6 Questions With … Plante Moran’s Lou Longo

It has been several decades since tariff policies factored significantly into the United States economy. Now, however, ongoing tariff shifts are creating new pressures for global businesses. The dynamic landscape is especially challenging for organizations without established, specialized expertise or robust systems necessary to adapt quickly.

Supply Chain Management Review spoke with Lou Longo, partner and leader of Plante Moran’s international consulting practice, on how to safeguard margins in a high-tariff economy in this 6 Questions With … feature.

Longo has over three decades of experience in helping clients increase operational efficiency and grow their businesses across borders. He frequently speaks on globalization and best practices for international operations.

(Answers have been edited for clarity and length)

SCMR: Tariffs will likely be a pervasive part of the business landscape for the foreseeable future. What supply chain “best practices” should supply chain leaders recommend that their organizations prioritize? 

LONGO: I agree. Organizations have to begin considering tariffs endemic to doing business. That means they need to shift to a more proactive approach to managing tariffs and their impact—just as they would for other well-established business processes.

The first best practice that comes to mind is to consider using free trade zones. These may have fallen off the radar of many small and mid-sized businesses as they previously might not have offered enough advantages. However, free trade zones make sense for many more organizations in today’s high-tariff environment. Given that, supply chain leaders may want to recommend that their executive team analyze (or re-analyze) their benefits.

Some other best practices might include:

• Review and update any transfer pricing agreements you have with related, cross-border entities—for example, if your company purchases components from a wholly owned subsidiary in Europe. Be sure the agreements reflect the best, most appropriate pricing for transfer pricing purposes and tariffs. Transfer pricing is a key issue that currently isn’t getting enough attention.
• Dive into the nuances of all the international commercial transit terms (a.k.a. Incoterms), understand why and when to use each term, and include them in purchase orders. Truly comprehending those terms and incorporating them in purchase orders is essential for covering responsibilities regarding origin.
• Don’t forget to take advantage of duty drawbacks, if applicable, and any opportunities for exclusions. Businesses should investigate these opportunities if they haven’t done so already.
• Leverage the “first sale rule” to reduce the valuation of incoming products. It’s surprising how often it unexpectedly comes into play because an agent participates in a sale that you thought was direct from the vendor.
• Review annually, at a minimum, the classification of your products and their tariff codes. This review should include any products your business buys or sells that cross a border. It’s no longer sufficient to do it every five or ten years; it’s vital for compliance and ensuring the business is not losing money.

To better understand Incoterms, read: A practical guide to using and choosing Incoterms rules correctly for global trade

SCMR: What is the most significant mistake businesses make as they try to identify their tariff risks?

LONGO: The biggest problem I typically see is failing to dig deep enough into origin determinations to uncover risk fully. It’s understandable; businesses have gotten by knowing only where their immediate subcomponents originate. But border crossings matter more now. With enforcement up, getting declarative origin statements from suppliers is critical. All companies should be moving toward looking through the supply chain at least one level, ideally two levels, before their supplier.

For example, let’s say a U.S. manufacturer buys a subcomponent from Germany. Not only should it get the EU/Germany certificate of origin, but it should also request at least the certificates of origin for all the componentry that goes into the German subcomponent. Ideally, it should obtain the certificates of origin for the next level down as well.

Doing this is a good safety practice, as it creates an evidence chain for your declarations and demonstrates due diligence. 

SCMR: What changes or investments should businesses make to accomplish these best practices and mitigate their risks?

LONGO: Having qualified suppliers who deliver high-quality products on time is as crucial as ever, but now organizations must additionally make sure that all declarations are correct as components or products cross borders. Don’t assume customs staff will handle everything; that’s not always part of their service.

This means it’s more important than ever for organizations to have an updated enterprise resource planning (ERP) system. It’s essential for adjusting product costing profiles, and it should be sophisticated enough to let you drill down and do all the vendor management things we’ve been discussing. Organizations with a fully implemented ERP system should ensure they’re deploying all the vendor management tools at their disposal.

They should also consider adding people/knowledge internally to build systems that automatically and correctly handle origin documentation requests, filing, and reviews. A technology system alone is seldom enough; organizations need the knowledge of people who can optimize those systems to meet both business and compliance needs. In short, organizations must have good people, processes, and systems in place to control the risk.

SCMR: Can you share an example of how businesses are successfully improving their supply chain visibility to mitigate their tariff risks?

LONGO: Absolutely! Some businesses already are including terms in their requests for proposal (RFPs), requests for quote (RFQs), and purchase orders. These terms require identification of the origin of whatever is coming to them, and for the suppliers that are a tier or two below. As a result, even if these organizations don’t know where everything is coming from today, they will know it going forward. It’s a great example of something organizations can do immediately to gain visibility.

SCMR: You’ve mentioned before that businesses considering reshoring their supply chains may not be as shielded from tariff impacts as they anticipate. Why not?

LONGO: Reshoring absolutely should be evaluated, but it shouldn’t be “the” immediate answer. The question to ask is whether it makes both strategic and financial sense to reshore some portion of what’s being done outside the U.S.

Do a cost-benefit analysis of reshoring against the cost of applicable tariffs, weighing the significant risk, cost, and disruption involved in moving the supply chain. It’s not a minor upheaval. Some of our clients, for example, are finding that there are certain processes, products, materials, talent, etc., that they can’t efficiently reshore.

So, organizations shouldn’t simply assume they’ll fare better by reshoring their operations. They may have better results in some cases, but there are many cases where reshoring will not yield a better financial outcome. If reshoring does make sense, it’s likely not a wholesale move to bring everything back. The decision must be made strategically.

SCMR: What advice would you give to supply chain leaders just beginning to assess their tariff exposure and financial risks?

LONGO: First and foremost, accept this is a time of change and be flexible. Then, if you haven’t already, you should conduct a thorough tariff impact assessment. We see it as an eight-step process that starts with compiling data and validating bills of material (BOMs) but ultimately demands ongoing vigilance.

Next, look strategically at your future plans and consider the impacts from a regional—not global—perspective. Breaking down what you’re going to do as an organization by various regions of focus allows you to diversify, makes you more flexible, and gives you a greater likelihood of success.

Regardless of your approach, it’s important to remain strategic and not overreact to every change and shift that comes along. Tariffs may be a relatively new strategic issue for many organizations, but we can and will learn to manage them.

SCMR: Thank you

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