Impact of Tariffs on Manufacturing

by | Jul 22, 2019

Discussing the Impact of Tariffs on Manufacturing

by BCA Technologies, Inc. | Episode One

This article is adapted from the BCA Technologies podcast, Episode 1, featuring BCA Technologies CEO Brian Cumming. Access the full audio version by clicking the play button.

What are tariffs?

Basically, a tariff is a tax and it’s imposed by one country on specific goods and services that are imported from another country. And why would they do that it’s because it’s a source of income for the country. The tariffs can be fixed or variable and they can be limited to certain goods and services. It just depends on the tariff that the government wants to impose. There’s a unit tariff that’s a fixed charge for each unit of good that’s imported. For example, it may be on an iPhone. There could be a twenty-dollar tariff that’s put on that as it’s brought into the country. There are also ad valorem tariffs which are typically a percentage of the value of a good imported. The other thing is the tariffs are used to protect domestic industries from foreign competition in addition to raising revenue.

What types of products are typically subjected to tariffs?

Tariffs can be imposed on any product or service. For example, in the past the United States had little or no tariffs on China’s products. About 30 years ago when China started really exporting a lot to the United States, they did not produce many refined goods. It was mostly plastic toys and very low-tech objects. Today it’s all changed. China’s one of the leaders in technology. So, it’s kind of a different ballgame.

China in the past has had, on average, about 25 percent tariffs on U.S. goods they imported. Of course, this is changing now as negotiations are going on to equalize the playing field not just between the United States and China but other countries as well.

How will ongoing trade negotiations impact manufacturers in the US?

Manufacturers may not be able to get the products they need to make their own stock. They buy materials and goods from other countries like China, Germany, Mexico, Europe and Southeast Asia to manufacture products. These materials could impact their entire product line, or it could be just certain parts or components that they put into their final products as part of their manufacturing process or it could be raw materials like rubber aluminum or steel. The tariffs increase the price of these products and materials. And that impacts the cost of the manufactured product which is then passed on to their consumer.

How does a tariff increase impact the supply chain?

Obviously, increases in tariffs increases costs for the manufacturer on anything that they put into their product that is affected by a tariff. A good analogy to think about this is like when OPEC announces they’re going to increase the price of oil the market, crude oil price reacts immediately. And the guy at the 7-Eleven store goes out and immediately increases the price of gas the next day even though he’s still pumping gas that he bought at the old prices. And it can take weeks or sometimes months to get the OPEC oil out of the ground, shipped, and refined so that consumers can finally purchase it at the gas pump. But the sales channel is already charging the consumer the higher prices just based on the announcement that there’s going to be an increase in price. This is very similar to a tariff announcement. Unfortunately, the supply chain to manufacturers is not much different from what I just explained with the oil prices.

However, the price of the final product usually doesn’t get increased the next day because the effect on the pricing of a manufactured product is much more complex. It’s not tied directly to the price of one particular item. But what ends up happening for many manufacturers is they’ll try and stock up on the products, parts or components before the tariffs go into effect to minimize the cost impact for a short amount of time. The supply chain reacts quickly because the products have become more valuable since the future cost just went up. The sales channels react in different ways because unlike how the price of oil is tied to the price of gas, the manufacturer’s price is more complex unless the product is manufactured one hundred percent in the other country like an iPhone is for example.

How can manufacturers and their sales channels avoid the chaos of tariffs?

Certainly, a tariff announcement does create chaos because the salespeople on the front lines who are doing the quotes on a daily basis are significantly impacted. When manufacturers’ rep firms hear about these tariff increases, they are putting out quotes every day based upon the current pricing, yet they don’t know how much it’s going to affect the price because the manufacturer they’re representing has not figured that out yet. This confusion leads rep firms to not know how much extra markup to put to cover themselves if the quote is approved in the future. So, they must honor their price for a specified period, sometimes, 30, 60, or 90 days from the time that the initial quote was given. Many times, the padding of the quote because an emotional decision, or a gut-feeling they have to make because they really don’t have the information on how much the true impact of the price increase is going to affect them or their quotes. And in addition to that, they’re up against with other competitor sales teams who may or may not be doing the same thing to their quotes and pricing.

What is the most effective way to update pricing with different sales channels?

Typically, there’s a delay of when a tariff is announced and when it actually goes into effect. Getting the facts and letting the sales channels know as soon as possible is the best way to avoid emotional decisions from coming into play. Starting day one, I would recommend talk talking to the manufacturers’ sales managers to start resisting special discounts that are provided until more information is given. Then the manufacturer has to analyze what the price increase is going to do to their list prices. And the problem is that many ERP systems don’t let you do that type of what-if cost analysis. Cost calculations often have to be calculated by some sort of spreadsheet analysis. From what I’ve seen, this can be tricky because the tariffs only apply to certain products or components or even materials. Once the cost impact is known for the products the manufacturer must get the new pricing out to the sales channels as quickly as possible. New quotes have to be generated with the new pricing, and the manufacturer should have a quoting system that the salespeople are using that includes a feature where the quote is only good for a certain amount of time. That way, if the price needs to change in the future, it can be accounted for.

Recommendation for manufacturers to be able to future proof themselves against other future tariffs or external price changes.

One thing is for sure tariffs, taxes, labor and price changes are never going to go away. In fact, many economists believe that there will be more not less tariff changes in the future. To protect sales and margins a manufacturer needs to have systems in place to quickly and efficiently analyze the impact of cost changes like tariffs on their pricing and margins, then be able to adjust pricing to those changes quickly and efficiently not only for themselves but also for their sales channels. Price changes have to be distributed instantly to the sales channels and avoid selling disruption processes. Everyone needs to be confident that the prices being quoted and ordered are up to date and 100 percent accurate. Using a web-based quoting tool is the most efficient way to adjust and protect margins while changing prices.

My company has talked to a lot of manufacturers who are still using the spreadsheet pricing pages and they just send out an announcement in emails to their sales channels. The problem with this is that it causes many salespeople to not use the new spreadsheet or the pricing increase because they’re busy selling all day long. The manufacturer’s announcement just goes into their email inbox and it kind of gets ignored. And so they continue to do quotes with old pricing or old spreadsheets and this causes the quotes to become inaccurate which leads to inaccurate orders when those quotes are finally converted into orders. In this type of system, the manufacturers have a very difficult time to properly invoice or enforce the use of the new price increase with these manual methods.

When a CPQ solution is used that’s web based, manufacturers can push out the price updates all at one time. This type of solution ensures that all quotes and orders created within this software are accurate from the moment they start using it. Even better, the pricing team and the salespeople don’t have to worry about updating price sheets or adding extra percentages or things like that because the pricing quoting tool does that for them automatically.

What is a CPQ solution?

CPQ stands for a configuration pricing and quoting solution. Basically, what it does is that there’s a lot of products that have options and accessories on them and they require a bit of configuration where you pick certain options with other options and then there’s rules that some options don’t go with other options. And then some accessories can go with certain products with certain options and all this is essentially rules-based pricing. So that’s what CPQ means: configuration, pricing, and developing a quote accordingly. Then being able to send the order into the manufacturer with a 100% accurate product that can be built for a given price.

Does BCA Technologies offer a CPQ solution?

Yes, BCA Technologies offers a product called eRep which is used by over 30,000 users to do their quotes and configuration pricing, generate technical submittals and do engineering selections as well for some of our clients.