Many US companies are likely to be affected by changes to the North American Free Trade Agreement (NAFTA) currently being negotiated by the United States., Canada, and Mexico. As renegotiation discussions continue, there is a growing sense of uncertainty as to how the trade agreement’s restructuring will affect U.S. companies—especially as both the U.S. and Mexico head into elections in 2018.
With that in mind, do you know the point of origin for the critical materials used in your business? Will one or more of your suppliers be impacted by a change in NAFTA? Could your supply chain be interrupted—or worse, cut off entirely—under revised NAFTA provisions? These are important questions and the answers can have significant impact on your business.
Rather than riding the wave of uncertainty, why not take a proactive approach to anticipate the best and plan for the worst? While our leaders talk about solutions, there are steps you can take to mitigate the impact NAFTA could have on your business.
Learn how NAFTA affects your suppliers
Now is the time to talk to your suppliers about where they source their raw materials, or finished goods, and whether changes to NAFTA could affect their business, as this ultimately impacts your business. Even though material prices themselves may not change, companies sourcing from Mexico or Canada may face increased tariffs as a result of changes in NAFTA; you can be sure that any increase in costs will be passed on to you.
Product availability may be impacted by changes to NAFTA, and it may be necessary to consider alternate sources or materials should currently purchased products no longer be readily available. During your discussions with suppliers, ask what contingencies they have in place to ensure continuity of service if current sources are affected by disruptions in supply or temporary unavailability of materials. Do they have access to additional sources for the products you are currently buying? Do they have access to alternative products/materials that can either be sourced domestically or imported from countries not impacted by NAFTA? Proactively addressing these possibilities can help your organization avoid any supply disruptions that may result in the wake of NAFTA’s renegotiations, if the U.S. ultimately decides to withdraw from the agreement.
This could also be the right time to re-evaluate suppliers and determine if they can still meet your needs going forward or if it’s necessary to investigate alternate sources.
Forecast demand and establish pricing agreements
Once you have determined which suppliers have the ability to continue providing the materials/resources necessary to run your business, consider how you will work with these suppliers to secure materials and protect pricing. There are many purchasing options: blanket orders, with defined future release dates, or a series of individual purchase orders, calling for delivery at specific dates, or entering into a “Make and Hold” arrangement.
Choose the purchasing option that works best for you and your suppliers; however, ensure that the chosen option also includes a definite plan to lock-in pricing to avoid potential price increases resulting from increased tariffs, product cost increases on imports, or “opportunistic” price jumps on domestically produced materials. A simple indexing provision will at least tie any price change to a documented variance in the base raw material and preclude price changes simply as a result of forecasted market changes.
While NAFTA renegotiation discussions are far from over—and the uncertainties surrounding them continue to grow, taking a proactive approach to sourcing, supply chain management, and procurement practices can mitigate some, if not most, of the impact that a “New NAFTA” could have on your business.