Managing tariff costs: Strategies for business adaptation

As global trade tensions rise and tariff policies shift, companies worldwide are feeling the impact on their supply chains and pricing structures. Companies need to proactively assess their exposure to these changes and explore options for managing the added costs effectively.

The market has responded to tariffs in a few different ways and to mitigate the impact of additional costs to the bottom line, companies have a few key options for passing through tariff expenses. In the short-term, one of the most straightforward methods to manage tariff risk is to increase prices. This approach can help offset the new duties, though it requires careful consideration of market conditions and customer sensitivity.

Another short-term method to manage the tariff expense is to add a tariff surcharge to the existing cost of goods and pass through the actual cost of the tariff. This strategy is effective for companies that sell direct; however, it becomes more complicated for companies in the distribution space.

Additionally, due to the uncertainty regarding the length of the tariff risk, there are two longer-term solutions companies can employ to manage risk. First, is to diversify the supply chain.  Companies should explore alternative supply sources from regions not affected by tariffs or with lower tariff costs. This strategy may not only mitigate costs, but it also diversifies supply chains for greater resilience overall.

Second, companies should engage in negotiations with suppliers to share or manage tariff costs within existing agreements. Such discussions can lead to mutual agreements that minimize the financial burden on both parties. Another benefit to re-negotiation is the potential to amend any unfavorable allocation of supply term risk.

To effectively navigate these challenges, companies should review their current tariff exposure and assess options tailored to their specific business model. Preparing clear, customer-focused communication is essential if pricing adjustments are necessary. By adopting a proactive and strategic approach, companies can better manage the complexities of today's global trade environment and safeguard their market positions.

Contact Julie Toth or your McDonald Hopkins attorney to discuss further.