News / US SMEs forced to 'multi-source' to avoid tariff backlash

Photo: © One Photo Dreamstime.com.

Washington’s tariffs have forced US-based small and mid-sized enterprises (SMEs) to change their sourcing strategies, with supplier diversification and extended planning horizons emerging as popular trends.

Forwarders see shifts in sourcing areas, but many importers face high obstacles.

The impact of tariffs has pushed SMEs to look for alternative sources, a study published by demand and supply planning software provider Netstock shows.

More than half the respondents of its survey reported that the disruption from the tariffs proved worse than anticipated, with 20% of them stating that the impact was much greater than expected. Nearly three-quarters cited increased cost as the top concern related to tariffs.

In a study produced last year Netstock found that 44% of SMEs were absorbing tariff-related costs, but this has shifted to 82% passing them on now, reflecting serious pressure on margins.

A second indicator of the financial impact of tariffs on SMEs is the strong push to find alternative sources replacing the ‘wait-and-see’ attitude that many firms embraced initially. More than one in three (35%) reported changing suppliers last year.

At the same time, diversification was a strong driver of alternative sourcing decisions. Nearly half (48%) of the respondents are now importing from two or more sourcing regions.

Bob Imbriani, EVP international at forwarder Team Worldwide, has observed the same trend.

“Volumes are more dispersed in tradelanes. We’re seeing more or less the same volumes, but moving in different trade lanes,” he reported.

While cargo owners are diversifying their sourcing origins for protection against tariffs and higher rates, the strategy thins out volumes, which makes it difficult to maintain margins, he noted, adding that the sourcing shift is mostly associated with larger volumes that move by ocean carrier rather than as airfreight.

The Netstock survey shows that 44% of SMEs changed suppliers because of increased costs, while country-of-origin risk and supplier reliability issues accounted for 26% and 15%, respectively, of changes.

“People do what they can to avoid China,” Mr Imbriani said.

In the Netstock study 74% of SMEs identified China as their most-impacted sourcing region. Europe followed at 30%, South-east Asia at 25%, Mexico at 17%, Canada at 10%, and Latin America at 9%.

Besides China, Taiwan is another origin many of Team’s clients are not showing much interest in, which appears to be borne out of concern over China’s long-term ambition to annex the island, Mr Imbriani said.

Team has noted increased volumes moving out of Vietnam, Indonesia and Malaysia, he said, adding: “It appears that many Chinese companies have opened facilities in these countries.” Some of the imports from these origins bear Chinese company labels identical to tags seen on China imports,” he reported.

Diversification in South-east Asia appears to outpace interest in near-shoring. Mr Imbriani noted that interest in Latin America had somewhat abated after an early surge.

“It’s still going on, but at a much slower pace,” he said.

This tallies with the Netstock report, where only about 10% of SMEs cited near-shoring as a strategy. It suggests SMEs are more focused on spreading sourcing risk across regions than relocating it closer to home.

While 35% of SMEs in Netstock’s survey shifted suppliers, almost two-thirds did not, which indicates that many firms still face formidable barriers.

“In many cases customers have no choice,” Mr Imbriani suggested.

Joe Delli, president of New York-based forwarder Cargo Tours, has several clients that sourced high-end products and materials from Turkey and Italy, only to find their shipments in limbo because neither importer nor exporter are able to stomach the tariffs which have hugely inflated the cost.

“I have three big projects now on hold because there were no tariffs on steel and aluminium when the deals were signed,” he said.

Many customers of Team that look to diversify into new origins approached the company early on to enquire about its rates and services for the targeted region and, for the most part, they have stuck with the logistics firm.

However, arrangements with new suppliers can derail the logistics connection. In some cases, new suppliers offer to offset some of the tariff through lower prices but ask to control the freight aspect in exchange, Mr Imbriani said.

For many importers, this produces a dilemma, as the connection with their logistics provider is deepening as a result of another trend identified in the Netstock report: SMEs are looking to extend their planning horizon.

The report shows that 73% want to plan inventory further ahead, but 62% are basing their projections on actual inventory levels. One lever companies are looking to is better demand-sensing capabilities, but when it comes to the logistics aspect, many rely on their forwarder, which requires better data flow between the pair.

“Information has become more and more important,” Mr Imbriani said, adding that updates should happen as close to real time as possible. If this is in the hands of a supplier on the opposite side of the globe, that’s a tall order.

Inside the industry’s AI shift

Complete The Loadstar’s ‘State of AI in the Supply Chain’ survey — and receive the full report and data before release.

Take the 2-min survey