Subsequent to filming this week’s video, the situation in the Middle East involving Iran, Israel and now the United States became more “complicated.” This event, coupled with everything else going on, underscores the importance of utilizing scenario planning to address critical logistics and supply chain issues. The impact of this conflict is very “fluid” right now, so we will address this matter in the future.
The need to shift supply chain plans quickly and more often due to situations like the one that is developing aligns with a question we've been highlighting recently: “Is your company really serious about proactively managing your logistics and supply chain operations?”
We've found that relatively few shippers have much in writing when it comes to managing their supply chain or tariff strategies. We discussed this last week and also talked about how the tariff situation could have a significant impact on your balance sheet. Afterwards, we heard from several people asking if we could elaborate on how tariffs are impacting their cash and inventory areas – two of the most significant balance sheet categories to focus on.
The Two Minute Warning format doesn’t allow for in-depth discussions, but given the significance of this issue, I reached out to my friend Ami Kassar, the Founder and CEO of MultiFunding, to ask him questions about how tariffs are impacting balance sheets and working capital structures. While Ami’s firm represents both bigger and smaller companies, there are some financial principles that apply regardless of the size of the company. With that thought in mind we encourage you to check out what Ami shared in our interview.
Personally, after listening to Ami, I thought about some of the recent conversations and experiences I've had talking and meeting with C-Level executives about the impact of tariffs and how it is affecting their cash flow and inventory turn rates.
On the cash flow front, several CEOs and CFOs have told me that their cash conversion cycles are lengthening. One executive told me that prior to all this stuff with tariffs, their cash conversion cycle was about 50 days; now it is about 65 days. Another company we talked with had a cash conversion cycle of 57 days, and that number is now up to about 77 days. This is a major change in a short amount of time. Aside from the obvious, “How much is each additional day in our cash conversion cycle costing our company” question, Ami talked about how this tied in with changes affecting a company's working capital requirements.
On the inventory front, having toured several warehouses over the past three months I have noticed one thing they all have in common: They have a ton of inventory! Apparently, many companies have panicked and gone from JIT to JIC, (a.k.a. Just In Time to Just In Case) because they haven’t stress tested their inventories or identified the “must have” parts versus the parts that would be inconvenient if they didn’t have them in stock. When you order everything versus selectively ordering what you really need, you get full warehouses! How much does one day’s worth of extra inventory carrying cost run your company?
Add it all up and this is an extremely challenging time for many supply chain professionals. Similar to the pandemic, there’s a ton of change, uncertainty about what’s ahead, and escalating costs. And with a “grace period” for tariffs due to expire in July and August, the cost increases for businesses could be more significant and last a lot longer than expected.
If you’re looking for support or have questions about using scenario planning to protect your supply chains, GREAT NEWS! WE CAN HELP! Our Tariff Management Plan and Rapid Assessment process are great tools that can get your team on the same page and produce a plan that addresses how to manage critical logistics and supply chain issues that are affecting your company’s financial performance.
To learn more, just send us an email, give us a call at 630-833-0890 Ext 190, or use Calendly to schedule a time to meet.
BY MIKE REGAN, CO-FOUNDER OF TRANZACT
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