Fluctuating prices from hundreds of vendors, customers who want to be kept in the loop as to the source of price increases and signs of a potential market slow down are all impacts for distributors of the Trump administration’s ongoing tariffs on Chinese goods.
Editor’s note: The tariff situation is continually evolving. For the latest economic updates visit mdm.com.
Months past the initial March 1 deadline President Trump set for trade negotiation talks with China, he recently tweeted that China “should probably wait out our election” to come to a deal with the U.S. on tariff negotiations. Whether it takes that long is anyone’s guess. Meanwhile, on Aug. 1 the administration announced further tariffs beyond the $250 billion in place, on approximately $300 billion in Chinese goods, effective Sept. 1, after further negotiations broke down this summer. In response, China allowed its currency to fall below 7 renminbi-per-dollar for the first time since 2008. As the trade war carries on, distributors and manufacturers in the U.S. continue to navigate the ongoing impact of tariffs.
“We feel concern, I think would be the right word, about future tariff increases. We are certainly hoping that there is going to be a deal between the U.S. and China,” says Alex Chausovsky, director of speaking services at ITR Economics. “So far, there’s been a lot of talk, but it really hasn’t materialized into anything. The threat of further tariffs looms large with the president’s most recent announcement.”
For P&I Supply in Evansville, Indiana, it’s materialized into a de facto new position at the company, where “intense administrative efforts” are necessary to manage the impact. “We have a full-time person just trying to keep up with it that didn’t exist until these tariffs came along,” says Bruce Stallings, president.
Prices must be continually monitored and updated as vendor price sheets are retracted and revised, and customers are demanding detailed information that is often hard to come by. “It’s just been really difficult to keep on top of it for everybody,” says Katrina Stallings, P&I Supply’s VP of sales operations.
The company has up to 150 vendors all sending letters notifying of tariff-related price increases, on top of regularly scheduled price increases. “We’re used to having an annual or a bi-annual increase from most of our manufacturers. Most have submitted at least three or four increases to us in the last 12 months,” says Katrina Stallings. “So, all that work that we do once a year or once every two years, we’re doing now quarterly. The impact on that for us has been pretty profound. We’ve got people who are actively working on that and not working on anything else.”
Jennifer Murphy, president of buying group NetPlus Alliance, agrees it is “a challenge” to be continually changing prices in the system. “It is very time consuming for distributors,” she says.
She notes that some manufacturers NetPlus works with are adding tariffs as an additional line item on their invoices, with the indication that it will be removed if and when related tariffs are repealed.
At P&I Supply, it’s not unusual for customers to ask the company to quote a contract with two-year firm pricing. It’s always been difficult to do, but the distributor could typically get a supplier to commit to at least one-year of firm pricing on a large contract. “They won’t do that anymore,” adds Bruce Stallings, “and I don’t blame them.”
Murphy recently reached out to members of her Distributor Advisory Council on the topic of tariffs. The members report little pushback from customers on tariff-related costs they’ve had to pass on. “The more talk in the media that it’s happening, the more recognition there is that tariffs are out there, the easier it is for the customer to say, ‘OK,’” she says.
However, one distributor did note to Murphy that they make a practice of confirming with the manufacturer that price increases are a true tariff cost as opposed to an overall price increase. “The manufacturers we work with in NetPlus Alliance are great at communicating to the distributors exactly what it is, how it’s impacting the cost and where they’ll see that reflected. They’re very upfront. They’ve done a great job communicating those changes to the distributors,” she says.
In P&I Supply’s experience, vendors don’t typically make a practice of outlining the percentage of their price increases that come as a direct result of tariffs, Bruce Stallings says, although some products are affected at greater percentages than others. Meanwhile, the end users — his customers — usually expect full documentation to validate those price increases. P&I Supply has developed a SharePoint data flow system just to manage the back-and-forth flow of requested information.
“The customers are very resistant to these changes. We have had some that say, ‘Wait a minute, you’re giving me a 15% increase on this item because of steel content. Well, what percentage of the price of that good is material and what percentage of the price of that good is overhead and profit? I only want to pay 15% on the percentage that is steel,’” Bruce Stallings explains. “Imagine a power tool. That thing isn’t all steel. There’s a lot of cost in that. They aren’t just rolling over and accepting these increases by any stretch.”
Murphy expects small-piece manufacturers are likely feeling the greatest impact of tariffs. “They’re dealing with a lot of the pains of small business,” she says. “Trying to make sure they keep their employees working. Those impacts affect those small manufacturers when they’re forced to cut back on production and lay people off. It’s a trickle-down effect that has the biggest impact on small businesses. It’s difficult for someone who owns a small manufacturing business to manage increased costs, which thereby reduces or eliminates their ability to be price competitive.”
