There is no shortage of newspaper columns filled with speculation about the possible consequences of a trade war between the US and China. As with any economic conflict, there are winners and losers, but who will come out on top? Some media outlets are quoting the disparity in foreign exchange reserves, with China sitting on $3 trillion, as opposed to US reserves at $120 billion, but what does that matter in practical terms? There are a lot of theories going around about who will “win” the trade war, but the reality is no one can tell you with certainty how this will play out.
What you can say with a high degree of confidence, is that uncertainty is bad for business. If you are a supplier to retail, and you source goods in China, you probably have been grappling with a looming deadline of March 1st and trying to factor in the impact of tariffs on your margins. If you are struggling with the question of whether to increase prices to protect margins, or whether to shift your sourcing to other offshore markets, you are not alone.
The Supplier or the Consumer?
There are trickle-down effects that are common to many retailers and suppliers in the US. For starters, in the second half of 2018, many US vendors increased their Chinese purchases to bring in more inventory ahead of the tariffs. Not surprisingly, the increased demand in certain categories caused bottlenecks with the manufacturers in China. In some cases, sensing an opportunity, Chinese manufacturers increased their prices.
With the increased flow of goods coming out of China, there was a consequent surge in demand for freight forwarding services, leading to longer lead times and, in some cases, higher costs. Since many businesses imported additional inventory into the US in anticipation of the tariffs, there has also been an artificial surge in demand for warehouse space to store the goods, and with reduced availability comes higher rent costs. Add in the additional demand for working capital to fund the front loading of inventory, and you have a painful recipe for higher costs and lower margins, before the tariffs have even kicked in.
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It is not surprising that many US suppliers and retailers are planning or implementing price increases to cover not just the tariff component, but also the added supply chain costs they are experiencing. Who bears the brunt of that? The US consumer of imported Chinese goods.
With all this uncertainty, it is critical to have thorough visibility of the inventory in your supply chain, from offshore manufacturing locations right through to the shelf in the retail store. You need a firm grip on what products are selling through, what retailer stock levels are and what stock you will need coming from offshore in order to keep fulfilling orders.
Questions to Answer
The critical, but difficult question to answer is, “What is the optimum amount of stock in my supply chain?” That of course depends on so many variables – seasonality, promotions, competitive activity, new ranges, and displays, to name but a few. However, a few basic principles can help as follows:
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- What is my current sales velocity, and based on my best modeling, what is the expected sales velocity for my forecasting horizon?
- How much stock are my customers holding in total? Where is that stock in their supply chain – in store, in the DC, in transit to store?
- How many weeks of cover does that stock represent based on my anticipated sales velocity?
- How many weeks of stock do I need to hold in my own warehouse to cover the anticipated demand of my retailers, based on my known lead times? What does that mean in absolute terms?
- How many weeks of stock should I have on order from my manufacturers given the expected lead times?
- How can I build flexibility into my supply chain so that I can quickly react based on initial reads of the sell through data?
If you are interested in having a conversation about what Krunchbox can do to help offset the impact of tariffs, please contact us!