By Matthew Grant, Senior Writer, SAP LeanIX and SAP Signavio
The emerging tariff-driven trade war is the latest in a series of “unprecedented” events –– financial crises, military conflicts, global pandemic –– businesses have had to weather over the last decade or so.
Add to these events the revolutionary rise of AI and other paradigm-shifting technologies (i.e., quantum computing, biomanufacturing, etc.), and it would be fair to say that disruptive unpredictability is the new normal.
If you find your business struggling in the face of this unpredictability, particularly on the economic front, you’re not alone. The impact and implications of current events weigh heavy on many a mind. As an indicator of how concerning things have become, one need look no further than the US stock market, which recently saw “the largest two-day wipeout of shareholder value,” while the Dow heads for its worst April since 1932.
Tariffs have an impact well beyond the stock markets, however. As tariffs increase the cost of imported goods – from raw materials to parts to finished products – manufacturers feel the pinch in the form of shrinking margins.
While not an optimal solution, companies can and do increase prices to address these pressures, passing along costs to consumers. Not only does this increase inflation, but it can also affect consumer demand. In that case manufacturers get a second hit from the tariffs in the form of rising inventory holding costs.
The best time to prepare is always in the past
“If you are only now trying to figure out the best strategy for dealing with tariffs,” says Josèphe Blondaut, VP of Product Marketing for SAP Signavio, “I’m afraid to say it may be too late. On the other hand, if you have a solid business process management practice in place, then there are already several steps you should have taken to prepare yourself for what was, in the end, a foreseeable disruption.”
After all, the tariffs were hardly a surprise. In anticipation of them, prudent companies took several steps to get ready and mitigate their impact. The first, naturally, was to analyze the supply chain from end to end, seeking out tariff-sensitive touchpoints, such as import/export steps and border crossings. Based on these insights, they worked on changing and even transforming current processes to incorporate nearshoring, dual sourcing, and alternate logistical routes.
Victor Perez, Director Value Management at Signavio, describes one potential scenario.
“With the tariffs approaching,” Victor said, “companies began looking at the diversity of their supplier and areas where they might get into trouble. Once they identified areas of risk, they could develop plans to avoid them or, at least, soften their impact.”
Here’s how that could play out. Let’s say you import steel from country A and you believe a new tariff will increase duty from 10% to 30%. Analysis reveals that paying 20% more on steel will increase landed costs 18% and lead time by two days, while shaving 5% off your margin.
As an alternative, you explore getting steel from country B with a far lower tariff. Modeling and simulating this alternative might show that, despite an increase in your raw material costs, this would actually yield a lower landed cost. So, you make the necessary changes.
“Eat your vegetables”
“I always hate telling people to ‘eat their vegetables,’ but what we are going through right now is a big reminder that the best time to prepare for a marathon is not the morning of the race,” says Josèphe.
“By the same token,” she adds, “the time to optimize your business processes is well before the day you pick up the paper and find out tariffs have upset the entire global economy! The goal is always to be ready to respond and transform when the need arises.”
If you want to analyze your supply chain–or, frankly, any part of your value chain–you need to have a detailed understanding of your business operations, specifically, your business processes. Since that understanding should be accurate and data-rich, you will want to mine your processes, building models based on how processes run in reality.
Since mining processes alone can’t give you the whole picture, your management solution should be able to pull in data from other enterprise systems. It’s the only way to truly understand operations, including things like the real landed cost of the goods you produce
Finally, you will want to become intentional about your processes, designing or re-designing them to fit the evolving market landscape. To this end, AI or machine learning more generally can help you simulate alternatives so you can make informed decisions about next steps.
Data collection and analysis, not to mention the development and implementation of appropriate, strategic responses, takes time. That’s why, in the end, the problem that companies face today is not tariffs or the unpredictable nature of national trade policies. It’s that they have too long neglected some basic operational best practices.
Here’s the good news: time is exactly what you get back when you implement a set of solutions like SAP Signavio Business Tranformation Suite. As one customer, Tyler Hawkins, senior analyst for digital process automation at Lousiana-Pacific Corporation (LP), put it after beginning to work with Signavio, “We didn’t have to spend three to four weeks digging through data to validate an issue. SAP Signavio Process Insights allowed us to quickly pinpoint bottlenecks and inefficiencies, helping us identify and prioritize what to improve.”
Develop resilience before you need it
“There are companies out there telling you that with the right business process mining tools, you can weather the tariff storm and come out on top,” says Victor, “and while I totally agree with that, the claim leaves some important things out.”
“In my work with clients,” he continues, “I find the most successful do three things consistently.”
“First, they make process mining and process optimization a standard operating procedure. This isn’t a once-a-year thing. It’s continuous.”
“Second, they focus on identifying value hidden in inefficiencies. Improving business processes can take time, and because it requires people to change their behaviors, it can feel disruptive. Concentrating your efforts on the value you want to realize can help people keep their eyes on the prize.”
“Finally,” Victor says, “they try to look over the horizon and anticipate changes that might impact process performance. Running simulations and ‘what if?’ scenarios can uncover threats and vulnerabilities to your costs and margins. It’s also the only way to figure out how to overcome them.
The current unpredictable situation will hardly be the last. If it caught you unawares, consider this a wake-up call. It’s time to get to work and invest in understanding how your business operates today as well as how to continuously improve it.
