A shifting tariff environment: ‘It’s like a puzzle’

While most respondents (85%) said in March—before the administration’s April 2 announcement of sweeping new tariffs on all countries and its subsequent partial rollback and an announcement of a 145% tariff on China—they were very prepared or somewhat prepared to handle the rollout of potential new trade and tariff stances in the next six to 12 months, their views on the expected impact were mixed. Forty percent predicted a negative impact, 36% expected a positive impact and 24% foresaw no impact.

“If your business—or even a product or product line within your business—has a lower exposure to tariffs as compared to your competition, then you suddenly have a significant opportunity to gain market share from your competitors,” says RSM US management consulting principal and supply chain leader Casey Chapman. “No doubt we will see more ‘Buy American’ messages as the companies take advantage of the moment.”

Some organizations may be planning to simply pass tariff costs on to customers. Some companies might be ordering more inventory now in anticipation of tariffs, so that orders get delivered before those levies hit; indeed, total inventories increased by 0.3% in January and 0.2% in February, according to U.S. Commerce Department data. Others might be taking advantage of tactics such as bonded warehouses and free trade zones. Still, overall, “the situation is so volatile,” says Winquist, “it’s important to take the time to plan for these scenarios so you’re equipped to make adjustments.”

Companies that are most prepared are probably also the ones that have analyzed their supply chain and understand their tariff spend, tariff codes and products’ countries of origin—and which of their imports they ultimately reexport.

“Companies should take the time to map out their supply chains as a starting point,” says Jodi Ader, a senior manager in the trade and tariff advisory practice at RSM US. “If you understand your supply chain, you can identify new opportunities.”

For instance, she says, a company that already knows 80% of its tariff spend is from China or that it incurs high tariffs on certain materials has a head start on exploring solutions like considering different tariff classifications or renegotiating supplier contracts.

Canadian respondents were significantly more likely than U.S. firms to say these new trade and tariff stances will have a negative impact (58% vs. 36%). When asked about specifics on trade regulations, 84% of all respondents said they have documented policies and procedures for ensuring compliance, with firms in the U.S. being significantly more likely to say that compared to their Canadian counterparts (87% vs. 70%). A similar percentage of all firms (83%) said they have a formal process for the storage and retrieval of customs records. Seventy percent have a master database of tariff classifications for imported products.

Ader suddenly became busy with an influx of tariff-related work for Canadian clients moving goods northbound and southbound, she says, as they seek out solutions such as temporary import procedures, special tariff provisions or other ways to adapt.

“It’s like a puzzle,” she says. And because of how common it is for parts and products to move across the United States, Canada and Mexico, that puzzle will be one that many companies need to solve. Still, she conveys a simple but useful message: Don’t panic. Be solutions oriented.

“This is about having an agile mindset, exploring new ideas and being open-minded,” Ader says. “Just because things worked a certain way historically doesn’t mean those things will necessarily work now.” Companies might need to make operational changes or seek outside guidance.

Some specific avenues companies might explore to adapt and reduce risk in their supply chains include:

• Assessing whether specific tariff provisions will reduce or eliminate tariffs
• Restructuring import transactions to lower the customs value
• Exploring bonded warehouses, temporary import bonds and foreign trade zones
• Understanding tariff codes and ensuring products are classified correctly
• Finding suppliers in countries that might have more favorable tariff positions with the U.S. (though this remains a challenge)

Working with a third-party advisor can help many organizations navigate the complexities of tariffs, the evolving regulatory framework and the many implications for supply chains—while, critically, maintaining compliance. Gaining a better understanding of their global supply chain network and its intricacies is always beneficial for companies, but the current environment makes this effort crucial. 

The regulatory landscape

Along with adjusting to a shifting trade outlook, companies find themselves navigating a growing list of regulations and reporting requirements. In the past 18 months, several new regulations have emerged within the sustainability/compliance space. Three-quarters (74%) of respondents said their organization has taken steps to prepare for some new or pending compliance regulations. Canadian firms were significantly less likely than U.S. firms to have done so (58% vs. 78%).  

