The impact of tariffs on supply chain risks

19 minutes

Our EiQ experts unpack how the trade environment is impacting supply chain sustainability risks and responsible sourcing strategies. EiQ CEO Kevin Franklin explains how you can remain agile and resilient during this time of fast-moving changes and sourcing pressures.

Full transcript:

Andy Gibbard, EiQ Chief Customer Officer: Hello everyone. Welcome to our session today on the impacts of tariffs on responsible sourcing. So I am here with Kevin Franklin, CEO of EiQ, and also Chief Product Officer at LRQA. Kevin is the right person to be talking to today because he spent more than 25 years working in responsible sourcing, and he was actually the very first employee, employee number one within the EiQ team as well. We're going to drill into this topic and see what insights you have to share.

Tariffs are impacting everyone. The trade environment is shifting by the day, and perhaps more quickly than ever before. This is creating all sorts of challenges and risks as businesses scramble to try to adapt and to try to work around this shifting environment. So today, we will look at how to stay calm among the chaos and how to start to turn some of these risks into opportunities on the journey towards total supply chain confidence. So Kevin, to kick us off, please. What would be the one key piece of advice you would give to people who are trying to navigate these changes effectively?

Kevin Franklin, EiQ CEO: Great question, Andy. I think it would have to be to take a structured, data driven approach. One of the big challenges with tariffs is that it is eliciting a lot of emotions, right? And a lot of people have different viewpoints and are looking at it from different geographies, from different perspectives. That makes it very hard to navigate and to filter the wood from the trees. So, I would say data and objective approaches are really critical.

AG: How have you seen then these recent tariff changes impacting supply chain strategies specifically for responsible sourcing, and what challenges are they creating for the teams working in this area? 

KF: I think one of the biggest challenges as and one of the biggest concerns, actually, is whether all of the incredibly hard work that's been done by this industry over the last 25 years could be undone. I'm thinking particularly of all of the hard work that was done in China around advancing things like wages and working hours, where we now have knee jerk responses from companies well founded, because there are significant costs involved to basically stop placing orders with that action is also the corresponding action of no longer auditing in these individual factories and into the supply chain, and that, of course, exposes a business to a lot of risk. It also exposes workers in those factories and risks undermining all of the positive action that's been taken over the last 5, 10, 20 years.

KF: What we're also seeing a lot of though, of course, is questions being asked around costs, and that means potentially switching geographies, so looking at alternative sourcing locations. And of course, our EiQ platform is incredibly well set up for that, because the platform, in many respects, is basically geographically oriented. So, you can easily go into the platform and do a risk assessment for five or six near adjacent countries that one might look at as an alternative to China in particular, which is where the tariffs are the most significant, and also other countries that might be impacted. So that is definitely something that's happening today as well. What key factors should companies consider if they are really thinking of pivoting their sourcing strategies in response to sudden tariff increases? I think the first is really benchmarking and understanding one's current supply chain versus what one's new future supply chain might look like. What I mean by that is, if you are moving from a country that you know and trust, where you have relationships that you know and that are based on years of potentially working together to a new environment, you should firstly start to benchmark and to evaluate what that really means for your business. So, using platforms like EiQ allows you to generate those risk exposures for different markets.

KF: I think linked to that, benchmarking is also needed to really evaluate the tradeoffs. What I mean here specifically is, in fact, let's take a country like Lesotho, which has gotten a lot of press in the trade conversations, given that it's such a small, sort of isolated part of Africa that has been potentially very negatively impacted by - potentially, because they haven't gone into force yet the tariffs - if you move sourcing from Lesotho to any other country, you're going to generate a lot of additional emissions, because Lesotho is basically country fueled through hydropower. So that means that all grid electricity basically generates zero emissions.

KF: So, if I'm homeshoring from Lesotho to the US, I've now got emissions - and that's about tradeoffs, right? So, you might actually trade off a trade imbalance or a human rights risk for an environmental impact. The same will happen from a cost perspective. It may actually be more cost intensive going to a new location than it was prior to tariffs, and that will impact the consumer.

AG: We've recently released a supply chain risk outlook report which highlights some of the key production hubs which might actually, in a way, benefit from tariffs and might see a bit of an influx of business. And we've looked at some of the risks in some of those locations. So, if you haven't done it already, I'd encourage you to go to eiq.com and download a copy of that report. Kevin, with tariffs driving businesses to explore these alternative production hubs. Firstly, where are these hubs emerging? And secondly, what inherent risks should companies then be aware of? 

