5 Ways to Reconfigure Supply Chains Amid High Tariffs

How should companies act today to mitigate the impact of high tariffs? Should they restructure their supply chains in this endeavor? Or should they continue to operate with their existing supply chain and supplier base?

If there was a way for companies to adjust to the high tariff environment, it would surely involve reducing the exposure to tariffs in the first place. 

One effective way to manage the tariff impact is by reconfiguring their supply chains. Such reconfiguration involves identifying the country of origin, partnering with local suppliers, and decentralizing supply chain operations.

How Companies Can Reconfigure Their Supply Chain – A Few Examples 

In Brazil, leading electronics companies such as Samsung, Lenovo and Foxconn have invested in localized production. They sidestepped tariffs as high as 35% on commercial imports by producing locally. Blending local sourcing with partial assembly allowed these companies to lower overall costs as well as tap into valuable incentives.

In India, luxury car brands thrived by adopting a similar strategy. 

Luxury car manufacturers such as BMW, Audi and Mercedes Benz transformed their operating models for the region. Instead of importing fully assembled vehicles, they started sending semi-knocked down kits for local assembly. This necessitated a full-scale reimagining of sourcing, labor training, logistics, and quality controls. Further, these companies passed on the additional costs to end consumers by raising their prices in these markets.

Indonesia is another example. Car companies adopted local assembly by importing semi-knocked down or completely knocked down kits. They also built a local tier 1 and tier 2 supplier base. Electronics companies such as Xiaomi, Oppo and Samsung built local assembly operations and cultivated regional supplier ecosystems specifically tailored to Indonesian regulations. 

How to Determine the Country of Origin 

Companies can use the principle of substantial transformation to identify the country of origin and tariff percentage. The country of origin for a product is the place where the product undergoes significant change in form, appearance, nature, or character.

The objective is to determine when and where there is a significant change in the abovementioned traits

Ways to Reconfigure Supply Chains 

In the quickly evolving business landscape, companies can reconfigure their supply chains in several ways to reduce their exposure to tariffs. Here are a few ways they can progress:

1. Pivot to regional hubs

Production hubs will emerge in geographically strategic locations that offer tariff-safe proximity to major markets. As a result, we will see increasing production investments in Mexico (North America), Poland (Europe) and Vietnam (Southeast Asia).

2. Assemble in end-markets

To mitigate the impact of tariffs, the final assembly will shift into consumer markets. In this process, companies will invest in new facilities, work closely with local suppliers, and train their workforce.

3. Decentralize operations

The one global supply chain will split into several semi-autonomous regional networks. While this will increase complexity, it will improve supply chain resilience.

4. Invest in digital infrastructure 

Companies will improve their digital infrastructure and capabilities. AI-powered demand planning, predictive analytics, and real-time visibility will be key to building an agile and resilient supply chain.

5. Derive total costs

Companies need to add geopolitical risks and tariff costs to traditional cost structures. Instead of prioritizing upfront costs, companies will look to build more stable and resilient sourcing strategies, even if this involves slightly higher production costs.

Supply Chains Must Adapt

High tariffs will have a significant impact on the business landscape. For companies to thrive in the emerging highly competitive environment, the key to succeeding is via their supply chains. 

Companies must reduce their tariff exposure by reconfiguring their supply chains. Identify the country of origin, build a local supplier network, and work closely with them. 

Read the GEP bulletin to learn more.