Here are some common and relevant KPIs that can help you quantify any potential tariff impacts. If your digital transformation game is on point, these data will be at your fingertips.
It’s no secret that a new regime of massive tariffs is set to roil the North American economy. Indeed, what was once a continent made of economic partners now appears to have become something completely different.
White House press secretary Karoline Leavitt at a press briefing on January 31 brushed off reports that a plan to impose 25% tariffs on both Canada and Mexico has been pushed back to March 1, confirming that the tariffs will go ahead on Feb. 21.
For their part, Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheinbaum have both promised retaliation if the tariffs go ahead.
Tariff jitters have already started to leave their mark, as BNN Bloomberg has reported that several steelmakers based in Canada and Mexico have “paused” the processing of new orders from US customers until they have a better understanding of the impact of any new tariffs.
How to measure tariff risk in a manufacturing company
No doubt, the risk created by 25% tariffs will be hard to predict for each region and any specific company. However, when considering tariff risk in a manufacturing company, there are several Key Performance Indicators (KPIs) that can help assess and manage the impact of tariffs on operations, costs and profitability.
If your digital transformation game is on point, these data will be at your fingertips. If your company is still in the early stages of digitalization, you will need to compile these from different sources. While every company will have its own specific metrics, here are some basic relevant KPIs that can help you quantify any potential tariff impacts:
Cost of goods sold (COGS)
Why it’s relevant: Tariffs can directly impact the cost of raw materials, components, and goods imported from other countries. Tracking COGS allows the company to monitor how tariff increases affect the overall cost structure and profitability.
What to track: Compare pre- and post-tariff costs for critical materials or products and assess the impact on overall COGS.
Supply chain lead time
Why it’s relevant: Tariffs may disrupt supply chains by delaying deliveries due to customs processes, new suppliers or changing routes. Monitoring lead times helps evaluate whether tariffs are increasing time-to-delivery for materials or finished goods.
What to track: Track delays in the arrival of materials and products due to tariff-related issues (such as port congestion or customs clearance) and adjust production schedules accordingly.
Inventory turnover
Why it’s relevant: Changes in tariffs can lead to shifts in inventory needs—either in response to price changes or disruptions in supply. Tracking inventory turnover can help manufacturers understand if they are holding too much or too little inventory due to tariff impacts.
What to track: Measure how tariffs influence inventory levels, and whether adjustments in inventory turnover rates are needed due to price fluctuations or supply chain delays.
Gross margin
Why it’s relevant: Gross margin is an important indicator of profitability, and tariffs can eat into profits if they increase costs without the ability to pass those costs onto customers. Monitoring gross margin provides insight into how well the business is absorbing tariff-related cost increases.
What to track: Compare margin changes before and after tariffs are applied to determine their impact on profitability.
Product cost variance
Why it’s relevant: Tariffs can alter the cost of production by raising prices for materials or components. Monitoring product cost variance helps manufacturers determine if tariffs are affecting specific products or lines disproportionately.
What to track: Measure the difference between expected and actual product costs and determine how tariff changes contribute to these discrepancies.
Supplier performance and reliability
Why it’s relevant: Tariffs can affect supplier reliability, especially if they cause delays in receiving materials or goods. Tracking supplier performance ensures that any tariff-related disruptions are identified early and can be addressed by sourcing alternatives.
What to track: Evaluate lead times, quality issues, and delivery reliability from suppliers in light of tariff changes.
Cost of imported goods
Why it’s relevant: The price of imported goods is one of the most direct effects of tariffs. Tracking this KPI allows manufacturers to assess how much more expensive their imported goods or materials have become because of tariffs.
What to track: Monitor changes in the cost of raw materials, components, or products that are imported, and assess whether this increase impacts product pricing or margins.
Customer pricing and profitability
Why it’s relevant: If tariffs increase costs, manufacturers may need to adjust their pricing strategies. This KPI helps assess whether customers are absorbing price increases or if the company is forced to take a hit on profit margins.
What to track: Track any pricing changes made in response to tariffs, and measure customer response (e.g., sales volume or customer retention) to determine if pricing adjustments are successful.
Market share
Why it’s relevant: Tariffs can affect a company’s ability to compete on price, especially in global markets. Monitoring market share helps assess whether tariff-related price increases are affecting the company’s competitiveness in the market.
What to track: Monitor changes in market share relative to competitors that may be more or less impacted by tariffs, or who have moved their production to regions with lower tariffs.
Cash flow
Why it’s relevant: Tariffs may impact cash flow due to increased costs of materials, potential price hikes, or delayed shipments. Cash flow KPIs allow businesses to ensure they have enough liquidity to manage tariff-related expenses.
What to track: Track working capital and cash flow from operations to see if tariffs are causing cash crunches, particularly if tariffs affect the timing of payments or the availability of materials.
Production efficiency and overall equipment efficiency
Why it’s relevant: Tariff-related supply chain disruptions can affect production schedules, which in turn impacts production efficiency. Monitoring this KPI helps assess whether the production line is experiencing inefficiencies due to material shortages or delays.
What to track: Track OEE metrics, including availability, performance, and quality, to see if tariff impacts are affecting production rates or quality.
Risk exposure by country or region
Why it’s relevant: Tariffs are often country- or region-specific, and some manufacturers may rely heavily on suppliers from regions that are subject to high tariffs. Monitoring this KPI helps companies assess their exposure to specific trade regions and diversify their supply chains accordingly.
What to track: Track the percentage of materials or components sourced from countries or regions that are likely to face tariffs and adjust sourcing strategies if needed.
Regulatory compliance and tariff changes
Why it’s relevant: Keeping track of changes in tariff rates and compliance requirements is essential for avoiding penalties and ensuring smooth operations. This KPI helps manufacturers stay on top of tariff updates and implement necessary changes in business practices.
What to track: Measure how quickly the company can adjust to regulatory and tariff changes, and track compliance with new tariff rules to avoid fines or legal issues.
By watching these KPIs and others, manufacturers can understand how tariff risk is affecting its cost structures, supply chains, cash flow, and overall competitiveness and proactively adapt, optimize their operations and make more informed decisions to mitigate tariff-related risks.
