Riding out tariff turmoil takes more than watching the balance sheet.
I took a few economics courses in college, but I’m no Adam Smith. And I have predicted the future reasonably accurately, but no one would mistake me for a prophet. What I do understand, however, after nearly 50 years in manufacturing, most spent as a corporate president, is the impact of costs on profitability. More specifically, the impact of dramatic and unpredictable rising costs on a business’s ability to thrive, survive or founder.
Cost accountants typically separate expenses into two overall buckets: fixed costs and variable costs. Fixed costs may include items such as insurance, occupancy, benefits and so on. Variable costs include materials, supplies, labor, etc. Within a couple of years in manufacturing, however, I realized that in the real world only a small portion of costs are fixed, and the majority are truly variable. While all costs must be watched, monitored and managed, variable costs are the ones that make or break a balance sheet and income statement.
Under “normal” conditions, managing costs in a business, especially in a manufacturing business, is challenging. Too much scrap adds to costs, just like better-than-expected yield helps reduce them. Unplanned maintenance or a vendor’s larger-than-anticipated price hike can and do happen in “normal” times. The offset is to prudently increase pricing by balancing the need for solid margins and satisfying customers with good value and a good product.
But these are not normal times. Ongoing upheaval on the global stage, most notably the economic roller coaster of constantly announced, implemented, rescinded, modified and eventually implemented tariffs, has global trade, and especially manufacturing, confounded and ill at ease.
In electronics manufacturing and especially printed circuit boards, my “A” list of direct variable costs to watch included copper (used in laminate as well as foil and plating nuggets); film; backer foil; drill/route bits; and gold. For the companies I was with, except for gold, all these purchased items came from a foreign country.
In a typical year, each and every item would rise in cost. Historically, increases would be in the 3-8% range. Commodity markets drove copper and gold increases, so they saw more price fluctuation, but over time the increases were in line with overall inflation. Since Jan. 1, the trends are notably different, however. Through mid-August, the pre-tariff price of gold is up 30%+ and copper is up 20%. While gold may not be directly impacted by tariffs, other raw materials such as aluminum, steel, film and copper, are as of this writing, subject to tariffs ranging between 20% and 100%.
Now, if everyone could count on the most recently announced tariffs, making business decisions, especially ones related to maintaining some reasonable margin, would be relatively simple. That is not the case in the extraordinary world we are in, however. In particular, reading and understanding the tea leaves regarding what, if any, exemptions are allowed is an ongoing and exhaustive exercise.
Managing when virtually every variable cost is in flux is extremely challenging. Decisions must be made with little or inaccurate information. Mistakes, therefore, will be made by just about all businesses. Customers, while aware of the supply-chain pressures, will be fighting to minimize any price increases on their orders. And regrettably, some smaller companies, or companies with weak balance sheets, may not survive.
While none of us has prior experience with these tariff swings, in times of upheaval history has shown two actions are essential. First, keep clear, proactive and ongoing communication with all your customers and suppliers. Up-to-date knowledge is critical in times of dynamic change. The knowledge may not just be about costs and impacts on pricing. Is an alternative supply flow occurring that may mitigate some of the impact of tariffs but cause longer lead times, and or knowledge about potential material shortages that changing supply routes may cause. Any knowledge you can glean from either supplier or customer – and then pass on to the other – is true value-add and could prevent a costly assumption from exacerbating an already difficult situation.
Second, and equally important, maintain clear, proactive and ongoing communication with all your employees. The team needs to know what is going on, and what management is doing to protect the business and employees’ jobs. In times of uncertainty, the rumor mill cranks up, especially when major news outlets are reporting different takes. Providing the workforce with the best available information will lower employee anxiety, helping to stave off mistakes that negatively impact yields.
Times are a-changing. Focus, patience and communication are needed now more than ever.
Peter Bigelow has more than 30 years’ experience as a PCB executive, most recently as president of FTG Circuits Haverhill; This email address is being protected from spambots. You need JavaScript enabled to view it.. He is vice chair of the PCB Management Symposium: Navigating through Turbulent Times, taking place Sept. 30 at PCB West.
