“The world is in a fog of tariffs—a time in which there are so many changing variables that it’s difficult to see the way forward,” said Nicholas Pinchuk, CEO of Snap-on and a keynote speaker at Chief Executive‘s Manufacturing Leadership Summit on May 7. But Pinchuk wasn’t advocating standing pat on the hand tool maker’s April 17 earnings call. “It’s an environment that will require urgent action to adjust to optimize and to take advantage,” he added (according to the S&P Capital IQ call transcript).
Joseph Esteves, CEO of supply chain and operations consulting firm Maine Pointe, agrees. Despite the 90-day pause on “reciprocal” U.S. tariffs, he’s urging companies to take control of the situation.
“I think there are some big, bold moves to be made,” Esteves told CFO Leadership. “There are some tariffs that are not going anywhere,” he added, even though, as yet, the long-term magnitude of some of them is not apparent.
We asked Esteves for some practical advice for companies dealing with the ramifications of the U.S. trade war, both operationally and financially. He provided those in an April 9 interview.
On first-quarter earnings calls, CEOs and CFOs seem confident they’ll be able to raise prices to blunt the impact of higher costs, as some did during the first Trump tariffs. Is that going to be feasible this time?
You had an insatiable demand during COVID. You do not have that today. The consumer is breaking. People are looking at their 401(k)s. Look at consumer sentiment. I think passing on price increases is a foolish mistake. The environment has changed. Companies don’t have the leverage they had during Covid.
Some companies don’t have a choice—they’re not going to [record] a loss, so they have to push the price. But there are companies [already] reducing tariff costs. If companies aren’t viciously attacking costs and taking control, they will lose market share. What can you do to immediately reduce the tariff impact and other business costs to maintain profitability? Companies that do that will gain market share.
What actions can I take if I’m importing products from other countries, especially China?
Take control of the supply chain. We’ve seen companies [relinquish] control of their supply chain. They have importers. The importers use customs brokers, and the products magically appear on the shelves. That broker has tons of clients. That broker doesn’t understand your business.
For example, a company brings in nuts and bolts. Remember, harmonized tariff codes (HTS) and duties only apply to the base product, not the labor in loading, not the cardboard [packaging]. Not all the other ancillary costs that could be 60 percent to 70 percent of the total cost of the goods. Your customs broker is saying that the bolt is $1.40. But $1.20 of that bolt is in the blister packaging. Maybe 30 cents is an actual bolt that should be tariffed.
That requires a fundamental understanding of your bill of materials. What is your real exposure? We’ve asked companies, ‘What is your exposure?’ They say, ‘Thirty percent of our product comes from China.’ But how much of that base product is coming from China? What’s the value-add? Because this is where you have to, I’ll call it, ‘engineer’ profitability. You have to dig in. And you need to quickly drill down to those 10 to 20 products that move the needle for your business.
What else can be done to limit the financial impact?
Look at and follow customs reclassification rulings. [There have been some] great examples over the years. Remember the old Snuggie 20 years ago? I think they first called that a sweater or a pair of pajamas. Once they reclassified the product to a blanket, [the company received] a 70% cost savings on the duty. Just by simply reclassifying the product.
HTS and customs rulings are kind of like our judicial system. Once a ruling has been made, it’s grandfathered. So, companies can refer to an HTS ruling 20 years ago and point to that as part of their justification [a product’s classification].
I would watch the customs database to track what the U.S. reclassifies. You’re doing this if you’re Nike or one of these other big companies with more resources. You might not be the first to market if you’re a middle-market company, but you can capture the wave.
What can companies do right now vis-à-vis their suppliers?
Revisit their international commercial terms. FCA Incoterm is a brilliant option. The producer (seller) has to get the product to a transportation facility. FCA requires the shipper to file the customs paperwork. It also gives you flexibility if you’re conserving cash. Do you want to take possession of the product?
Because once you take possession of a product, you’ve committed cash. You have a hard purchase order. In this environment, you need to create as much flexibility as possible. We don’t know where demand is going. Do you want this inventory or not?
What aspects of working capital should CFOs and the finance team track closely?
Finance has to understand the impacts. I’d be monitoring cash-to-cash cycle times and DSO. Because I think you’re going to be seeing late payments. Inventory velocity is the biggest one, and I don’t think people appreciate it. What is my current inventory, divided by my upcoming period sales forecast? That’s assuming you have a good sales forecast in this environment. That velocity is critical because it tells you if the inventory will move tomorrow or next month or not [at all]. And, as you see, customers cancel purchase orders. You don’t want to be caught with ineffective inventories.
Right now, a major reaction is, ‘Let’s get all the pre-positioned inventory that exists because tariffs are coming. Let’s buy up all this inventory.’ But that’s assuming a stable sales forecast that sales and finance probably developed back in October when everybody was cheering for the administration, deregulation, and the market.
At the same time, you don’t want to cut muscle, correct?
Not long ago, we talked about AI and how we must invest. We still have to invest. We’re at such an inflection point—geopolitically, economically and technologically. Yes, tariffs are the headlines today. I fear companies will pull out the old draconian playbook. But it’s like surfing: don’t let the wave take you. You have to paddle into it.
