Sudden and significant tariffs can feel like a rogue wave for consumer product businesses, disrupting carefully constructed business models and threatening lean margins. 

When the cost of importing components or finished goods from affected countries skyrockets, simply absorbing the increase is not a sustainable option. 

What can a business do? Below is the standard playbook of tactics that consumer product companies use now, as well as some more powerful long term approaches to implement.

The stock playbook for product companies dealing with tariffs usually includes the following strategies:

• Find lower priced components
  • Negotiate lower prices with current suppliers
  • Commit to larger volumes to reduce costs
  • Find new suppliers at pricing that offsets tariffs 
  • Find manufacturing efficiencies that save money
• Reduce shipping costs
  • Ship through other non-tariff countries
  • Adjust supply chain planning to use slower, cheaper shipping methods, like ocean freight.
  • Co-op shipping solutions with partner companies like shared containers 
• Avoid tariffs by Onshoring & Nearshoring
  • Find new suppliers in places with no or lower tariffs 
  • Find a (unicorn) US supplier that can match quality, speed, and price. 
• Reduce labor costs
  • Automate manufacturing or assembly processes
  • Downsize to leanest workforce  
• Manage Financials
  • Optimize SIOP to push or hold inventory orders based on forecasted future rates to optimize cost
  • Raise prices to maintain margin dollars
  • Cut non-essential spending to survive on lower margins, like expansion, hiring, sales travel, R&D, employee perks, etc.

For businesses facing this harsh reality, a multi-pronged approach is necessary. Immediate cost-cutting measures are essential, yet business leaders should also consider a fundamental look to identify more powerful strategies to achieve long term relief, such as evolutions in product design and supply chain architecture.

---

Motivation: The concept of bringing manufacturing or sourcing back to the United States is romantic. The intent behind tariffs is often to incentivize domestic production, create jobs, and stimulate the US economy – all good things. Shifting spend to US manufacturers contributes to a powerful economic multiplier effect, where those dollars circulate within the local and national economy, supporting wages, creating jobs, and driving further economic activity. There are benefits in speed and agility for working with local businesses by avoiding language, cultural and time zone challenges.

First steps: One of the typical immediate responses to tariff impacts is a rigorous examination of all possible cost reduction avenues across manufacturing, shipping, and the broader supply chain. This can involve renegotiating supplier contracts, optimizing logistics routes, exploring alternative shipping methods, and improving manufacturing efficiencies to eke out savings wherever possible. Every dollar saved in these areas helps to offset the tariff burden.

The next level: Beyond optimizing existing operations, a significant strategic shift involves evaluating manufacturing locations. Businesses are increasingly looking to move the production of components or even finished goods to countries with lower or no tariffs, or exploring the feasibility of “shipping through” such countries to leverage more favorable trade agreements. This requires a deep understanding of global trade regulations and logistics, as well as the potential complexities of setting up or relocating manufacturing operations. It will require a time and energy investment to strategize and implement. You might need to look outside your business for the expertise to do it.  US businesses need help to connect with each other. Often it’s harder to find or communicate with a local CNC shop than one across the world. Any changes will include some initial transition costs before savings are realized. 

The flip side: The time-money-quality triangle zero sum relationship is in play here. Many of these cost savings strategies will have negative pressure on lead times and quality. Others will stress your balance sheet as you have to allocate more assets further into the future making your business more vulnerable and less agile. 

Passing the buck: Passing the burden to consumers through higher prices can deflate demand.  As consumer wallets are strained they become more discerning with every purchasing decision, scrutinizing value, comparing prices, or delaying purchases until life is more certain. 

Business owners have to call these plays or at least consider them as options. For some businesses, all of these mitigation strategies together are still not enough to pull out of a precarious situation. A larger lever is required.  So what else can we do?

Don’t forget the future as you deal with this kitchen fire

America is resilient. Businesses will figure out how to survive. Crisis often boxes companies into a short term mindset though that limits solutions to the problem directly in front of them. They try to solve these problems: 

“How do I get our product made cheap enough to offset tariffs, avoid price increases, and maintain cashflow?”

“How do I get our products made in the US or a country that isn’t subject to tariffs?” 

Pinching pennies and changing suppliers are moves that are required in the short term, but might not be enough to satisfactorily offset significant tariff increases entirely or sustainably. The US economy needs company leadership to have thoughtful and long term approaches.

In parallel to that fire fighting, try reframing the challenge as “How do I solve the same problem for users within the US network?” This is where product design and engineering play a crucial, often underestimated, role.

Posed with this problem, engineers will arrive at different solutions that are native to the future policy makers are trying to create. This might mean significant changes to products or new products entirely. Companies that are proactive now stand to lead in 1-2 years as their competitors stumble. We saw this during the COVID pandemic. Companies that stopped development lost ground on their competitors and the market. This effect lags. You won’t feel the gap until later and at which point it’ll be months before your responses can roll out. 

If you want to thrive and not just survive this time of uncertainty, what should you do?