KF: Well, to answer this, you need to look at, really, the nexus of geographies and sectors. And the new hubs really are different depending on what sectors or commodities one's looking at. If you're looking at kind of more traditional manufacturing - apparel, footwear, or even potentially hard goods , consumer goods and retail - then the majority will be in some of the Southeast Asian locations. So, Vietnam, which was already growing significantly as a result of the previous tariff rounds, Vietnam, potentially Thailand. We're also seeing interest in Malaysia, India, within that kind of Southeast Asia cluster. You may also see renewed interest in Mexico, and that's definitely the case for automotive. And you may also see additional interest in Turkey as well.

KF: Now we're all kind of in the consumer goods retail space, leaning a little bit into more automotive, if we're talking about some of the food commodities, Brazil is a definite beneficiary of the tariffs, and we're already seeing a lot of action around Brazil for soybeans and other items. So, it also depends on whether you're looking at it from a kind of US sourcing or a China sourcing perspective, because they both have tariffs in place for China, where it has quite significant tariffs on US imports.

KF: Take something like beef. We're now seeing Australia targeted as a potential source geography for a lot of those beefs, and benefiting significantly from it, and then thinking then about the risks of shifting production into these these countries. What are the factors that companies should bear in mind when undergoing these supply chain transformations, basically? So, I think there's multiple different risks.

KF: Firstly, one really needs to know and understand the landscape in terms of labour, health and safety, environment and business ethics issues, even moving to a country like the US, which might seem like a safe bet, can pose a lot of risks. And we recently released, as you alluded to earlier, Andy, our supply chain risk report for really the first half of this year, and we've seen the US move into the high-risk bracket from what was previously medium risk. So there we're seeing increased risk around migrant workers, despite a lot of the action that's been taken around migrant workers in the US, we're also seeing more risk around forced labour, potentially even child labour, and a lot of kind of informal contract working that can lead to a heightened risk exposure. So, one is understanding the risk landscape.

KF: There are no truly zero risk environments, particularly for a lot of the goods and services that most of our clients will be looking at. So that's one. The second is trade offs right? If you're moving from one location to another, things are going to be different. You're going to have to trade one thing off versus another. It may be that you're trading off what is now a lower cost market with maybe more emissions on the environmental side. Or you might be trading off this lower cost market with less knowledge or trust of a supplier. Certainly, if you're moving to a new supplier, it is exactly that. It's one where you do not have a relationship, or where maybe they haven't sourced or produced the same volume of product for you, and that will create a lot of challenges for a supply chain.

AG: With tariffs sometimes forcing businesses to onboard new suppliers much more quickly than they would have previously. How can sourcing teams ensure efficient yet still effective screening and monitoring processes?

KF: Great question. Andy, so firstly, on the screening side, I would say tools like Sentinel, which is our adverse media scanning tool, can be very effective. A lot of our clients will already be evaluating new suppliers on a fairly regular basis, but perhaps not as many and not as frequently as they might need to do now, as a result of tariffs. So step one, I would say, run them through an adverse media scanning tool like Sentinel, where we can look at geographic risk, product risk, and we can also actually evaluate labor, health and safety, environment, business ethics and management systems, which are key sustainability criteria typically built into a responsible sourcing program,e, all done remotely and can be turned around within 24 hours. So that's point one in terms of monitoring. Again here, I think you can certainly start to leverage tools like Sentinel for ongoing and regular monitoring, maybe on a monthly basis, or potentially even more frequently. That should be part of a responsible sourcing programme design. But then we've got tools like self-assessment questionnaires and, of course, audits. Now, what I would say is there's probably a temptation to leverage some industry scheme audits if you're looking at a fast setup of a program. But this does potentially present risks, because oftentimes these audits may be more likely to see low transparency rates. Certainly what we see when we look at countries in the Southeast Asia region is maybe transparency rates closer to 10% which is a lot lower than clients’ own protocols, where they may have been used to transparency rates of like 60 to 70%, so that's something to be aware of.

KF: You definitely want to work with an organisation that can do rapid audit delivery, and maybe also has the ability for self-assessment questionnaires. What I would also say can be very helpful is thinking about audit sharing mechanisms and equivalency. Equivalency is a tool that we use where we can basically ingest multiple different audit types. So from any of the different industry schemes or potentially even different company-delivered audits and normalise those into the common structure and framework. So if you're kind of bringing new suppliers on board, I would ask them to share the audit reports they already have with you, run them through a platform like EiQ, and basically harmonise, normalise all of that data into one place - collect as much data as you can through both Sentinel legacy order reports and potentially deliver or deploy ad hoc, quick form audits for suppliers that you perceive as being really critical to your medium term supply base.

