills of Materials (BOMs) that are sensitive to local content rules based on volume and value.

This does not negate nor limit the role of Supply Chain Design solutions. They remain a required business process for strategic infrastructure planning, but Supply Chain Design should not be the first port of call when Twitter breaks the next geopolitical news.

Do you use Supply Chain Design solutions to model change? Is your S&OP process sufficiently mature for source and serve discussion? Is your company agile enough to respond to changes in source and serve in a collaboratively manner? Share your thoughts in the comments section below.

Shaun Phillips
Shaun joined DynaSys in 2017 and brings with him an extensive career in Supply Chain technology. As global product & market manager, Shaun is responsible for the strategic direction of the DynaSys DSCP product as well as the go-to-market enablement and market development. Shaun has an international focus having started his career in Australia spending many years serving the APAC region. He then spent several years in Germany and since 2012 has called Paris home. Outside the office, Shaun often sneaks a shocking game of golf in between the adventures of raising two young boys. He is very passionate about Australian Rules football.