Despite the ongoing uncertainty caused by announcements of tariffs on goods imported from China, Mexico, and Canada and the resulting volatility in the stock markets in recent weeks, business owners can benefit from a focus on what they can control and adapting their operations and forecasts to meet the changing environment. During this time of unpredictability, there may be near-term opportunities to critically review fixed and variable cost structures, relationships and terms with top suppliers, and contribution margins by channel, customer, and product. Transparency with lenders and capital providers will be imperative.

There are several risk mitigation strategies that could result in lower cost of goods sold and, ultimately, higher gross margins. 

Supplier diversification

Assess your supply chain and see if there is opportunity to diversify into countries not impacted by the current changes (Vietnam or Indonesia, for example). 

Analyze relationships beyond Tier 1 suppliers, as there may be savings from shifting supply for componentry (Tier 2-4 suppliers) in addition to the primary product parts.

Contractual agreements

Review production agreements and remember that tariffs generally go into effect on the date of entry to a country, not on the date of agreement execution. Along with legal counsel, closely review the definitions for product classification (or essential character), valuation, and country of origin (versus final assembly, where tariffs are likely to be significantly higher). 

The product valuation definition is particularly important, as there are potential deductions to the landed cost that may result in significant savings. These include international freight, freight from the foreign factory to the port, buying commissions, port fees, and certain royalties, if set up correctly.

Duty mitigation – whereby an importer only pays duties on the cost of product components and labor, but not on the administration or “middle-man” charges – is also an important consideration that can ultimately lead to lower input costs. 

In addition, to the extent customer contracts are due for renewal, a review of pricing and ability to pass along increases in cost inputs may be timely. 

Demand forecasting and preemptive buying 

Understanding contribution margin by top customer and channel has never been more important, as is a thorough review of SKU performance. In this ever-changing cost environment, focusing on the highest and best use of company resources is critical to maximizing profits and cash flow. Automating key performance indicators (KPIs), such as trade-spend, inventory turns, and price-volume by top customer, as well as implementing a demand forecasting module, can assist with more timely and informed decision-making and optimum use of capital.

Net working capital and liquidity

In addition to forecasting gross margins and EBITDA, a timely review of short- and long-term liquidity is vital. Banks are more focused than ever on meeting covenants and rising input costs, and thus are adding to the scrutiny. Companies dependent on government funding will need to plan for possible delays and potentially replace with other sources of income. 

A financial forecast (including a 13-week cashflow) that can easily be stress-tested in collaboration with business unit leaders will allow for nimble decision-making.

Undoubtedly, we are living in uncertain times, but uncertainty can lead to opportunity, for those who are prepared and take action proactively and course-correct where needed. 

This article was inspired by a recent CohnReznick webinar. Listen on demand now(Opens a new window).