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        Professors offer ideas industries could use to reduce the costs of tariffs

        August 28, 2018 By Joe McAdory

        All News

         

        How can the supply chain and its organizations best minimize the economic hit of tariffs placed on raw materials and goods from China? Maximize efficiency, find effective alternate suppliers, change the country of origin, or simply pass the cost on to the customer in order to maintain a profit.

        These are suggestions made by professors in supply chain management within the Harbert College of Business.

        tariff pic“When you start thinking about what we do in supply chain, in order for us to be really efficient and keep costs down, those cargo vehicles (truck, train, ship, etc.), need to be full – maxed out,” Glenn Richey, Harbert Eminent Scholar and Professor in Supply Chain Management,  suggested. “We want our ships to be full of containers and we want our trucks cubed out so that every square inch is being used. If that isn’t the case, expect costs to rise.”

        “Luckily, there are long standing companies out there that are working on an Uber style model. They are renting space inside those delivery vehicles, whether it is by truck, train, or ship.”

        Rafay Ishfaq, W. Allen Reed associate professor in supply chain management, believes that diversifying the structure of the supply base and bypassing the tariff can be a strategic ploy in a situation where tariffs are nation-specific. “But that’s a risky proposition,” he said. “How much can the steel or aluminum industries in newly-sourced countries sustain the volume of purchasing that goes on in the U.S.? You also have to factor in the extensive effort needed for evaluation and selection of potential sources. You have to qualify them before you can enter into a long-term contract.”

        Another strategy to maintain profit margin is to pass on increased costs to the consumer. But what happens when prices increase? Demand falls, Ishfaq said. “With new tariffs on parts and materials that go into those finished products, U.S. companies have to react,” he added. “They understand how prices will impact demand and that they may have to revise their replenishment decisions – how much they are going to purchase from their suppliers.”

        Industries in Alabama aren’t immune to the tariff hit, Richey says. “Alabama stands as great a chance of receiving a negative  economic hit as any state in the nation,” he said. “When you think about Alabama, you think about automobiles (Hyundai plant near Montgomery and Mercedes plant near Tuscaloosa), aerospace, distribution, technology, and raw materials.  For the supply chain, especially in Alabama, we’ve got some serious issues. Managers at some of our regional car companies are telling me that the current steel and aluminum cost have jumped $1,400 per vehicle. That will certainly have a negative impact on demand and create overcapacity in the supply chain.”

        Beth Davis-Sramek, Gayle Parks Forehand associate professor in supply chain management, said years of outsourcing and off-shoring weakened America’s ability to process raw materials, including steel and aluminum. “Outsourcing isn’t new,” she said. “We’ve been outsourcing and offshoring production for decades. As companies have moved things abroad – at a lower cost -- their own manufacturing capabilities and skill sets declined as they let somebody else make those products for them.”

        The U.S. steel industry peaked in 1973 – producing a combined 229 million tons of iron and steel. By 1982, that total had dropped to 107 metric tons. Since 1990, employment in the steel industry has dipped from almost 400,000 nationwide to approximately 380,000, according to the Bureau of Labor Statistics.

        Davis-Sramek noted that the logic for the tariffs is twofold: revive the U.S. steel industry and eliminate dependency on foreign imports for specific resources.

         “The administration wants to give American steel companies the ability to compete -- placing tariffs on the foreign products -- to give American companies time to ramp production back up,” she said. “However, it takes time. Once those capabilities are offshored, it’s very difficult to come back and compete at the same level, especially there are competitors who have been innovating and moving forward. Any time companies re-shore, there is a tremendous learning curve.”

        The U.S. economy will need to wait for U.S. steel companies to revive themselves back to full capacity. But is the short-term economic pain worth potential long-term gain?

         “If not, then we’re just putting restrictions on ourselves,” Richey said. “The integration of supply chains both domestically and globally has meant that any governmental trade measure implemented on a single country or industry sector will ripple outward to other regions and sectors. Because companies are expected to continually grow sales of goods and related services, the effects aren't limited to manufacturing. The supply chain services sector will also feel the pinch of protectionism driven by decades of interventionist US policy. Let’s hope these new tariffs are a negotiation tool and not a long-term fact of life.”