Dealing with Risk, Uncertainty and Tariffs: What the Recent Tariff Delay Means for Retailers
What’s the scariest part of a horror movie? Knowing there’s a killer in the house but not knowing when or where they’ll strike. That’s sort of what retailers are going through right now with the whipsaw nature of the trade war with China. You know the tariffs will hit you, but you’re not sure when or how much they will be.
Case in point: on August 1, President Trump announced new 10% tariffs on $300 billion of mostly consumer goods to take effect September 1. Soon after, realizing the damaging impact on retailers and consumers during the holiday shopping season, he backed the start date off to December 15. Then on August 23, angered by Chinese retaliatory tariffs, he increased the tariffs to 15%. Then again on August 25, he indicated he may have second thoughts. For retailers, the uncertainty over timing and amounts, and the real risk these tariffs could put some out of business is a true horror story.
Who will be impacted most?
Unlike previous rounds of tariffs on aluminum or steel the new round is directed at consumer goods such as shoes, clothing, toys, and consumer electronics that are the sweet spot for most retailers.
But which retailers will be impacted most? Those who source a significant portion of their goods from China. But beyond that, retailers selling goods that are more price-sensitive such as non-luxury shoes and clothing or discount store goods will have the least ability to absorb tariff costs. Also, those retailers who have not already diversified their sourcing options, as some of the major players have, will have little time to do that before the new tariffs kick in, putting them at a distinct disadvantage. Retailers with scale and a value strategy will be better able to weather the impact of tariffs, absorbing the impact of margin loss while attracting shoppers looking to counter rising prices.
What options do retailers have?
The three key options retailers are considering for dealing with the new tariffs are:
1. increasing inventory before the deadline
2. negotiating lower costs from Chinese manufacturers where they have leverage
3. finding alternate sources for goods outside of China
All have their costs and limitations. Other strategies include rationalizing SKUs where it makes sense and maximizing margins where price elasticity is possible to shore up the P&L.
Loading up on inventory drives additional inventory carrying costs, insurance and often contracting for more storage. It also creates a greater risk of obsolescence and steep markdowns if buyers misjudge demand or fashion trends. There is also the risk that inventory will be in the wrong place when demand develops, necessitating expedited shipments to reposition it.Switching to alternate sources comes with both uncertainties and risk. While Vietnam is a popular choice, reports are surfacing that the country’s limited manufacturing capacity is already heavily booked and their ports and other infrastructure are maxed out. Other Asian sources have similar uncertainties to navigate.
While near-shoring to Mexico, Canada or the U.S. (for U.S.-based retailers) is an attractive option because it moves production closer to markets and provides greater agility in reacting to changes in demand, it has its uncertainties. Can relationships and facilities be set up in time? How will this impact the holiday shopping season, if at all? What will be the impact on costs for production and transportation? And how will moving some or all of production out of China impact your ability to sell into the vast Chinese market?
The solution: AI-Enabled Planning and Execution
At times of heightened risk and uncertainty such as the current trade war, the importance of timely, accurate inventory management, as well as the ability to quickly re-plan as situations and demand change, cannot be overestimated. But it can’t be done the old way—internally focused, historically based, disconnected across departments or blind to network partner constraints.
In the current environment of tit-for-tat tariffs with ever-changing amounts and start dates, planning must be agile, network-wide, and accurate. It must consider meaningful news and events as well as understand constraints from partners, infrastructure, procurement, production, distribution, and transportation. Most importantly, it must be able to quickly and continuously react, re-plan and adjust as events and markets change.
Today’s retail planning cannot be done manually, or with spreadsheets or outdated software. It requires network-wide supply and demand planning capabilities augmented with IoT sensors, artificial intelligence, and machine learning forecasts to immediately sense and respond to changes with execution-ready logistics resources. It requires constraint-based scenario planning capabilities so planners can understand the trade-offs of various sourcing options and can intelligently balance those against customer service goals and costs. And the demand forecast must integrate with markdown optimization and dynamic allocation systems to optimize pricing and placement to maximize sales and margins. Lastly, it requires an open digital platform that cannot only ingest real-time digital signals from a vast ecosystem of sources and partners but can also scale and adapt to future data sources that have yet to become available.
So, what does the delay in the recent tariffs mean for retailers? It provides a little breathing room to make better sourcing, inventory and pricing decisions. While it is unlikely you will be able to implement a new, network-wide planning system in time to react to the December 15 deadline, the new tariff is not a one-time event. Those who have the right people, technology and business processes to quickly and accurately respond to this and future events will be the winners going forward.