Where tariffs hurt
Hello, and welcome to this week’s edition of Straight Talk. Inside, we discuss:
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NextGen set for Nashville
Before I jump into this week’s newsletter, I’d like to write a few words about our upcoming NextGen Supply Chain Conference. This year, we will be heading to the Music City – Nashville, on Oct. 22-24 at the W Hotel. We are hard at work on building an agenda, but I can tell you we will be focused on four industry areas of supply chain: 3PL/logistics, Consumer Packaged Goods, Food and Beverage, and Life Sciences. If you are a practitioner or senior-level supply chain professional in any of these areas, and are interested in speaking and sharing your expertise or a relevant case study, feel free to reach out to me directly or visit the conference website to fill out a Speaker Form. There is also information on sponsorship opportunities on the site. Of course, we would love to see you there. You can find more details on this year’s event at www.nextgensupplychainconference.com.
Tariff impacts
Tariffs are having a ripple effect throughout the supply chain. While most of the media has been focused on the impact to consumers in terms of higher prices, there is little widespread understanding of the vast impact a single tariff can have on the end price. Many assume a 20% tariff leads to a 20% price increase, but that is too simplistic an answer to explain the dynamic at play.
To help me understand the full effects of tariffs, I spoke with Tracey Ortiz, director, product management at SPS Commerce for a Talking Supply Chain episode. I wanted to use this space to dive deeper into some of the impacts Ortiz shared with me ahead of the episode recording. Since the episode is only 45 minutes long, there is only so much detail we could get into, but I think there was some interesting content that got left on the “cutting room” floor as they say. (If you want to listen to the full conversation with Ortiz, you can do so here.)
Post-Covid warehouse redux?
One of the interesting things taking place has been the surge in companies moving product into the United States. U.S. container import volumes increased 4.7% year-over-year in February, according to data from Descartes, and that was on top of a big increase in January, which saw the top 10 ports in the U.S. post a collective increase of 14.2%, Global Trade Magazine reported. The surge has some similarities to the post-Covid period where businesses were afraid of running out of goods again and dramatically increased inventories. That led to a decline in warehouse space and a rise on commercial industrial rents.
Ortiz noted that as companies rushed to move goods into the country ahead of tariffs, warehouse space has been shrinking and that has a number of impacts, including higher rents and the need to adjust inventory location, which potentially puts customer service success at risk. It also leads to other issues, including staffing and training.
“It’s more difficult behind the scenes on a 3PL warehouse than it is … to the suppliers that are shipping to them,” she said. “They’re facing labor shortages because … a warehouse can have loads show up and either you don’t know or you don’t have very much notice. The temp agencies benefit from that because they need to get temporary employment in there. That having been said, those employees aren’t trained in the process. And so it ends up becoming sort of this hamster wheel of chaos.”
The added labor and training costs, along with higher rents, add further cost pressure to the final price of the item.
To Ortiz, it seems like she has lived through this scenario before, and it is something businesses can look to as they try to navigate the current market.
“It’s very familiar to me because I was in the logistics and warehousing space during Covid, and the similarities are becoming eerie for sure,” se said. “Companies were preemptively increasing inventory levels. They want to avoid disruptions because the tariffs and the costs are not the only concern. In a situation like this, we end up with higher transportation costs, and then capacity within transportation companies. And so the surge in demand for warehouse space is huge.”
While Covid was a different type of disruption, Ortiz said the similarities can offer some guidance. “The rates did drop on warehouse space and level out a little bit at some point, and then we ended up with the extra warehouse space because there was this need to build. But there’s absolutely the same constraints and the same level of initial chaos that was experienced during Covid. So what will be interesting to see is what did 3PL warehouses and suppliers alike learn from Covid as well as freight forwarders, so that maybe we can mitigate a little bit of that.”
