Brexit & Trade Wars – Supply Chain Modeling a Clear Path in an Uncertain World

Author: Daniel Wilhelmi

Remember the days when our Supply Chain efforts focused on calculating the optimal inventory quantities, improving an availability check, reducing forecast bias, and building out technology roadmaps? Now we check Twitter each morning to know what trade policies have changed and dive into war rooms to assess tariff and tax implications on everything from our product routing to free trade zone positions. Our customers are experiencing direct supply chain modeling impacts by two major political events that have taken place over the last ~24 months: Brexit and the US tariff “trade war”. They are all asking the question: how do you keep your planning, execution, and processes in sync with an ever-changing environment?

 

While the final Brexit scenario seems to be swinging wildly with each passing day, this political volatility has forced our customers to plan for multiple scenarios, many of them with very different tax implications, and subsequent supply chain consequences. At the same time, it never became clear what these EU tariffs would look like, or what type of customs documentation would have to be created. This leads to significant inventory management challenges at different levels of the supply chain while reducing economies of scale from an inbound shipment standpoint, which especially applies to the Fashion industry. The real-time assessment of whether to pay customs for trans-European shipments vs. supply chain efficiencies is now a critical analysis need.

The other global event driving multi-national companies nuts is the recent introduction of massive tariffs on goods entering the United States from China or the EU. With China being a major manufacturing hub for both American companies as well as other international entities doing business in the U.S., companies are scrambling to expand on their “China plus” strategies to minimize the negative impact these tariffs can have. This has led to more intensive analysis on move manufacturing back to the United States, but we have seen much more focus on finding alternative countries in the “ASEAN Supply Chain” through Singapore, Thailand, Taiwan, Vietnam, Penang, and the Philippines who did not have tariffs imposed by the U.S. This of course requires considerations in the areas of existing infrastructure, tax implications, workforce qualification, regulations, etc.

For the fashion industry, countries like Vietnam and Malaysia have become more attractive due to a confluence of factors like existing infrastructure for production, warehousing and shipping, as well as availability of workforce. For the high-tech industry this has posed more of a challenge, because of the capital-intensive requirements to move a manufacturing facility from one place to another, let alone another country. Companies like Intel and Samsung have operated like this for decades, finding opportunities to relocate or substantially grow existing operations to offset tariff impacts.

So, what it is like in those Supply Chain war rooms? We are observing teams locked in on two efforts:

  • Scenario Planning – network optimization and other scenario planning tools/processes have been around for a long time promising to help Supply Chain teams execute broad scenario impact analysis. Tools like SAP IBP, Kinaxis, and JDA all play in this area to varying degrees with the key capabilities lying more in the S&OP higher level analysis. Understanding the direct ROI on new capital spending and logistic routing away from China/United Kingdom help the teams assess the trade-offs and set the long-range plan.
  • Master Data & Supply/Sourcing/Planning – while the more strategic analysis is done through the scenario planning tools, the more detailed supply impacts must be implemented quickly. The most common way we have seen this, is through introducing new Master Data specific to the impacted areas and then using the modeling tools to either eliminate or minimize how those new elements play into the plan. For example, we have multiple clients who have created China-specific material masters so that the supply line is more cleanly differentiated in their SAP system, thus giving them the ability to match that supply to non-US based customers, while at the same time planning for the non-China supply items to support their U.S. customer base. This integrates well into systems like SAP IBP and Global ATP, as isolated supply in the form of unique materials is more straightforward to manage.
Examples like these reinforce just how important it is to plan and execute alternative supply chain and overall company strategies to head off situations like these. It also continues to show the need for diversified supply chains to ensure uninterrupted flows of goods, services, and being able to fulfill customer demands under such geo-political impacts. This means balancing economies of scale of single-sourcing (or manufacturing) vs. the ability to react flexibly when unexpected events occur, or, as the case is with Brexit, uncertainty lingers for a long time. Managing these challenges requires world class sourcing and fulfillment strategies, supported by flexible, scalable and agile supply chain planning systems that allow timely impact analytics, response and optimization around new constraints.
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