Navigating Tariffs: What Suppliers can learn from the Strategic Brilliance of 3M

Summary

In this episode of The Savvy Supplier, Boyd Evert & Al Frank discuss how suppliers, particularly 3M, are navigating the challenges posed by tariffs. They explore strategies for building resilience in supply chains, the importance of inventory management, and the complexities of quality control in multi-sourcing. The conversation also highlights the culture of 3M, emphasizing their adaptability and commitment to best practices. Finally, they address the necessity of pivoting away from high-tariff suppliers to ensure a fault-tolerant supply chain.

#Tariffs #SupplyChain #3M #Resilience #InventoryManagement  #QualityControl #BusinessCulture #Multi-Sourcing #StrategicPlanning #Adaptability

Takeaways

• 3M is a prime example of resilience in supply chains.
• Multiple points of fulfillment can mitigate tariff impacts.
• Suppliers need to anticipate uncertainty in costs.
• Inventory management is crucial for navigating tariffs.
• Quality control becomes complex with multi-sourcing.
• 3M's culture emphasizes partnership and continuous improvement.
• Best practices help in maintaining competitive pricing.
• Companies must pivot away from high-tariff suppliers.
• Adaptability is key in a volatile market.
• Learning from past challenges is essential for future success.

Sound Bites

• "Some are setting themselves up for long-term."
• "They try to stay around 90 days of inventory."
• "Necessity is the mother of invention."
• "You need multiple points of sourcing."

Chapters

00:00

Navigating Tariffs: Lessons from 3M

02:59

Building Resilience in Supply Chains

06:01

Strategic Inventory Management

09:11

Quality Control in Multi-Sourcing

12:34

The Culture of 3M: Partnership and Adaptability

20:39

Pivoting Away from High-Tariff Suppliers

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Transcript

Have you wondered how other suppliers are navigating the tariffs challenge? Some are setting themselves up for a long-term supply chain success. A great example of this is 3M. Today, what we can all learn from the resilience and the brilliance of 3M on this episode of The Savvy Supplier. 

Al Frank (00:52.844)

Welcome into the savvy supplier where we save you time and money. I'm Al Frank alongside Boyd Evert, the CEO and co-founder of HRG. Boyd, do remember those old EF Hutton commercials? They said when EF Hutton talks...

Boyd Evert (01:37.838)

People listen.

Al Frank (01:39.2)

You got it. I knew i could count on you. Well, right now, suppliers are listening and they want to know how best to navigate these tariffs increases. And I'm excited to hear what you have to say about one of our clients, 3M, and how they're reducing their exposure to higher tariffs. What are some other ways that they're doing that?

Boyd Evert (02:01.09)

Right. So I think it's the biggest method that they're using to cope with this is having multiple redundant points of fulfillment within their supply chain. We saw how devastating the pandemic COVID was on the supply chain. And some suppliers looked at it and said never again. And they went about finding multiple points of sourcing. Others, well,

We were able to get through that. It'll be another 100 years. So we can go back to business as usual. So those companies that did business as usual, those are the ones that I think are in a bit of a panic right now because of just the ground underneath their feet is constantly shifting with all of the tariff policies. so companies like 3M that chose to

essentially say never again, we're not going to go down this path again. They went about looking for multiple points of fulfillment. And one of the things that they did, as other companies do, is try to locate the sourcing as close to the customers possible. So rather than having a supply chain highly optimized for the lowest cost, you make it highly fragile.

because you could have parts being assembled in multiple places and then finally in one final location, but it would have incurred multiple tariffs along the way. And we've seen that in different news publications, for instance, with the iPhone, here's all of the tariffs that would roll into a typical iPhone at this moment. So I think looking at 3M's way of approaching this,

It looks like they have really figured out the way to move forward in this environment where it's highly volatile. And I would say this, that a lot of suppliers, in every category, they hate surprises. They want to be able to anticipate, they hate uncertainty. Because when you have uncertainty, eventually that works its way into the cost of goods. Because they could be incurring some lower prices.

