Business as Unusual

Knee-deep in the “uncertain 20s” (if no one has claimed it, we hereby coin the phrase), businesses have been pummeled with yet another disruption of unforeseen magnitude. No one needs reminding of the growing list—COVID and its rippling aftermath of supply chain crisis, recession, and inflation, mixed in with geopolitical issues and now...tariffs. Leaders everywhere are no longer surprised, for uncertainty is the only thing that is certain about this decade.

We are not political or economic analysts here to weigh in on the outcome of the trade war or predict its end. But we are servants of the American manufacturing industry—our job is to guide manufacturing companies to operational efficiency, transformative focus, and profitable growth. So, we have some skin in the game. We need the industry to prevail.

Let’s get to it—tips to survive tariff turmoil.

Think of it as a Math Problem

Successful leaders don’t let fear paralyze decision-making. Instead of panicking, they use the potential implications of tariffs as inputs to scenario planning. What is the scenario plan if: End-user demand decreases by 5%, 20%, or 100%? If tariffs drive COGS up by X%? If cash gets tied up in inventory? If inventory is delayed by months? If a key supplier on-shores? If a recession occurs?

Many immediate decisions will require you to look at three scenarios:

• If tariffs stay at X%
• If tariffs decrease by 50%
• If tariffs disappear

Know which business areas must be fortified and protected (our clients know it’s “The Fort”). Know what, where, and when you must eject, accelerate, pause, tighten, or exit.

There Will be Surcharges

Under normal circumstances (remember those?), we typically avoid surcharges. But these are not normal circumstances. Companies must expect to face and pass on surcharges. Communication and transparency with your top customers are crucial.

Don’t use this to gain share by NOT raising prices.

As our own Joe Hahn reminds us, “An industry is always in the grip of its stupidest competitor—make sure it isn’t you.” If you don’t raise prices, it is you. Be aware that a stupid competitor who will not raise prices to gain share may be out there. In that case, use judgment. How long can the competitor hang in before cash becomes a problem? How sticky is the business? How much risk is there in switching? Most likely, the best course is to hang in.

To Relocate or Not to Relocate? That is the Question.

Relocating manufacturing is costly. At present, we do not advise companies to reshore, near-shore, or make massive manufacturing or supply chain changes reactively. Given the volatile nature of the tariffs and the complexity and bureaucracy involved in relocating, the trade war may be over by the time you have revamped the supply chain.

For now, we stick to our tried-and-true manufacturing strategy: We advise companies to manufacture/source as close to their top customers as possible. We favor sourcing as much as possible (80% or more) in the manufacturing country to drive speed, efficiency, and continuity of supply. This strategy is better for the customer—they get things faster and easier. However, it is often more expensive, particularly in direct labor. To afford this, companies must drive inefficiency from their systems (more on that later).

We’d be remiss if we didn’t pass along a tactic that works for some: bonded warehouses. They’re storage facilities where taxes and tariffs are not charged until goods are withdrawn. At times like these, they are worth exploring. Whatever you do, don’t over-index inventory (surely the industry learned that lesson with COVID, right?).

Efficiency in the Spotlight

Since his first economic disruption (we’d tell you the year but that would reveal his age), our own Marc Fooksman has preached the following truth: “The time to fix a business is when things are going well. A good analogy is that if a person is unhealthy going into an illness, it will take longer to recover. The same is true for a company going into any challenging climate.” Good news for our 80/20 clients. They are decentralized, efficient, and focused on profit, ready to withstand the turmoil and recover more quickly.

For those looking around, ready to cut X% of costs willy-nilly to survive this...Take a beat. Put the scissors down. There’s a strategy that will allow you to reduce costly complexity and drive profitable growth, but you must act quickly and precisely. If you wait too long, your actions must be twice as drastic to catch up.

80/20 shines in moments like these. It enables companies to focus on and grow the things that drive profits (customers, people, suppliers, segments, processes, teams) while cutting the complexity and costs associated with the things that drain a company.

One example (of many) is product line simplification (PLS). Our clients who have already applied the 80/20 approach to product rationalization face significantly fewer tariffs simply because they manufacture significantly fewer products. Take the client who had 385 product configurations before the simplification. 80/20 analysis exposed that only 35 of those were necessary. PLS increased throughput by 40%, giving a price concession. They started at a 10% price reduction. Plus, that’s 350 products for which they don’t have to incur costs or pay tariffs. The key is to ensure you carefully analyze who buys what and don’t hack the long tail indiscriminately.

Pro-Tip: If you have already successfully simplified your finished product lines, we suggest you take the same approach to streamlining your materials.

A Position of Partnership

Uncertainty challenges everyone: your customers, suppliers, channel partners, employees, everyone. Increase the level of communication with all critical partners. Be transparent. Be fair. Don’t be afraid to ask for the information you need—you need to track supply and demand closely through the chain. So, ask.

Always look for ways to help and partner with your top customers. Demand may dip (with good communication, this won’t be a surprise). Still, you can gain share if you strengthen relationships, make the increased costs worth it with superior service, and nail your value proposition. If your top accounts need 60 days to digest the change, grant it—you’re within your rights to request 60 days post-tariff. Force majeure clauses should tackle fixed-price contracts; you may need to push and expose the catastrophic business impact of the fixed price.

Mary Kate Phillips reminds us to look for ways to partner with top suppliers. She says, “You don’t want to hurt your suppliers because, ultimately, that will hurt you.” Whatever you expect from your top accounts, give that treatment to your top suppliers.

Learn to Surf

You can’t control legislation, so focus on what you can control—efficiency, customer relationships, and cost structure.

Remember:

• Simplify your product line and supply chain so you can hyper-focus on your top products and suppliers.
• Remain agile with changing regulations. Expect pricing to vary.
• Strengthen top customer relationships to better predict demand.
• Keep calm and use scenario analysis.
• Price increases and surcharges are necessary to remain a healthy supplier.

As a valued client recently said, “We can’t control the waves, but we can learn to surf.”

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ABOUT THE AUTHORS

Jennifer Desrosiers is Managing Director of 80/20 Profit & Growth. She spent the first decade of her career with Illinois Tool Works (ITW). During that tenure, she undertook progressive business leadership roles across several divisions, including functional responsibility for sales, marketing, product management, operations, and corporate strategy. Since joining Strategex, Jenn has consulted with more than 20 companies across various industries. She has helped her clients achieve profitable margin expansion and cash flow growth through revenue increases, overhead reductions, working capital reductions, and more.

David Philippi is CEO of Strategex. His expertise includes 80/20 execution, product development, and market analysis to drive profitability. Before joining Strategex, David gained experience at Cinch Connectors in various product management and business development roles. There, he honed his skills in market research, product development, growth planning, and manufacturing. He was responsible for growing product lines, penetrating new markets, and devising long-term strategies for driving profitable revenue. Since joining Strategex, David has consulted with over 50 clients and has contributed to the success of Strategex's 80/20 Profit & Growth engagements.