If your company relies on steel or aluminum as a direct material for manufacturing, tariffs are probably top-of-mind and your organization is likely looking for ways to best navigate an uncertain environment.
In March 2018, the Trump administration announced plans to enact a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum, with the intent of reducing manufacturer’s reliance on imported metals by providing fewer incentives to rely on sources from outside of the US and ultimately boosting domestic steel production. The tariffs impact trade relations with not only China, but also the European Union, Canada, Mexico, Brazil, and South Korea. Many countries affected by tariffs have responded by implementing tariffs on US exports. As a result, steel’s sharp price increase has affected numerous industries, from auto makers to nail manufacturers.
As more businesses that were sourcing steel products from China and other international suppliers begin relying on domestic suppliers, demand (and price) will increase. This makes securing a steady supply all the more challenging and also makes companies more apprehensive about signing long-term contracts with steel suppliers. While it’s still uncertain as to how this situation will continue to unfold, there are steps your company can take to help minimize the effect it will have on your ability to source steel.
Develop a good benchmark methodology
As steel prices continue to fluctuate, it is necessary to develop a methodology to benchmark pricing. There may be a lag between the market price vs. the price you’ll pay, but the price increase you receive should still be in the ballpark of the market price. If the market price increases 5 percent but your pricing increases by 20 percent, this should be a red flag. When you receive a price change from your supplier, a benchmarking methodology can help you understand the justification behind a price increase (or decrease).
Get to know your suppliers
If you are in the process of switching to a domestic steel supplier, get to know your potential suppliers very well in terms of their service, inventory, quality, and how they can meet your organization’s needs. For example, if your company purchases an average of $2M in steel annually, and one of the supplier’s other clients purchases $10M in steel annually, you want to make sure you have cultivated a strong enough relationship with your supplier so that you don’t get pushed aside by larger-volume customers. If your company purchases $20M – $30M in steel annually, you may want to consider working directly with a steel mill to obtain the best service and pricing for the volume you are purchasing.
Pay in a timely manner
One of the most important things to do as you cultivate a relationship with your supplier is to become an appealing client with whom the supplier wants to do business. The best way to do this is to make sure your payments are at least net 30 or better. If you are paying net 60 or more, you are likely to become one of a supplier’s lower priority clients.
As the big-picture tariff situation and potential ramifications continue to evolve, developing strong relationships with new suppliers is a key component in maintaining necessary supply and services at rates that are aligned with the market. Your organization may also want to consider bringing in a third-party with expertise in this area to help navigate this environment and help facilitate the process of finding suppliers that are right for your business.