Days of Our Distribution: Tariff Troubles & Supply Chain Scandals
By Desiree Grace & Frank Hurtte
The plot twists are enough to give you vertigo. Your friends are now your enemies, or are they frenemies? Your cousin next door is persona non grata, and your old arch-nemesis is now your bestie. The pairings and couplings get stranger and stranger. No, we are not talking about daytime drama, aka Soap Operas. It’s “Tariff-Time!”
What to do? You can’t change the channel. Eating popcorn and sitting on your couch isn’t advisable, either. Let’s break down some of the challenges and talk about how to cope. While the numbers and countries impacted change by the hour, directionally, we know that products and components sourced from the bid C, China, are most impacted. This impact will flood downstream from manufacturers to distributors and end-users, with potential impact on rep agents, too.
Major issues and concerns – Manufacturers:
• Manufacturers are concerned that tariff prices will impact their market share position by raising their prices and creating opportunities for other suppliers to undercut their pricing.
• Manufacturers fear distributors will use tariffs as a tool for gaining additional margin dollars, further raising their prices.
• For most manufacturers, their first approach (without distributor feedback) is to add a tariff surcharge to all products sold.
Major issues and concerns – Distributors:
• Concerns about how orders will be placed, including placing orders now at one price, then receiving a higher, and perhaps unknown, price at the time of shipment.
• Impact on backlog, including concerns about orders already placed. Especially when part of a larger “blanket” order.
• Some customers require a 60-day notification on any price change, and some will not be understanding of the situation.
Tariff Surcharge – information:
• At first glance, a tariff surcharge is the choice of most manufacturers. Why are they leaning this way?
o The surcharges can be easily calculated based on the country of origin and the value of imported content within the product.
o A surcharge means commission plans will not be impacted because they will be excluded from the order/sales volumes of salespeople and rep agencies.
o Most believe surcharges will simply be passed on to customers by distributors with no additional margin added.
o A surcharge will not impact the distributor’s incentives or rebates, as the fee is segregated much like an expedited fee or drop-ship charge.
o A surcharge means changes in tariff policies will not reflect poorly on them when/if tariffs are lifted. Some said they don’t want to be responsible for issues created when a tariff is lifted, and the distributor’s inventory is immediately deflated. Some openly stated, “I don’t want distributors asking us to rebate tariff costs on inventory when/if this situation changes.”
• All the distributors we interviewed do not want surcharges. Here are the issues for distributors:
o Distributor ERP systems cannot easily attach surcharges to individual products or families of products. This means a massive effort in manually updating price files for hundreds of thousands of SKUs.
o Prior experience indicates customers will question the surcharges added to their invoices. In some cases, the customer will leverage their purchase volume to refuse surcharges, especially if not noted on their purchase order.
o Regardless of whether the price increase is called a price increase or a surcharge, the distributor will have increased interest. Many distributors believe they should be allowed to increase prices to maintain their overall margin percentage and cover additional costs.
• BOTH Manufacturers and Distributors:
o Are concerned about potential supply chain delays.
o Are concerned about the potential stockpiling of inventory by competition or cash-rich distribution.
o Potential Accounts Receivable and Payables issues when surcharges or new prices get auto-rejected and must be negotiated or un-snarled. The time suck along causes heartburn.
o The impact on important OEMs and Contractors.
• Rep Agents:
o What will this do to my commissions?
o Why do I have to be the messenger of bad news?
o What kind of support will my manufacturers provide?
• End-Users and Contractor:
o Are extremely concerned about cost increases to projects and production.
River Heights Consulting Recommendations:
For manufacturers, we recommend that tariff-based increases be combined into a new pricing structure without tariff surcharges. If this is impossible because of issues with offshore headquarters’ locations, we recommend, as a fallback position, that price files be created with tariff and old product prices included. These will allow the distributor to more easily load new prices into their systems. Leveraging the ability to share price files seamlessly and accurately will cause a minimum of disruption. Work with your distributors on providing advance notice. We also recommend that manufacturers be transparent about the country of origin, as well as whether their final kits or assemblies might be completed in the USA.
Consider building a communication script with talking points for your rep agents. They have multiple lines, and the more tools you provide your field salesforce, the better. Be willing to participate in the discussions with distribution and end-customers so they feel supported.
For distributors, we recommend sending letters to key customers now, letting them know that pricing levels can no longer be guaranteed beyond the onset of tariffs. Further, this letter will serve as a warning that it is beyond your control to hold prices should the tariffs become a reality. Again, be as transparent and proactive as possible.
If your cash position allows it, you should make “tariff-free” purchases for the future. If the tariffs hit, consider immediately increasing the price and taking advantage of the gain in value. This gain could cover any loss should the tariffs be phased out.
Work with your in-process construction projects and OEM blankets to minimize disruptions as much as possible. If there was ever a time to apply the 80-20 rule and focus on your VIPs, it is now. Customers WILL remember how you managed this challenge.
Begin building a system of checks and balances to ensure that salespeople immediately apply the new pricing levels. Experience dictates that this will require management oversight. Many distributors do a poor job of immediately rolling out price increases and often lose margin for several months (or longer) based on sellers dragging their feet. Price increase realization is important to your bottom line.
For everyone who is impacted, stay calm, and do your best to be professional, transparent, and easy to do business with. We’ll all weather this latest plot twist together and learn many valuable lessons along the way.
About the Authors: A Duo Destined by Distribution Drama
Frank Hurtte and Desiree Grace aren't your average channel strategists—they're the leading duo in an ongoing saga of supply chain twists, manufacturer meltdowns, and distribution dilemmas.
Frank, the wise and seasoned industrial consultant, has seen more plot twists in pricing than most soap operas dare script. With decades of experience and a Rolodex of war stories, he’s the Obi-Wan of the Order Entry line.
Desiree, the fierce and fearless channel champion, brings fire and finesse
Together, they're like the Mulder and Scully of the supply chain, the Ross and Rachel of rep support—
except they’re always on the same page and never on a break.
Their shared mission? To decode complexity, fight for fairness, and keep the drama where it belongs: in daytime television, not your bottom line.
...
Comments