Tech investments can help
While focus has been on strategies to mitigate tariffs, such as nearshoring and onshoring, and adopting a China Plus One strategy, the announcement this past week of reciprocal tariffs of at least 10% on nearly every nation mutes some of this strategy. Ortiz said that inventory management strategies – adjusting inventory locations and building up buffer inventory – as well as optimizing transportation networks can help, so can technology. Data analytics and AI tools can help predict tariff impacts, she said, allowing companies to develop plans for quick adjustments and proactive discussions with suppliers.
However, Ortiz noted that many 3PLs are using warehouse management systems (WMS) for their “own purposes but not purchasing” and they are not investing in EDI connections to their suppliers.
“The 3 Pl has a WMS system, they have inventory recorded, and then, rather than connecting through EDI to exchange that information with their supplier, they are exporting a report into Excel and sending it via email. And then it’s not real time, right? So there has to be multiple exports,” she said. “And this happens more often than I think all of us would like to believe. And so what what is really important in a time like this is for 3PLs and suppliers alike to be able to communicate in real time and understand where those inventory levels are at, especially with e-commerce, because it’s ever changing right by the minute. And so there has to be a real understanding of that, more so than any other time.”
She went on to say that companies need to look to EDI solutions to get more real-time communication. The impact of not having that insight is higher transportation costs as goods are expedited to meet production or customer timelines.
Of course, technology such as AI, order management and purchasing systems and more can assist in gaining real-time visibility into networks. Every bit of information can lead to better inventory optimization and placement and will have a trickle down effect on things such as transportation and warehousing costs, Ortiz noted. It will also help reduce transportation chargebacks and can help maintain customer loyalty.
“They’re going to need to reevaluate their entire supply chain. That means everything from overseas to domestic to their 3PL,” Ortiz said. Unfortunately, we are once again in uncharted territory, with a very fluid situation. The solutions, are equally challenging to find.
“It’s change management. But it’s also behavioral management within an organization,” Ortiz added. “If you’re a 3PL, if you're a supplier, understand where there’s fat to trim. Understand what your expedited costs are, and why. Understand what your inventory levels are, and make sure that there’s eyes on every piece of your supply chain along the way.”
You can listen to the full conversation with Ortiz here.
Q1 business insights
Global business and technology consulting firm West Monroe has released a “Q1 Quick Poll” of supply chain businesses. A few highlights I found interesting. More companies (23%) said cybersecurity was their top issue in Q1, edging out tariffs (20%), geopolitical tensions (16%) and cost of materials (15%). Nearly all (98%) said they had integrated AI into their operations, led by inventory management (77%), demand forecasting (54%) and pricing optimization (48%), but nearly a third said they were having trouble demonstrating ROI. And finally, 89% of companies said they have made changes to their supply chain, with altering product/materials/sourcing mix (58%) just ahead of transportation mix changes (56%) and production schedule changes (45%). Thirty-one percent had updated pricing to pass along increased costs. You can download the full survey here.
Retail sales growth?
On the day President Trump announced reciprocal tariffs, the National Retail Federation issued its 2025 consumer spending outlook. The organization still sees retail sales growth this year, but at a slightly slower pace than in 2024. NRF said that retail sales are expected to see annual growth between 2.7%-to-3.7%, coming in between $5.42 trillion-to-$5.48 trillion. In its 2024, forecast, the organization called for a 3.6% annual increase, at $5.29 trillion, and it added that the 2025 forecast matches up with its 10-year pre-pandemic average annual sales growth rate, at 3.6%.
What I read this week
Reactions from across industry rolled in following the announcement of reciprocal tariffs. … Marko Kovacevic of the Digital Supply Chain Institute outlines key strategies for success in an evolving global environment. … Controlling freight costs can be made easier if more businesses looked toward Metropolitan Statistical Areas. … The U.S. has shut down the de minimus loophole for imports of less than $800. … Maersk has acquired the Panama Railway Company from Canadian Pacific Kansas City. … A robotic dog is now making deliveries in the UK, helping local couriers. … Manufacturing contracted in March as tariff impacts weighed on growth said the Institute for Supply Management.
Thank you for reading,
Brian