Why you need to rethink supply chains for the tariff storm

Supply chains are the most compelling example of just how complex and interconnected our world has become. Even a small local business will often have a footprint that extends well beyond our borders, typically into our Asian neighbours. This makes these businesses more competitive, but it also increases their exposure to risk.

One of these risks has business leaders on high alert as we slide inevitably towards a trade war between the US and China. This has seen the US imposing tariffs on thousands of important products and materials from China. 

In the most recent escalation, it slapped tariffs on more than $200 billion in Chinese goods. Given that these are Australia’s two largest trading partners, the growing tension could have major consequences and shouldn’t be ignored.

While many Australian companies have opened new opportunities by moving to global supply chains, few have mapped the vulnerabilities surrounding them. They don’t fully understand the economic, legal and reputational risks they’re now exposed to.

Although the US and China trade war is just one example of potentially damaging fallout from global supply chains, it serves to highlight the importance of planning for political and economic disruption. So, what can Australian companies do to mitigate this and other possible disruptions before they hit?

The impact of tariffs

While globalisation presents new business opportunities, it also creates exposure to instabilities from political and economic disruption. Trade tensions between the US and China is one example. When countries impose changes to taxes, such as tariffs, it disrupts the ability to import or export parts of products, manufacturing processes or even service delivery. As a result, it can have a negative impact on the value proposition for small and large businesses alike.

This current standoff is particularly significant for Australian businesses given our exposure to China. A large and growing number of local businesses have extended their supply chains into China and other parts of Asia. Frosty trade relations between the US and China poses a large risk to profit margins and more generally to business confidence and reputation.

It’s worth remembering that although the current trade instability has grabbed the headlines, it’s not the only potential issue. Political and economic disruption comes from different places but it all impacts business in the same way.

For example, the recent introduction of the Modern Slavery Act in Australia requires companies with an annual turnover of more than $100 million to report on the risks of modern slavery across their supply chains. For many Australian businesses with supply links in Asia – a hotbed of this activity – these laws posed a very real disruption to existing operations.

How to mitigate risk 

The current market serves as a strong reminder for local businesses to focus on risk management. It’s critically important that all businesses, large or small, assess their supply chains and ensure resilience to further shifts in trade policy.

Depending on your business this could mean assessing costs, the impact of potential supply shortages or even alternative sources of materials or parts. Company procurement teams are also critical at this stage, monitoring commodity prices and ensuring supply continuity.

Supply insights are an important tactic in mitigating the financial blows associated with tariffs. Digital business networks and cloud-based procurement solutions provide data to help local businesses anticipate bottlenecks to supply chains and address them before they become problematic. These networks are also transparent, finding more efficient supply chains and alternative sources for manufacturing or parts. 

There are significant opportunities trading with regional and global partners, but lack of awareness about the effects of political and economic disrupt can have long-lasting effects on business performance and reputation. Inadvertently forcing your business to rethink its supply chain, hedge against risk and discover new suppliers, may unearth a new preferred partner which better suits your business needs and current risk appetite.

As the trade war between China and the US continues, there’s no telling what the fall out could be. But even if the risk evaporates, as more Australian businesses engage with overseas suppliers, risk management will remain an important issue. To ensure supply chains will flex to meet the demands of a shifting, volatile landscape, it’s critical to assess supply chains. Developing robust strategies today will help you avert whatever disruption may surface tomorrow.

Henrik Smedberg is regional vice president of SAP Ariba ANZ, the world’s largest business network, linking together buyers and suppliers from 4.1 million companies in 190 countries