How tariffs impact Supply Chains?

In today's globalized economy, supply chains are increasingly complex and interconnected, stretching across countries and continents. As businesses source materials and goods from around the world, they must also navigate a constantly shifting landscape of regulations, trade policies, and tariffs. These trade barriers can have a profound impact on the flow of goods, production timelines, and overall costs.

But what exactly are tariffs, and how do they affect supply chains?

Tariffs are taxes or duties imposed by a government on imports and exports. Governments use tariffs to regulate trade, protect domestic industries, or retaliate against trade imbalances or unfair trade practices. While tariffs serve as a source of revenue for governments, they also increase the cost of goods that cross borders. These added costs are typically passed along the supply chain, ultimately impacting consumers.

One of the most direct impacts of tariffs is the increase in the cost of goods. When a government imposes tariffs on imported goods, it raises the price of those goods for businesses importing them. For supply chains that rely on foreign suppliers for raw materials, components, or finished products, this results in higher production costs.

In response to tariffs, many businesses reevaluate their sourcing strategies to mitigate increased costs. This often means shifting production or sourcing to countries with lower or no tariffs. However, moving production or sourcing to a new country isn't always a simple solution. The decision to relocate production can involve significant capital investment, operational changes, and the development of new supplier relationships all of which can take time to implement.

Tariffs can also affect consumer behavior. Higher prices on imported goods due to tariffs may lead consumers to reconsider their purchasing decisions. If goods become more expensive, they may seek alternatives or reduce their spending altogether.

All in all, tariffs are more than just a political or economic issue they have tangible impacts on global supply chains. Increased costs, disruptions, and the need for strategic adaptation are just a few of the challenges businesses face in navigating tariff-related obstacles.

A deep dive into Cost to Serve

 
Cost to Serve or Cost to Deliver has been a concept that we have explored in the past, you can find the last post we published in this link: The importance of Cost to Serve in Supply Chain.

In this post, we are going to deep dive further on this concept and shed some light around the different components that can impact cost to serve.

First things first, a quick reminder of what is cost to serve; It is the total cost of providing a product or service to a customer including all direct and indirect costs.

Direct costs are those that can be directly traced to the production or delivery of the product or service, while indirect costs are those that are not easily traced to the specific product or service but are still incurred in the process of providing it.

Now onto why understanding your cost to serve is important.

By understanding how much it costs to serve each customer, companies can segment their customers and identify potential areas for cost savings. It can also be used to evaluate different pricing strategies and understand how changes in price may impact overall costs ultimately helping organizations to transform unprofitable customers into profitable ones.

But what is the best way to determine cost to serve, and what are the different elements that make up this metric?

There are several elements and categories that need to be captured to be able to analyse cost to serve and have some meaningful data to work with:

1- Customer: Customer services overheads, order management, customer specific services, presales costs etc

2- Sourcing and manufacturing: Sourcing and procurement, cost of goods, production costs, manufacturing costs etc.

3- Warehousing: Picking packing and storage cost.

4- Delivery/Transportation: Transport, last mile delivery, returns and reverse logistics etc.

Finally, how do we put everything together and calculate cost to serve?

This is the easiest part, providing you have managed to do the hardest part which is to identify all the different costs impacting your operations. Once this information is ready, it´s just a question of subtracting from the customer sale price all these different elements, leaving you with a data point that can be compared across all customers in your organization.