New plays for your play book

Navigating a landscape impacted by tariffs requires a proactive and strategic response.  The businesses that will truly thrive are those that leverage the power of product design and engineering to fundamentally reduce costs and adapt to the strengths of domestic manufacturing. By aligning their product strategy with the economic incentives tariffs aim to create, businesses can not only mitigate the long term financial impact and build a more robust, resilient, and domestically integrated supply chain positioned for the future.

Companies should consider the opportunities of design and engineering strategies aimed at reducing long term manufacturing costs or making products more amenable to production in the USA. This could involve:

• Designing for value and quality: Through user centric design you can deliver experience and solve problems in an elevated way that users are willing to pay more for.  
• Simplifying product architecture: Reducing the number of components through design can significantly lower manufacturing and assembly costs, as well as the complexity of the supply chain. Fewer parts mean fewer items potentially subject to tariffs.
• Utilizing alternative materials: Exploring domestically available or lower-tariffed materials that meet product requirements can directly reduce costs.
• Designing for manufacturing efficiency: Modifying designs to facilitate automated assembly or simpler manufacturing processes suitable to US vendors can lower labor costs and make US production more competitive.
• Modular design: Creating products with modular components allows for greater flexibility in sourcing and assembly by lowering the part count necessary to achieve all of your SKUs. 
• Reducing packaging: Optimizing or reducing packaging, which are often sourced internationally, can cut material and shipping costs.
• Investing in automation: Fixturing, robots, cobots, vision systems, etc.

Automation may not be in your playbook

Automation is another romantic concept positioned as a solution for US businesses to compete with lower cost international labor. However the real costs are usually left out of the conversation. The costs to develop and deploy custom automated solutions might be on the order of magnitude of a 10x a year’s salary for the employee they are replacing. This traditional route is financially impractical for most small to mid-sized businesses who can’t wait years for an ROI. The automation market acknowledges this and is transitioning.

There is a need in the market for approachable automation platforms that are affordable and adaptable.  Something where a small business owner, who is not an engineer, can understand a path forward to implement automation for assembly that has a clear short term ROI. Many times it’s easier to add automation for a new product or process than to replace an existing one.

“We cannot expect that small and medium size manufacturing companies have 10s of millions of dollars for traditional large scale greenfield automation deployments,” says Dr. Roby Lynn, founder of R2 Labs, automation solution experts. “We are seeing more and more affordable automation platforms come online and the market isn’t entirely dictated by legacy industrial conglomerates and their integration partners anymore.” 

“Additionally, automation is becoming more of a software game as companies begin to rely on intelligent and highly computationally capable systems that can be developed by software engineers. AI and vision platforms are becoming less expensive and byzantine. Businesses can use these new technologies to augment and upgrade their existing equipment, or roll out new equipment in a piecemeal fashion.” 

To embrace the future you should embrace the future workforce. “Students are coming out of engineering schools with the skillset they need to deploy software-based industrial automation solutions and do not need extra training. We need to empower young talent with these skills, coupled with powerful and open automation platforms, to drive the industry forward.” 

If automating is a play that makes sense for your business consider contacting Roby at R2 Labs for help.

Wrapping up the game

An unfortunate truth is that not all companies will be in a position to take this advice for long term strategy. They do not have the cash or credit to both address the current situation and reposition themselves for future success. This is because we enjoyed long periods of low volatility that afforded businesses the confidence to run lean companies with on demand supply chains. This allowed them to spend on growth. Moving into the future, leaders should consider the lessons of Covid and this trade conflict to rebalance their financial equations to include larger cash positions and more modest growth plans, decisions that are less sexy but make you more stable and resilient. Many of us expect volatility to only increase in the coming decades as technology races forward. 

The driving intent of this situation is to trigger businesses to spend more US dollars in the US. This may not be practical for all product companies. It is easier for businesses that have quality products and premium brands that command higher margins. They can absorb higher costs, inch prices up, or justify more expensive stateside vendors. Commodity products, like a toothbrush for example, where consumer behavior is driven more by price than quality, have margins too small to take a hit. To sustain they rely on the lowest labor and component costs.  Do we want to bring those jobs and products to the US? Do we want those products to get more expensive? Or do we want to incentivize the jobs that warrant higher salaries and products that are built on quality or performance?

Tariffs add friction to a system that is too complicated for anyone to predict the effects. It will be interesting to observe: if prices continue to increase relative to US wages, will consumers purchase less frequently and then index higher towards products that will last longer. Will US consumers vote with their wallet for US products to drive the demand and prices that are needed to bring production stateside? For now, we’ll throw the kitchen sink at the problem and hope that the volatility and uncertainty have peaked. Once the system can stabilize under consistent policy, businesses can adapt new strategies that position US businesses and workers in a stronger position. 

I am optimistic about American product companies. Necessity is the mother of invention and I’m sure the millions of talented individuals we have are hard at work at brilliant solutions that we could never predict.

 

Contact John Boezi about product development questions : www.johnboezi.com

Contact Dr. Roby Lynn about automation solutions: https://www.r2-labs.io