Tariffs and Inflation: A Good Time to Forward-Buy Inventory? (Part 1)

"Buy low, sell high" … If you took anything away from any Economics class, that’s probably it. Now that President Trump’s import tariffs have pushed inflation to the highest level in six years, many retailers and distributors are putting that strategy into play. In cases where suppliers pre-announce a price increase or promotion on a high-turnover item, forward buying can be an attractive option. There’s a fine line, however, between buying inventory ahead of inflation and cannibalizing your profits.

Don’t forward buy just to do it. Your savings could be negated by the cost of carrying inventory you can’t sell. Finding that perfect balance — no stockouts, no surplus, no surprises — requires deep analytical capability and the tools to make the right decisions at exactly the right time. NOT an easy task in today’s highly volatile and complex supply chain.

So the question isn't “should you forward-buy?” but rather, “are you ready for it?”

Before you decide, let’s take a look at the bigger picture:

• Where's inflation going?
• What are the pros and cons of forward buying?
• Why is demand forecasting so difficult?
• Are you ready? Do you have the right technology in place to make the right purchasing decisions at the right times to protect your profits?

Inflation is Trending

2.9 percent. Immediately following chatter about the import tariffs and possible trade wars, U.S. consumer prices rose by 2.9 percent nationally in the 12 months ending in June (the highest inflation increase in six years). While the Federal Reserve is OK with that figure, economists predict consumer prices will climb higher if the Administration continues to impose steep tariffs on a wide range of imported goods. Signs certainly point to an upward trend, making forward buying an attractive supply chain strategy.

Price hikes will be felt most by businesses downstream the supply chain that rely on imported steel (25 percent tariff) and aluminum (10 percent tariff) to make their products.

For consumers, wallets will be hit hardest in the areas of dining out (prices up 3.6 percent), alcoholic beverages (up 3.9 percent), and gasoline (up 26.8 percent). For example, a 20 percent to 50 percent tariff on washing machines from China, South Korea and Mexico could increase the price of foreign-made washers from $50 to $90. We’ve already seen a 20 percent tariff on Canadian lumber bump housing prices by $9,000!

One thing for sure is that prices for everything are going up. If wholesalers and distributors don’t react to that, they’re losing profit.

Forward Buying: Pros and Cons

A smart forward buy on inventory could bring 5 percent to 20 percent in additional savings to wholesalers, distributors and retailers. Merchants may also be able to pass on savings downstream to their customers, an added perk that can extend profitability further and cement their reputation in the market as a price leader, without sacrificing much.

Good candidates for forward buying are non-perishable goods or perishable goods with a long shelf life (nothing that will be out of date within 30 days or 60 days), as well as products in hard lines, such as heating/AC parts, automotive parts, etc.

But whoa, Nelly. Before you run out and borrow cash, beware. Inventory is the biggest asset on the profit-loss statement, therefore you must hedge your investment buy against inflation so that you're operating profitably at all times.

Excess or dead inventory makes forward buying risky without the right math behind it. Consider the following when evaluating your options:

• inventory carrying costs are about 12 percent of the average unit cost of production;
• anywhere from 20 percent to 30 percent of inventory is dead or obsolete, even in well-run companies; and
• interest rates on loans for extra stock are running up to 8 percent.

Ouch.

Forecasting Demand: Patterns Are Extinct

So how do you determine what to purchase and when, so as to minimize unsold goods? Historically, supply chain managers used manual forecasting methods. This got tricky when it came to running promotions. However, for the most part, they could maintain that balance by watching demand patterns. It was typically a spreadsheet, rule of thumb or a gut feeling. When you look at today’s increasingly complex demand volatility, there are no patterns anymore.

Manual demand forecast techniques can no longer react to demand volatility in today’s complex, multi-echelon supply chain. More automated supply chain analytics and real-time intelligence tools are required to effectively forecast, plan, collaborate and execute on forward buying — or any supply chain strategy, for that matter.

In part two of this multipart series, I’ll look at how a purpose-built supply chain planning solution taps into all the demand factors (e.g., price changes, promotions, etc.) to optimize purchasing decisions and help you plan your forward buying strategically.

Rod Daugherty is the vice president of product strategy for Blue Ridge, a supply chain solution.