Boyd Evert (04:26.218)

outsourcing things, but they're not going to pass it on to their customers because they're going to set it aside and accrue for that uncertainty. And so I think what we're going to see here in this year is you're going to see fewer rollbacks, fewer events where temporary price decline, what have you. so it's eventually going to impact the customer. yeah, hats off to 3M. They really were proactive and they really seemed to execute on.

Al Frank (04:53.624)

Yeah, it sounds like they were playing 3D chess and planning their moves out well in advance. Maybe game planning various scenarios. Is that what they did to kind of get them ahead of the curve?

Boyd Evert (05:02.2)

Yeah.

Right and and companies like 3m and We've worked with them from I'm companies like 3m where they make excellent business partners They're the ones that really will circle back with you and say all right. What are the lessons learned right? Okay, so what what's the root cause what's driving this particular? Issue that we're having and so they're very very intentional about wanting to understand

not just what happened, but how do we mitigate the risk of that happening again? And I think that's exactly what happened after COVID. And it put them in a really good place when the tariffs started to hit because for them, a pandemic and a tariff war are very, similar, right? Because you're going to have costs that are going to be incurred

almost immediately and you have to deal with that. You're going to have shortages, right? So it may be prohibitive to bring in certain material to manufacture certain items because of the tariffs so high. And so it's almost as if the sourcing country would almost have a lockdown in place like we saw during COVID. So I think that's one of the things that maybe they didn't anticipate a tariff war, but certainly

they've positioned themselves to be in a place of strength and resilience.

Al Frank (06:37.25)

Well, how much inventory does 3M typically have on hand and how big of a strategic advantage is it for them to have the size inventory that they typically carry?

Boyd Evert (06:48.61)

Well, following some of their leaders in the press, they've messaged out to the public that they try to stay around 90 days of inventory, which essentially a day of inventory is how long does it a day take? A day would take you to sell through all that particular item, so they've got a three month balance, and I would have to say that a lot of companies are somewhere between 30 to 90 days. It really depends. mean electronics, a lot of.

The major orders for Black Friday are manufactured after everything's negotiated and they're manufactured at the last possible moment before they need to ship that item because typically in electronics, the prices are continuing to drop. so in electronics, if you set that industry aside, consumer electronics, for the most part, a lot of other companies like to do that. Now, that also cuts both ways. So then you can't be, if you've got 90 days of inventory,

You can't be as swift to take a price decrease when some of the material, the costs drop around it. And the other aspect of it is in just in time retailing, right, where the orders are coming in just at the last possible moment, you have something like tariff policy come in where it's going to create uncertainty. Some retailers are going to want to buy a lot of inventory before those tariffs take effect.

So that could eat into your days of inventory. But the other aspect of it is it could swing the other way. Like we're going to really cut back on this particular item and just for whatever reason and lean into other areas where there might be some more price stability. So this might even affect the items that are carried within individual stores, your points of distribution, how many facings you have in all of the stores for a retailer.

I could easily see that as playing, as reflecting the uncertainty that's in the marketplace.

Al Frank (08:52.792)

Well, multi-sourcing can make a company more resilient. We see that in their case, but doesn't it also add more complexity, maybe some higher upfront costs as well. Talk through that a little bit. How do you compensate for the complexity increase?