Of the survey respondents who reported their organization has taken steps to prepare for compliance with the regulations cited in the survey, the top actions taken were:

• Investing in new technology (63%)
• Updating organizational policies (60%)
• Providing training for staff (56%)
• Implementing new data collection methods (50%)
   

Respondents identified supply chain sustainability and keeping up with compliance requirements as the top two items of importance to their supply chain efforts over the next 12 to 24 months (56% of respondents reported each of these items as a 9 or 10 on a 10-point scale). While the pandemic may have forced companies to optimize their supply chains and reexamine the focus on just-in-time inventory management, these survey results might indicate a priority shift since then, says Jon Caforio, a principal and sustainability consulting leader at RSM US.

“Now your supply chain might need to be more resilient than optimized," he says.

There is also an abundance of complexity and minutiae involved in adapting to new regulations, he adds. A food and beverage business might need to learn how to calculate its compost emissions, for instance. A transportation company determining its greenhouse gas emissions might need to distinguish between where various types of fuel originate and where and how they are stored and used. Organizations across industries will need to understand the implications of operating in states that have specific climate disclosure requirements.

“Closing your books on sustainability-related metrics is just like closing your financial books,” Caforio says. “That means data traceability and auditability is now critical to the process.”

Likewise, Nguyen, the RSM Canada economist, says prioritizing sustainability and compliance further underscores the need to have reliable, granular data reporting systems in place. Technology plays an important role in that effort.

"Mapping out entire supply chain networks is one example where businesses can lean into AI and technology to improve reporting and compliance,” she says. Tools that can provide nth-tier visibility might reveal a supplier many layers down in the chain that isn’t compliant with regulations, for instance: “Five years ago, it would have been nearly impossible to find that out.”

The two most common technologies respondents said they were using for sustainability tracking and reporting are AI and machine learning (57%) and supply chain management systems (55%).

Respondents from organizations that the new regulations apply to said the factors that have been or will be the most challenging are:

• Integrating new technologies with existing ones (40%)
• Training and educating staff (40%)
• Managing supply chain compliance (38%)
• Collecting and managing data (37%)
• Understanding regulatory requirements (37%)

Related to the top challenge of integrating technologies, organizations increasingly are trying to figure out how to balance monolithic systems—such as enterprise resource planning systems—with various point solutions such as warehouse management and demand planning tools, says Chapman.

“There are a lot of different systems in the supply chain ecosystem, and getting them to talk to one another in real time is not intuitive,” he says. “You have to dig in and make thoughtful, tough decisions about how the operating model will look from a data and systems perspective.”

Finally, 85% reported having taken at least some degree of action to handle potential changes in supply chain regulations in the coming year, with results nearly identical across U.S. and Canadian respondents (85% vs. 84%, respectively).

Supply chain implications for the tax function

Supply chain decisions will continue to have implications for organizations’ tax functions, especially as legislation potentially shifts. Eight in 10 respondents (82%) said their organizations have taken action to handle potential changes in tax laws. Nearly half (49%) said their primary focus of tax optimization is operational efficiency followed by compliance (25%), minimizing tax liability (16%) and treasury management (9%).

Larry LeBlanc, a partner in the international tax practice at RSM US, has noticed that with tax authorities seeking more transparency into organizations’ global operations, compliance is becoming a larger focus from a tax perspective. As geopolitical uncertainties rise in conjunction with accelerated tax law changes, he’s also seen middle market companies improve their supply chain management practices and related tax optimization efforts.

“Multinational businesses are monitoring the ongoing global environment closely, and boards are asking for an increased level of contingency planning,” he says.

Indeed, 76% of respondents said their organization has a formal process in place to assess and mitigate tax risks associated with their global supply chain, according to the survey results.

