Risk in the new global supply chain

How the new U.S. administration may affect NAFTA, trade and tariffs for North American manufacturing
Wednesday July 12, 2017
Written by Luc Janssen, QAD
Jul. 12, 2017 - Supply chain executives are paying close attention to the implications of what trade might mean under the new administration. With U.S. President Donald Trump’s new agenda to put “America first,” supply chain executives are specifically concerned about issues surrounding import tariffs and trade rules.

The administration is now beginning to renegotiate the North American Free Trade Agreement (NAFTA), which will undo more than 20 years of free trade between Canada, Mexico and the United States. The new administration also threatens to levy punitive duties on goods made in China. Trump has also stated he will sign executive orders to withdraw the United States from the Trans-Pacific Partnership.

How should global manufacturers and supply chain executives respond? Many think that the cost of sourcing parts and technologies between the U.S., Canada and other countries is likely to rise substantially, while finished goods and parts could be stranded. At the same time, there is concern that sales between Canada and the U.S. could slow, or stop altogether, as trade negotiators jockey for position and barriers appear elsewhere.

Canada and the U.S. currently have the largest bilateral economic relationship in the world, along with the world’s longest undefended border: 5,524 miles. Vast electrical, financial, intelligence and law enforcement networks tie the two countries. According to the Department of Commerce, U.S. exports of goods and services to Canada supported an estimated 1.6 million jobs in 2015.

Trade in services with Canada and the U.S. (exports and imports) totalled an estimated $83.7 billion in 2016. Services exports were $54.2 billion; services imports were $26.9 billion. So the implications for redefining the NAFTA terms could be unfortunate for our free flowing and profitable supply chain between Canada and the U.S.

Preparing for potential change and implementing policy
As we see changes start to emerge across the world, risk in the global supply chain is likely to rise considerably, which will cause buyers to temper their choices to more secure and dependable sources — even if some cost savings must be sacrificed.

The automotive industry already employs a standard template for measuring supplier risk, the Materials Management Operations Guideline/Logistics Evaluation (MMOG/LE), which defines an industry-wide set of best practices to help improve delivery performance. MMOG/LE is an assessment tool used to measure and improve materials planning and logistics efficiency within a manufacturing facility.

With a riskier overall global environment, will supplier risk management tools, such as MMOG/LE, become more popular across other supply chains? With uncertain policy changes by the new administration, today’s automotive suppliers could potentially face a wide range of business-critical issues, including shortages of raw materials, catastrophic property losses from unforeseen events, supply chain disruptions, and IT system outages and failures, to name a few. For Tier 1 automotive suppliers, the lack of transparency and control among sub-suppliers adds yet another layer of risk to this already-problematic equation. Now, and certainly well into the future, smart strategic planning is imperative to mitigate these concerns, especially as the globalization of automotive supply processes increases.
 
Today, there are thousands and thousands of automotive suppliers around the world, which must address the new requirements. Specifically in Canada, the auto industry consists primarily of assembly plants of foreign automakers — most with headquarters in the U.S or Japan — along with hundreds of manufacturers of automotive parts and systems. Canada is the ninth-largest auto producer in the world, producing 2.1 million cars a year, and the clock is ticking as these organization and others around the world must implement the regulations by September 18, 2018.

In the meantime, supply chain planning (SCP) software tools could increase and help with all of the new policies and government regulatory uncertainties. As supply chain executives increasingly look for more accurate forecasting and network optimization, given the potential riskier environment, tools like Cloud-based ERP systems and other Cloud-based solutions could help. Quality management solutions, which have already gained favour with manufacturers in the last several years to deal with ever-evolving regulatory reporting requirements, will also continue to be adopted, this time more to ensure suppliers are meeting the standards set forth by regulators and OEMs, rather than the manufacturers themselves.

Senior management must be committed to identifying risks within their respective companies, and then taking actions proportionate to those specific risk levels. In addition, organizations must prioritize, document, train, test, validate, monitor, and incorporate lessons learned for these identified risks, and turn to different industries — such as automotive — and different parts of the world for best practices. If risk isn’t planned for at this time of change, access to new business opportunities or existing operations could be in jeopardy. And, no organization wants that.

Luc Janssen is senior director, R&D for Manufacturing and Supply Chain Solutions, for QAD Inc.

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