Purchasing manager’s dilemma

Summary

Inventory management is a trying job at the best of times, but rising tariffs make it even harder. Stocking up on whatever you need sounds easy, but at a time when inventory financing remains dear, that’s an expensive fix. The choice of the purchasing manager has big implications for GDP.

Pity the purchasing manager

Across a diverse mix of businesses from retailers to manufacturers and even many parts of the service sector, someone is stuck with the job of figuring out what goods, raw materials or supplies will be needed in the short-, medium- and long-term. That is tricky work at the best of times, but in the past decade it has been made even more difficult by a trend move away from globalization, a pandemic that snarled global supply chains and a rate environment that has made inventory financing a consequential line item for corporate profits.

The outcome of the 2024 U.S. elections adds another consideration to that list: Will Trump really put in place 60% tariffs on goods coming in from China and 10% across-the-board tariffs on other trading partners? Or will a watered-down version be the more likely outcome?

Even in the case of milder tariffs, history teaches us to expect immediate, tit-for-tat retaliatory tariffs. On that basis, the sooner a business can procure the needed inputs the less costly they will be, at least on a very basic level. But commodity prices and currency valuations could both move against you, so the longer you hold inventory, the greater the risk these unpredictable factors could nullify the savings or worse, end up costing you more. Also, win or lose in the commodity and FX markets, inventory financing still costs more that it did a few years ago, even after accounting for recent rate cuts.

Procurement is not unlike being a placekicker in the NFL: doing your job well is essentially the baseline expectation, while any sort of miss is often met with exasperation. Considering that in the context of all the variable costs that come with carrying inventory, there is not much incentive to make a major move to take on new inventory until there is greater distinction between campaign talk and actual policy. We have also identified how there are fairly-substantial lags associated with the implementation of tariffs. At the same time, it would be difficult to explain why you did not take measures to stock up on needed inputs amid oft-repeated tariff threats. The incoming administration is also making personnel announcements that include known protectionists who would be placed in positions to make tariff threats a reality.

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