Jeanine Ruppel, president of Precision Sheet Metal Supply, Inc., is one of those small business owners who has dealt with pricing-related challenges. The custom sheet metal fabrication company in Herndon, Virginia, creates metal parts for federal government subcontractors and other clients. The cost of her raw materials — both domestic and foreign — began to rise at the first mention of the possibility of tariffs. She estimates domestic metal went from around $1.84 a pound to about $3.15 a pound, while foreign metal peaked around $2.64. “It made it to where I spent a lot of money on metal and my customers didn’t want me to pass it on to them,” Ruppel says. “We had to try to go to different sources. We were strictly 100% domesticated metal. We had to start getting metal from other companies that sold foreign metal because it was cheaper, and my customers did not want me to pass along the cost, so I had to find ways to find that metal that would fit their needs, but at a cheaper cost.”
Both Ruppel and Katrina Stallings note that all prices rose, even for products not subject to tariffs, due to supply and demand. “Even if you’re buying U.S. steel products, the cost of that steel is going up,” says Katrina Stallings. “And so, even though it wasn’t really part of the tariffs, it just has that ripple effect from the tariffs.”
Ruppel says her business went from sourcing 100% domestic material to around 25% foreign before costs recently evened out enough for her to return to 100% domestic. “Because there was such an influx, domesticated metal’s finally starting to stable out. They have too much of a surplus right now because they were expecting these high demands … but people have kind of slowed down on buying the metals. So, I’ve had the companies with my domesticated metal call me, ‘We’re having a flash sale. We’re going to sell this to you for a $1.45 a pound.’ And I’m like, heck yeah, because that never happens,” Ruppel explains.
“It was very difficult at first,” she adds. “Even though we were having a really good year, a lot of the money that we were spending was going back into just buying the material. So, while it looks like in books that we had a great year last year, it’s not as great as you might think just because we were spending 20%-25% more. That part really stunk. I’m just happy it’s balancing itself out.”
Murphy has made it a priority at NetPlus to help distributors focus on working on their business in a way that prepares them for coping with rapid change. “We’ve been dealing with uncertainty from the beginning,” one Midwest distributor recently said to her. “There are a lot of large and extended instances of uncertainty but every company has to be prepared and adapt and have a contingency plan if things drastically slow down,” she adds.
One NetPlus Alliance member commented that the best method they have to deal with the uncertainty brought on by tariffs is to “communicate, communicate, communicate.” NetPlus is in constant contact with its supplier base on the topic on a global basis. “NetPlus shares all information from suppliers with distributors and fields questions about what’s going on,” Murphy says.
Still, one of the hardest things to manage, Katrina Stallings says, has been the continuing uncertainty around the process. At first it was, would there be any tariffs at all? If so, what products and how much? Now, the question is, when will it end? “We thought maybe it was all going to go away,” she says. “So, it’s just been very hard to manage just because we don’t know what the government’s going to do and what the future holds.”
ITR’s Chausovsky agrees that the uncertainty itself has had a big impact on distributors. “Businesses hate uncertainty more than anything else. People don’t know what’s going to happen. In some cases, it is causing delayed purchasing behavior. It’s causing projects and different things that would create demand for distributors to be put off into the future,” he says.
In the wake of the tariffs, ITR has observed “a pretty significant swell in inventory levels,” both for manufacturers and distributors, Chausovsky says. With the U.S. on the backside of its economic business cycle, ITR expects further slowdown over the next 12 months. “As things slow from an economic perspective, the question becomes, if you have inventory levels that are already quite robust, what does that mean to orders from distributors, from end consumers to the manufacturing community, to the makers of the goods? Most likely we’re going to see a bit of a vacuum there because these high inventory levels will need to be drawn down before we really start to see more demand be generated for the manufacturing of those products,” he explains.
As a result, ITR is advocating distributors “be quite conservative” with their inventory levels. “Of course, you don’t want to be stuck carrying high inventory levels because of cost, but also because it’s not good for products to sit on the shelf for extended periods of time,” Chausovsky says. “It’s going to start affecting your relationships with manufacturers. If your orders dry up over an extended period of time, that’s going to be detrimental to both parties involved.”
Chausovsky recommends distributors build up cash reserves while managing inventory levels conservatively. “Do not get stuck with a lot of products on hand,” he says, “because it’s going to create some pressure for you over the next 12 months, as there’s deceleration all around you.”
Overall, Murphy believes the tariffs have been necessary to “re-shore U.S. manufacturing businesses.” She does have concerns about a potential economic slowdown for some areas of the economy if they continue, but for the most part is optimistic.
“Our business is growing this year. Above the great growth of 2018. I’m a glass-half-full person, so as long as we pay attention to what’s going on, we can hopefully ride this out until the end for the most positive result for the industrial channel,” she says. “Most distributors day to day are trying to be agile and run with the economy as much as possible. They’re managing it, they’re passing it along and they are still growing in spite of it. Let’s keep it rolling until the end of the year.”
Insecurities about data quality, adequate budget, existing success and company bandwidth are common roadblocks to…
The Index offers distributors a weekly quantified view into how other distributors in the industry…
Inventory management is wholesale distributions biggest pain point, Blue Ridge and SmartBrief survey shows.