Managing unpredictability is a fundamental part of a supply chain executive’s job. The first months of Donald Trump’s presidency, however, have added new uncertainty about operations, and raised urgent questions concerning how companies can prepare for the “twists and turns” that administration statements have triggered in trade, taxation and investment, observes Yossi Sheffi, director of the Massachusetts Institute of Technology’s Center for Transportation & Logistics, and author of “The Power of Resilience: How the Best Companies Manage the Unexpected.”
On one hand, the new administration promises reduced corporate tax, less regulation, more U.S. investment, and support for domestic manufacturing and large infrastructure projects. Such policies could increase the competitiveness of U.S. firms and boost profits. Then again, as Sheffi wrote in an article that ran in the Wall Street Journal yesterday, there are so many possible scenarios and policy shifts in each part of the world that it’s increasingly difficult for supply chain planners to determine how their companies might fare. The incessant chatter about trade restrictions, new taxes on imports and limits on immigration and visas may further undermine their confidence, he wrote.
Sheffi goes on to note that there are several steps supply chain executives can—and should—do to prepare for this climate of volatility. First, they must ensure the company maps its supply chains. Many companies might have a reasonable picture of their supply chain that includes first-tier suppliers. However, companies should begin mapping supply chains further upstream in more detail. To understand the potential impact of an act such as creating a border tax, companies should have closer and more frequent contact with vendors, and share ideas on how potential changes in trade or regulatory restrictions may affect costs and the flow of goods.
Executives should also ensure flexibility is included in all new supply contracts so a company may change suppliers, volumes, routings and other key requirements in response to changes in the economic, tax or regulatory environment, Sheffi explains. Suppliers are likely to ask for this type of flexibility from a customer, so preparing to embed it in supplier contracts is useful preparation.
It’s also important to slow down capacity investment. The current uncertainty means that significant capital investments outside the U.S.—particularly those in manufacturing capacity—should be critically reviewed. If feasible, Sheffi writes, it may be better to simply wait for now.
Companies should also simulate responses in drills. Focus on one or two possible scenarios and make sure team members from legal, tax, finance, manufacturing and other functions are involved, Sheffi writes. While it’s unlikely that many scenarios will materialize, the preparations and exercises across offices with different responsibilities can be valuable if the need to respond does arise.
It's also important to create a communications strategy, if one is not already in place, to address supply-chain concerns. That way, Sheffi explains, if significant changes occur, the appropriate message may be crafted for suppliers, customers and investors to avoid knee-jerk reactions in the market.
Finally, it’s imperative to monitor the competition, Sheffi notes. When big changes occur, understanding how events may affect the broader market and how a company’s peers are responding can be crucial in mapping out an appropriate response, he says.
Even with all this preparation, supply chain executives also should be careful to not “overplan,” Sheffi writes. Some industry observers have cautioned that despite the heated rhetoric, there won’t be much substantive change anytime soon, and trading markets lately reflect a more confident view of the prospects for change. The country is facing possible changes in trade and regulatory policy, after all, not another Y2K scare or economy-crushing financial crisis, Sheffi continues.
What are your thoughts on preparing a company and supply chain for volatility?