Boyd Evert (09:11.99)

Right, yeah, so one of the biggest factors is quality control, right? So just to, let's take another industry, let's take clothing, right, goods. So in clothing, you have independent firms that test for colors, right? So that if a buyer's buying certain colored shirts, t-shirts, dress shirts, whatever, and

that has to match other items, right? So the pants matching the shirt. And so the dye, the mix of the dye, they'll have it tested separately. if somehow one point, let's say you're sourcing out of India and maybe Cambodia, and maybe the mix of the dye is off a little bit, that stuff makes it to the store and it doesn't match other shirts. Somebody comes in,

They love that shirt. They come back to buy another shirt and here it is. It's just slightly different. That falls back to the supplier. And so that's a particular case of where comparing colors becomes a little more challenging, right? Because even if you're using cameras, it's just the lighting, the exposure time, everything seems to impact color. So that's one example of quality control. I think another aspect of it is the

when you have changes being made, pushing those changes out, you now multiply the complexity of change management. And did we implement the changes correctly at both locations? I think as long as everything's the same, which it never is, but if everything's the same, then there's really not much of a risk. But we know in retailing, there's always change and there's always complexities that are entering in, maybe even unforeseen. And then that creates some friction.

and some additional costs because they're having to pay to correct for that.

Al Frank (11:14.776)

So I guess it's important to be able to analyze it quickly and quickly make the adjustments that need to be made to maintain the quality.

Boyd Evert (11:24.798)

Absolutely. like one unforeseen example was we were working with a supplier around soap, detergent, dishwasher soap, that sort of thing. And they had all their product ready to be palletized, but they didn't have the label to go on the box or bottle. And that was extremely frustrating because they had everything else. And so who would have thought

we need to have redundancy in labeling. But during COVID, you sure needed that because I think it was even down to the type of the color ink, right? Well, the company wants their logo to have the proper colors that it has. Otherwise, it looks like they bought it off of a third party website sourced out of some other country with, let's say, dubious...

claims to authenticity.

Al Frank (12:34.55)

When I think of 3M, I think about all the different products that they produce. It's many, many dozens, maybe even into the hundreds of different products and the challenges that would arise as you try and control the quality of all those products when multi-sourcing. They must have masters of business acumen and motivation for their employees and even a philosophical underpinning that doesn't change. What can you tell us about the culture of 3M?

Boyd Evert (13:16.334)

The culture for 3M is one of extreme partnership. They lean into best practices. They're always wondering is there a better way to do something? And it's not just the number of products. They certainly do have a number of products. They're in so many different categories, so many diverse categories. again, looking back at COVID, they had some items that were in extreme demand.

The N95 masks, the hand sanitizer, that sort of thing. But then maybe perhaps some of the other items, maybe the automotive items or maybe the filters for your HVAC, that demand might not have been as strong, right? And in some cases, you could easily see them saying, we want fewer facings of Band-Aids so we can have more facings of your hand sanitizer. Well, if

everyone's doing that, it's going to put an extraordinary pressure on you to be able to pivot and have this huge surge in demand. Right. Because I don't think I was talking to a third party or not a third party. I was talking to a company that that makes generic hand sanitizers before COVID. And one of their frustrations were that some stores seemed to pull stuff off the the the

the shelf and use it for in-store use, right, inside play bathroom or in the break room or whatever, and maybe the smallest flaw to the pump or maybe it fell on the floor. So they were having these excessive defectives. And then after COVID hit, I just was following up asking how they were doing. they said, you know, we've, life's never been so good, right, that they had 100 % sell through. And I said, what about that excessive defective? we don't have that problem anymore.

Boyd Evert (15:10.914)

which sort of suggests maybe there was some things going on in certain stores, right, in certain locations where they were abusing it. But getting back to the 3M opportunity that they saw is that they're constantly learning that even with their forecasting, things can change quickly. And 3M, as well as other clients that we work with, they see that as an opportunity to learn, right?

when they're looking at the situation and saying, so now it's not only gonna impact our typical forecasting, but we're gonna have to update those forecasts as the facts on the ground change within the store. So they're constantly pivoting and performing in that direction of process improvement.

Al Frank (16:04.856)

Well, it's kind of amazing if you think about it, they're a Fortune 500 company. Obviously, as we've been pointing out, masters of business acumen and procedure and process. And yet they're humble.  They have the humility to seek out the help of others and learn from others. They find others, for example, HRG to help shoulder some of the burden that they face. This says a lot about who they are and even their ability to adapt and seek out help.

