Tariffs Are the Electronics Supply Chains’ ‘Grey Swans.’ Here’s What to Do About Them
As the current U.S. administration continues to move forward with its strategy to increase tariffs by 10 to 25 percent on nearly all Chinese imports beginning September 1st, electronic OEMs across all major industries continue to watch with concern. This comes in the wake of the first round of tariffs on imports enacted in June which cost importers an estimated $6 billion — a 74 percent jump from one year ago despite a slight decline in the value of imports. The medical devices industry, in particular, is poised to take a significant hit; the U.S. accounts for more than 30 percent of China’s medical device and diagnostic imports.
The silver lining to such measures, however, is the transparency with which such measures have been enacted. Such tariffs are an example of what financial analysts call “grey swans.” While a “black swan,” according to renowned risk analyst Nassim Taleb, is “a concept of an unpredictable financial event with extreme consequences,” a grey swan is a financial event that can indeed be seen and/or predicted. And ironically, while analysts spend time and resources to uncover the black swan, the innocuous grey swan is what sneaks up to take a bite out of the market.
While one month is not a lot of time to complete a full reconfiguration of an OEM supply chain, having a hard deadline does allow product managers and their inventory procurement departments enough time to develop a strategy that can mitigate the impending financial strain in the short term.
For example, a procurement strategy that uses last time buys as a proactive measure on the front end of a product’s lifecycle grants OEMs the ability to fortify their supply chain against all market-based risks and disruptions for as long as the lifecycle of the product. Instead of falling prey to extending lead times, market-based price fluctuations, and obsolescence-related issues that commonly lead to the use of unauthorized third-party vendors, OEMs can use last time buys to acquire all of the inventory needed for five, 10, or 20-year lifecycles in a single transaction. As long as the OEM has the capabilities and infrastructure necessary to securely store it — or the aid of a trusted supply chain partner to store the inventory on their behalf — there will be no reason to be concerned about being subject to variables beyond the OEM’s control.
Not all potential disruptions approach with the same coverage as the next round of tariffs, but one of the main benefits of last time buys is that the nature of the disruption, anticipated or sudden, minor or potentially catastrophic, is largely irrelevant. If the OEM has the foresight to only enter into the market sparingly and maximize all necessary inventory levels when they do, then more time and resources can be dedicated to doing what a company wants to do to move ahead in the industry, not what must be done to survive.
Going further, an OEM can even leverage a BOM Monitoring Solution such as the one offered by Partstat to properly time when they need to initiate last time buys. Using predictive analytics built on over 50 billion points of Big Data, Partstat BOM Monitoring customers are granted a real-time overview of the state of the market for each individual electronic component. Average distributor price, inventory quantities, and lead times are all charted in easy-to-read graphs, while algorithms capable of predicting allocation and obsolescence inform the customer if immediate action should be taken.
Last time buy-based solutions cover black swans and grey swans. Regardless of whether the next round of tariffs continue to strain the electronic components market or not, it is solutions like these that keep supply chain control firmly in the hands of the OEM.