In today’s volatile global trade landscape, enterprises face ongoing pressure to optimize their supply chain operations. Rising costs, geopolitical tensions, and tariffs demand a strategic and holistic approach to maintain profitability and competitive advantage. 

There are many ways an organization can cut supply chain costs. While there are no short-term fixes, enterprises should prioritize areas where they can make the quickest gains to reduce costs. Depending on the nature of your business, your trading partners or your location, this could include procurement strategies, demand planning, logistics, and global trade management among others.

Mastering Direct Spend Management

Procurement teams generally do not report to the chief supply chain officer. Despite this, direct spend is a critical component of supply chain management. For many large enterprises, procurement makes up a large part of a company’s total costs. Strategic management in this area can yield substantial savings and build stronger supplier relationships. 

Direct spend refers to the costs associated with the goods and raw materials that are used in the production of a company’s products. This is often the largest procurement cost for manufacturers. Optimizing this area, even by small percentages, translates to significant savings.

Procurement teams should build long-term, collaborative relationships with key direct suppliers. This involves rigorous supplier selection, negotiation of pricing, quality standards, and delivery schedules, fostering trust and consistency. 

When costs rise, companies — particularly larger ones — may try and pass the total cost increase onto suppliers. This is a short term strategy, and one that can ultimately damage relationships with key suppliers. Ideally, these relationships should be beneficial for both parties.

Having said that, you should also consider developing alternative sourcing strategies. This helps reduce the risk should a key supplier be unable to meet your demand. Even without trade tension, natural disasters, fire and other disruptions can impact your suppliers.

Companies should also look for opportunities to consolidate purchasing across different business units. This should allow you to negotiate better pricing and terms with suppliers.

Understanding and Minimizing Total Landed Cost

Procurement professionals often focus on the unit price This can be misleading. The total landed cost includes all expenses until the goods arrive at your manufacturing facility or distribution center. This gives a clearer view of the true cost.

This includes, but is not limited to:

• Freight
• Duties, tariffs, and taxes
• Insurance
• Harbor fees
• Handling charges
• Currency exchange rates
• Payment processing fees

When evaluating suppliers, you should prioritize the lowest total landed cost. A seemingly cheaper supplier may be more expensive when you factor in all logistical and regulatory costs.

In addition, you need to periodically repeat this exercise. This will help you to identify opportunities for reducing shipping expenses through alternative carriers, transportation modes, or volume discounts.

Planning and Scheduling in Uncertain Times

Even best-in-class manufacturing companies with robust integrated business planning (IBP) or sales and operation planning (S&OP) processes can be impacted by tariffs. As well as dealing with rising prices, supply and demand could fluctuate.

One critical component is aligning production planning and inventory with demand. Accurate demand planning is crucial for profitability. Using historical data, statistical models, market trends, along with artificial intelligence (AI) and machine learning, supply chain management solutions help predict demand so that companies do not incur high inventory costs.

Scenario planning is particularly important during uncertain times. This allows you to stress-test the supply chain to assess the financial and operational impacts across a range of different scenarios.

For example, consumer behavior and buying patterns can change when prices rise. Companies should include the possible effects of tariffs in their forecasting models. This will allow you to better predict future demand and modify your production and inventory strategies to match.

Scheduling solutions help manufacturers to prioritize production in the correct order to reduce wait time, minimize changeovers and increase productivity. However, tariffs may disrupt inbound shipments of critical materials. As a result, you will need to pivot the daily production schedule to accommodate delays, without compromising productivity. 

With the uncertainty of tariffs, comes surprises which could necessitate unexpected changes to production schedules. Automated scheduling solutions allow companies to change schedules quickly and efficiently to keep the business running properly.

Taming Tariffs

The global trade environment is currently facing rising tariffs and trade tensions. Proactive strategies are crucial to minimize their impact on your bottom line.

The first step is to understand the specific impact of tariffs on your imported goods, including total landed costs. This will allow you to identify which products and parts are most affected.