Boyd Evert (16:40.684)

Yeah, it sure does. One of the things that's unique about 3M, or not unique, but rare, is a lot of suppliers suffer from the not invented here syndrome, right? Is that that's not the way we do it here sort of thing. Even if it's a great idea, they're not going to embrace it. If it's a good idea, they don't care where that idea is originally sourced, right? Who is the original proponent? If it sounds good and makes sense for their business, they're going to

They're going to embrace that, right? And it's the same thing with best practices, with deductions. We've got several clients among them at 3M, they embrace those best practices and they pay dividends because now you are creating an environment where it's a lot harder for an auditor coming back and looking at those transactions a year or two out saying,

something better be there, right? Is there a better, I should say this, they're looking at those transactions saying, did this retailer get the best price at that time? And with the best practices that they're embracing, it makes it a lot harder for, let's say, a creative auditor to come in and look at an email or look at a proposal or agreement and somehow renegotiate.

that agreement two years after the fact. And so with the best practices they embrace, we just don't see that happening.

Al Frank (20:15.96)

So at some point during this, 3M and other companies as well, realize that sometimes you have to pivot away from certain suppliers because they're in certain regions of the world that are maybe higher in tariffs. How do you go about doing that?  how long does that typically take? It seems like it would be a major, major shift.

Boyd Evert (20:39.978)

It is a major shift, but necessity is the mother of invention. So one particular example, not related to 3M, but it's certainly a compelling one, is I read the other day in the journal that Apple is going to be able to fulfill a great number of the phones because they're sourcing it from India. But those sources were initially to serve the Indian market. So they're robbing Peter to pay Paul. So then

they're probably going to to source it from China and then incur the tariffs coming in because I'm sure India has some tariffs, right, tariff policy with other nations, not just us. And so I think what you're seeing is a lot of companies that maybe took half steps, maybe they were just focused on having the supply chain stay within the nation. And so there are enough facilities where they're manufacturing

part of the product and maybe scaling out so they're making even more of that rather than pulling something in. Let's say that if they have a non-finished item coming into one country that gets a lower tariff versus a finished item coming in, maybe you end up bringing in the product at a state of semi-finished goods and then finishing it within that country. So you see both

the factories and facilities within the country. mean, you see this with automobiles, right? A lot of the foreign cars are made in North America, most in the US, but there's some in Canada and Mexico. And part of that just made sense in the automotive industry because the shipping costs, right? It almost became prohibitive to build the finished car in Japan or Germany or wherever.

you build it here. I think so. I think you're seeing some of that play out. But I think 3M was more intentional saying we need a fault tolerant supply chain. We need to be anti-fragile where things just aren't easily broken. And I think that's that's sort of the gold standard we're seeing across the board. I know that there's others doing it, but a lot of them are leveraging things that weren't

Boyd Evert (23:04.416)

intentionally designed to help cope with tariffs, but they're repurposing that solution like Apple is leveraging the production in India. But I think you're going to see more of that. And this is one of those fool me once, shame on you, fool me twice, shame on me. If suppliers don't learn this time around, you need multiple points of sourcing. Then when another major event comes about, their stock is going to look

extremely volatile and they might even be part of the portfolio of a day trader.

Al Frank (23:39.512)

Well, thanks again for bringing the information to us today. There's so much happening these days that it's great to have a spot where the suppliers can come and hear some useful information. It's a practical advice. And I just want to remind retail suppliers that the experts at HRG are able to take a look at your particular situation and help you to get a clearer picture of what you need to do right now.

You can schedule a free strategy call by going to the HRG website at HRG-audit.com, HRG-audit.com, or you can call HRG at 479-616-1600. You can email us at info at HRG-audit.com. All these different ways to reach out to us and knowing that HRG is here to help you. Our wish for you is this: wiser decisions, fewer deductions. See you next time on the Savvy Supplier.