Supply Chains Need to Become More Agile in an Age of Tariffs
The ground rules for global trade have changed dramatically in the last year—and sometimes changed back and changed again—as the U.S. has levied tariffs on rivals and allies alike. Prof. Sang Kim, an expert in supply chains, explains how the shifts in global politics and trade could disrupt the complex systems that get products to your door.
A port in Qingdao, China, earlier this month.
What's the potential scale of disruption to supply chains from the new tariff regime? How would you compare it to the COVID-caused disruptions?
To me, it’s not so much about a direct scale comparison, although I understand that’s a natural question to ask. Instead, I find it more insightful to examine the qualitative differences between COVID-led disruptions and the disruptions arising from today’s geopolitical shifts. Tariffs are one manifestation, but they are only one part of a broader, structural transformation.
Predictability and unpredictability co-exist in this new era. As the trends toward global de-coupling and regional conflicts accelerate, risk factors that would have been isolated become entangled.
Before COVID, most discussions on supply-chain disruptions revolved around local shocks—labor unrests, accidents, or natural disasters—that, while costly, were generally bounded in time and space. COVID created entirely different phenomena. First, disruptions occurred simultaneously on both demand and supply sides; while factories were shut down under lockdowns, demands for various products either skyrocketed or tanked. Second, unlike previous disruption events, COVID-led disruptions were uncontained and spread in unpredictable ways, as multiple variants of COVID wreaked havoc all around the world. For these reasons, it is no exaggeration to say that COVID was a watershed event that fundamentally altered how we think about supply-chain resilience.
What we are experiencing now is another departure from past experience. The risks stemming from geopolitical shifts, tariffs being a major facilitator, are unique in that, while we may have a sense of which direction the world is heading towards, we at the same time have a hard time identifying how the risks will manifest themselves. In other words, predictability and unpredictability co-exist in this new era. One of the reasons for this seemingly contradictory observation is that, as the trends toward global de-coupling and regional conflicts accelerate, the risk factors that would have been isolated become entangled. The result is that we will increasingly face the kinds of disruptions that are not only difficult to be prepared for but also cumulate in their impact, cascading across industries and geographies. Knock-on effects are becoming more common, as illustrated by the U.S. administration’s restrictions on advanced semiconductor exports to China, which not only harmed many global firms but also accelerated China’s drive to develop its own chip designs for self-sufficiency.
Another difference from the COVID-driven changes is that there’s not a sense that things will settle back down to the pre-crisis normal. Does that affect how you see the situation evolving?
Yes, exactly. This is another way in which the current situation is materially different from past experiences. Again, with pre-COVID supply chain disruptions, however painful it was to go through product shortages, there was always an expectation that things would return to business as usual once the problem was addressed. Even with COVID, although the level of uncertainty was much higher, there was still a sense that things would get back to normal, and in many respects, they did. For example, the system of tightly integrated global supply chains built on economies of scale and lean principles remained largely intact.
In contrast, one of the distinguishing features of geopolitical risks is that the notion of “restoring normalcy” is elusive at best. There are structural shifts that reshape the entire landscape, making it more likely than ever that the investments you make to optimize your supply chain today may be ineffective just a few years down the road. The tariff situation is a good example. Many companies moved production out of China and expanded capacity in India, only to face even higher tariffs as a result of unanticipated U.S. retaliation for India’s continued purchase of Russian oil. Is this a temporary situation? We don’t know for sure yet, but there is certainly a potential for lasting damage.
What should the firms do differently to manage their supply chains?
Many studies have examined the strategies for ensuring supply-chain resiliency. I categorize them into two buckets: redundancy and flexibility. Redundancy involves maintaining multiple copies of the same resources to mitigate the impact of disruptions—for example, stockpiling inventory or sourcing from multiple suppliers. Flexibility, on the other hand, focuses on designing resources to be more adaptable to changing environments. A classic example is flexible manufacturing, where automakers use the same production line to produce different variants of vehicles that would allow them to adjust production based on realized demands. Of course, both approaches come with significant costs.
In today’s environment, shaped by geopolitical risks, I would argue that greater attention needs to be paid to the latter category—flexibility. This is directly tied to the nature of the risk: the difficulty of anticipating how it will manifest, given the nonlinear interactions among risk factors and their knock-on effects. Established tools such as contingent capacity and modular product design can help firms to respond quickly to disruptions, but other innovations are possible. Put differently, more emphasis should be placed on investing in capabilities that enable agility. In addition, firms should make decisions with the expectation that what emerges from a disruptive event will differ from what they were accustomed to; they should cultivate a mindset of adaptability. These two elements—agility and adaptability—while not entirely new concepts, deserve renewed emphasis.