AG: Lots of haste here, and potentially lots of risk and pitfalls as well, some of which could be costly. So what processes or due diligence steps can companies take to avoid costly mistakes when shifting and pivoting in this environment?

KF: Yes, there is a temptation to move very quickly here, but you have to take a structured approach to this. So I would say businesses need to be putting the right kind of resourcing into these decisions. You don't want to make ad hoc, short-term decisions that can lead to medium- or long-term business impacts from both the production quality and also reputational perspectives. It's going to be really important to leverage good data in this process, to be doing supplier matching, to be leveraging data sets like EiQ from a geographic and a product risk perspective, or like Sentinel from an adverse media scanning perspective, and also looking at service providers and platforms like EiQ, where suppliers can share with you the information that they already have. So I think it's really critical to pull as much information into this decision-making process as you can, and to work with partners that you know, that you trust, and that spend a lot of time on the ground, and that includes EiQ team members as well as LRQA team members. Remember, we have people on the ground in pretty much all of these locations, and we can certainly support you in your decision making.

AG: Supplier relations may be under extreme pressure as well at the moment. So how important is it to build trust-based relationships with your suppliers? And how do you go about doing that?

KF: Supplier relationships are under extreme pressure right now, and it is very important to build trust-based relationships. I think what we're definitely seeing happening right now is at a minimum, suppliers are being asked to do a lot more with a lot less. If companies are continuing to source from suppliers that are heavily impacted by tariffs, then a lot of cost cutting is going on in order to ensure that each of those businesses can try and hit the margins or get as close as possible to the margins they had before. In many cases, that will be impossible, but if you're working with the same supplier, cost cutting is happening across the board. With this, is also a lot of responsible sourcing risk. The only way in many cases, to reduce costs is to reduce wages, increase working hours, to lean into things like unauthorised subcontracting and potentially the worst issues of child labour and forced labour. And these are very real dynamics wherever that production is still happening, because those costs are being very closely evaluated from all parties involved.

AG: Looking ahead then Kevin, how can companies balance the short-term disruptions caused by tariffs with more long term strategic planning, thinking more about the resilience and the sustainability of their supply chains.

KF: I think the key here is really to take a measured and calm approach to how you look at your supply base. It's certainly the case that we were in a very different world 90 days ago, and quite likely we'll be in a very different world 90 days into the future. We just don't know exactly what that will look like. My personal opinion is that we are seeing a transformation of trade. So my personal opinion is that we will see some of these measures sticking, maybe not all of them, but some. What that means is that as a business, we need to be fundamentally looking at how we've set up our supplier base and making strategic, medium to long term decisions about what we want that supply base to look like, and ultimately even how that will impact the cost to the consumer, the message to the consumer, etc. Within that mix, there are going to be a lot of tradeoffs, because it won't be the same as it was before, and that means maybe trading off price with sustainability or social with environmental and also risk as well as relationships. In many cases, you will be moving from suppliers you've known and worked with for a long time to new suppliers where the relationship will feel transactional and much less well trodden. In all cases, it's going to be critical that you do that with your eyes wide open, take an approach that's risk based and data driven, and certainly in the world of responsible sourcing, that you're still implementing a due diligence based approach to responsible sourcing, which means risk assessment programme design, delivery and deployment, implementation of that program, leveraging the right audits, self-assessment questionnaires, monitoring, benchmarking, continuous improvement, all of those things are still required and expected, because you still need to have to get product into the destination country in compliance with the respective regulatory regimes, so it requires a lot of thought and a lot of planning.

AG: Kevin, thank you very much for all of your insights today. Do you have any closing remarks before we close this session?

KF: Thank you, Andy. I think I just go back to my opening point, which is data. Leverage and use data to ensure that you bring an informed approach to risk assessment and to redesign of your supply chains. The good news is that AI is increasingly present in that decision making mindset, and you have not just data, data insights and tools that are available in platforms like EiQ, but also AI combined with deep human intelligence to support that decision making.

AG: Kevin, thank you very much. On the subject of data, please do go to eiq.com and download our latest supply chain risk outlook report, which does focus on some of these tariff driven shifts. some of these production hubs, which are under a lot of scrutiny now, and I think you'll be able to get a lot of additional context and content from the insights that we share there as well. Please do follow us on LinkedIn. Look out for announcements about future sessions like this one, and enjoy the rest of your day. Thank yo