The on-again, off-again, on-again tariffs are upending the automotive manufacturing industry by driving costs up and disrupting supply chains.
In response, many Original Equipment Manufacturers (OEMs) are reviewing and assessing their sourcing strategies and approaches, and many are adjusting.
Understanding the best way forward is far easier said than done. But there are some key tools that can help companies mitigate the impact of tariffs, including strengthening supplier diversification, considering nearshoring or reshoring, and implementing lean management practices that can result in significant operational improvements.
In this post, we aim to provide clear, actionable insights around how OEM’s can manage costs, improve supplier resilience and performance, and maintain efficiency and quality standards in a constantly shifting trade environment. The goal is to show how OEMs can get stronger from within through better supplier relationship management and improved operational efficiencies.
Tariffs reshaping automotive supply chains
Many companies have tightened their supply chain management processes due to pandemic lessons learned, and as these tariffs go into effect, they will need to apply their experience and knowledge in ways that can provide more than just a short-term response.
The increased costs and disruptions that will come go far beyond cost-cutting and will require more hard work. At an elevated level, automakers need to assess the long-term viability of every supplier to develop resilient procurement strategies that can help offset the rising, across-the-board prices.
Some of the more disruptive forces include:
- Increasing costs of raw materials
Tariffs on steel and aluminum raise prices of essential materials for auto manufacturers. In turn, companies either absorb the additional costs, which drag margins down, or they pass them on to the OEMs.
- Global supply chain disruptions
The auto industry relies heavily on Just-in-Time inventory and global sourcing. Tariffs disrupt established trade routes, causing delays and requiring supply chain redesigns or supplier diversification. For example, a US tariff on Chinese-made parts may force a Tier 1 supplier to look for alternative sources, driving up switching costs and lead time.
- Uncertainty and reduced investment
Ongoing trade tensions create policy uncertainty, which discourages long-term investment in new facilities, R&D, and partnerships.
Understanding the potential financial impact
One way to get a clear, comprehensive picture of the type of impact tariffs will have on financials is to deploy Total Cost of Ownership (TCO) Analysis, which assesses the comprehensive costs involved in acquiring, operating, and maintaining an asset or service throughout its lifetime, not just at the point of purchase.
Some specific benefits TCO analysis provides include:
- Clarity – relative to landed cost calculations, which are insufficient, TCO assessment provide a more accurate financial picture and status.
- Breadth – TCO analysis covers a wide range of cost considerations, such as tariffs, freight, logistics, inventory holding, supplier reliability, and quality risks.
- Actionable, applicable insights – a structured TCO approach helps manufacturers make informed sourcing decisions.
Comprehensive supplier audit
It is also critical to understand which suppliers are more vulnerable to tariffs and to ensure that your portfolio of suppliers is always highly diversified. Just like investment risk, being concentrated in this instance means relying too heavily on a single key source. If companies have not already, now is the time to perform extensive due diligence on existing suppliers and make sure there is a robust pipeline of alternative options for when you need a Plan B or C.
Strategies for reducing supplier risk include
- Dual sourcing
Dual sourcing is one of the more common strategies deployed. A 2022 McKinsey survey found that 81% of companies across industries had dual-sourcing strategies, a significant jump from 55% in 2020. Within the automotive sector specifically, 39% of companies have parallel or dual sourcing arrangements in place, a percentage which is likely climbing in light of the ongoing economic and trade uncertainty.
- Regional partnerships
Forming alliances with suppliers in different regions is another way to diversify the supply base in the face of rising geopolitical risk. Collaborating with local suppliers can reduce lead times, lower transportation costs, and help companies better navigate trade-related hurdles
- Real-time risk monitoring
Managing suppliers and their risks is anything but a set it and forget it for a while exercise. Risks do not sleep, and the ones that hurt the most are those that are identified too late. Implementing advanced analytics and digital platforms, powered by AI, can go a long way toward helping to monitor risks in real time, which allows for faster response time. As an example, 58% of auto manufacturers have dedicated teams that monitor trade policies in real time, enhancing their ability to be nimble and quick in adapting to changing conditions.
Nearshoring or Reshoring: Balancing the pros and cons
Nearshoring operations can also deliver tariff mitigation benefits, but the opportunities and challenges need to be carefully weighed, and companies need to use data to better understand whether it is a feasible strategy for them. While relocating operations can reduce tariff exposure, careful consideration needs to be given to factors such as labor availability, logistics, and cost efficiencies. If it is the right option for your firm, the top priority is making sure you can get products or raw materials when needed. Nearshoring or reshoring can also help eliminate volatile freight costs, cut down on expensive design changes, and improve worker morale at a time when labor markets are extremely challenging.
Lean management drives better cost control
Introducing lean principles and strategies into supply chain management processes is also important. Key lean strategies include:
- Value-stream mapping
Value-stream mapping (VSM) is just what it sounds like – visually mapping out all the steps involved in a process, from supplier to customer – to identify and eliminate waste. In procurement and logistics, VSM helps find clogs and bottlenecks, redundancies, and delays in sourcing, transportation, and delivery processes.
- Standardized workflows
While often underappreciated, the practice of creating consistent, repeatable procedures for tasks to ensure quality, reduce variation, and improve efficiencies is critical. In procurement and logistics, for example, standardized workflows help ensure that purchasing, receiving, inventory tracking, and shipping follow best practices, which reduces errors and accelerates workflows.
- Just-in-Time (JIT) inventory management
This strategy helps companies align their inventory levels more closely with prevailing demand levels and receive goods and materials on an as-needed basis. This trims excess inventory, cuts down on storage costs, and drives improvement in cash flows. JIT helps ensure that everything moves along the supply chain efficiently, without overstocking or delays.
Great manufacturers are made in the grind, not the glide
In today’s volatile trade environment, automakers have no choice but to shift from reactive to proactive mode to effectively manage the myriad operational and financial impacts of the tariffs. By implementing a mix of supplier diversification, nearshoring/reshoring, and lean management practices—including value-stream mapping, standardized workflows, and Just-in-Time inventory—OEMs build that desired resilience, improve cost control, and maintain production efficiency. Additionally, tools like Total Cost of Ownership analysis and real-time risk monitoring provide the insights needed to make smarter sourcing decisions and adapt quickly to evolving conditions. While uncertainty may be the new normal, companies that invest in robust risk mitigation strategies will be far better positioned to weather the bumps, protect margins, and turn external pressures into opportunities for long-term competitive advantage. Having a strategy is just the beginning—execution is what separates those who succeed. Our Tariff Toolkit provides the foundation, but results come from putting it into motion with the experts.