Of those respondents with formal processes, their methods for assessing/mitigating risk were:

• Using technology and data analytics (67%)
• Implementing a structured approach to identify and mitigate tax risks (60%)
• Integrating tax resources into the supply chain team (49%)
• Using external resources (46%)
• Establishing regional centers of excellence (39%)
• Optimizing transfer pricing (35%)

When it comes to implementing a structured approach to addressing tax risks, a best practice is typically to develop a steering committee of stakeholders from across the organization, LeBlanc says. That’s crucial for ensuring clear communication about how tax-specific issues impact the organization holistically.

"It all has a domino effect,” he says. “Something that changes on the tax front is likely going to ripple into one of these other functional areas. I find that organizations don't always have processes in place to efficiently quantify organizational tax risks and costs in a timely manner. So it’s not just about identifying tax law changes, but also doing an analysis on organizational impact. And when you have a global supply chain, the impact is even more integrated.”

Alongside prioritizing communication, technology solutions can play an important role in addressing and mitigating tax risks. Organizations need to ensure that their enterprise resource planning systems are equipped to generate invoices that accurately capture value-added tax, sales and use tax, and total landed cost. Automation in this area will play a bigger role as the amount of information that governments ask for grows, LeBlanc says.

“There is a big question mark about whether companies’ technologies will be able to keep up with global compliance burdens,” he adds.

The degree to which an organization’s ERP system is up to the task might depend in part on how a global business came together—whether through organic growth or through acquisition. Those that grew rapidly via acquisition often persist in a multiple-ERP environment that no longer meets their needs.

“Organizations are often slapping Band-Aids on to try to bring all these systems together to function in some integrated fashion, and they're inefficient in many ways,” LeBlanc says. Solving fragmentation—whether in terms of technology or siloed team members—will require businesses to prioritize better connectivity between the tax function and the business.

Technology and outsourcing solutions

As supply chains have become more like intricate global webs, middle market businesses are exploring how outsourcing can help navigate the associated complexities and how technologies can streamline various business processes.

Many survey respondents said their organization is currently using a third-party supply chain consulting service, and most said they would consider doing so if they weren’t already. Here’s a breakdown of services they reported currently working with a third party for:

• Sales and operations planning (S&OP) (57%)
• Monitoring supplier risk (53%)
• Outsourced supply chain planning (45%)
• Outsourced procurement (43%)

Third-party advisors can bring in powerful risk assessment tools to provide a deeper understanding of a company’s supply chain that might not be possible with in-house capabilities. Embracing those technologies and external help enables businesses to onboard new suppliers more effectively while simultaneously flagging changes in the risk profile of existing suppliers.

Digital tools can also help organizations with segment stratification drill down more precisely into the dynamics of various end markets. That’s one area where many middle market businesses typically fall short of their larger counterparts, says Chapman.

“That holistic picture is often lacking,” he says, “but stratifying segments in that way is an opportunity to improve your customer experience, your inventory efficiency and your working capital requirements.”

A company’s ability to get a more detailed supply-demand picture often depends on how far along it is in its digital transformation journey. 

Survey respondents clearly understand the necessity of technology solutions; 91% either strongly or somewhat agreed that their organization needs to invest in technology to become more efficient (53% of respondents strongly agreed). Most (88%) also agreed they would like to explore how AI can best be deployed to achieve success.

When it comes to exploring artificial intelligence use cases, organizations should balance excitement with some wariness, says Nguyen.

“AI can increase efficiency and productivity, but it can also make things more complex or opaque,” she says. “That’s something to be cautious about.” For instance, she says, employees need to understand that AI outputs still need human verification and fact-checking.

“When you implement technology and AI in supply chains and operations especially, it’s even more important to ensure accuracy,” she adds.

Organizations might be using AI tools for supply and demand forecasting, or for predictive maintenance in industrial settings. While there is interest in the middle market for exploring more AI use cases, much of it so far is manifesting as curiosity, says Chapman. Many companies still need to address AI governance considerations and data availability before they can move ahead with implementing the technology.