Diversifying your supplier base can provide insulation against tariffs imposed on specific regions. You need to seek out and cultivate relationships with suppliers in countries with lower tariff rates. This might involve building new partnerships or increasing orders from existing suppliers in favorable trade zones.

Imagine you are based in the United States. You have the choice to source the same goods from a supplier in China or one in the UK. The UK goods may have a higher unit price. However, the total landed cost may be significantly lower due to different tariff rates and shorter transportation routes.

The Importance of Correct Classification

Ensuring that you accurately classify your goods is crucial. Some importers may be tempted to get around tariffs by classifying imported goods incorrectly to get a more favorable rate. This is illegal. Companies violating import laws could face penalties, confiscated shipments and could lose their import licence.

You should also consider leveraging AI-assisted classification tools. This will help to ensure accurate HS code classification, minimizing the risk of incorrect duty payments.

However, tariff engineering is a legal way for importers to lower duties by changing how a product is made or put together. Ideally, companies should consider these duty rates when first designing a product.

A well-known example is Converse sneakers, which have felt in the soles. This design addition meant that the shoes are classified as “slippers”, which have a lower duty rate than “rubber-soled shoes.”

However, you should be careful with tariff engineering and follow the law. It’s fraud if you change a product just to get lower duties, and then change it back. Authorities will prosecute companies that try to trick them into applying lower duty rates.

US-based importers should also consider using a Foreign-Trade Zone. FTZs allow you to defer or eliminate tariffs on goods until they enter the domestic market. This could result in lower tariff rates on finished products compared to imported components. Additionally, FTZs streamline customs procedures with simplified processes and reduced Merchandise Processing Fees.

Optimizing Logistics and Transportation Costs

Logistics, especially for global enterprises, can feel like a constant drain on resources. Customers expect swift and affordable delivery, making logistics ROI a crucial metric for both costs and customer satisfaction. The key lies in gaining control and visibility over your shipping operations.

Multi-carrier shipping software is a game-changer for high-volume and global shippers. It transcends basic rate shopping by offering a suite of benefits that directly impact your bottom line. 

The solution automatically checks each shipment against the rates and service levels of all your contracted carriers. This eliminates the guesswork and ensures you consistently secure the most cost-effective option without sacrificing delivery timelines. 

Multi carrier solutions also identify opportunities to consolidate parcels destined for the same region into a single shipment. This greatly cuts transportation costs and reduces the number of customs forms needed.

It is important to audit your parcel shipping spend. Freight charges are complex. They include annual rate hikes, extra fees, fuel surcharges, and dimensional pricing. This makes manual audits take a lot of time and can lead to mistakes.

Advanced freight auditing can even identify and correct issues before they lead to unnecessary charges. For instance, it can recognize incorrect or incomplete addresses, preventing costly redelivery fees.

Processes Improvements

If tariffs increase the costs of imported goods, overall process efficiency becomes even more critical. There are different ways to tackle this issue. For example, a Quality Management System can help minimize defects. This reduces waste, as well as rework and its associated costs.

Furthermore, if you are paying a premium, it is critical that you ensure the quality of incoming materials. Substandard materials lead to production issues, waste and possible recalls.

Process intelligence tools are another way of identifying areas for process improvement. This will allow you to identify inefficiencies, bottlenecks and process deviations that slow you down. Even better, process intelligence facilitates the creation of process digital twins that allow you to predict potential problems and simulate corrective action before expending physical effort.

Conclusion

The global market is complex, so a comprehensive approach is essential. To reduce supply chain costs, procurement expenses, and tariffs, you need a clear strategy, as well as supporting technology. Where you start depends on your most pressing needs. 

The key is to go beyond reacting. You should use a proactive, data-driven, and tech-savvy approach to manage the supply chain. The right supply chain management systems help you to handle complexities, improve efficiency, and gain a lasting competitive edge.

Visit our website to find out more about how QAD can help you address supply chain challenges and tariffs.