Tariffs are official: Here's how to adapt your inventory strategy

Companies in the United States are facing increased supply chain pressure following the recent announcement of tariffs on Canada, Mexico, and China. A 2024 study by Rogers, Golara, et al. found that tariffs introduced in 2018 negatively impacted the industries they were meant to protect, and created ripple effects throughout the supply chain.

The introduction of new tariffs will inevitably shift the global supply chain ecosystem. The long-term effects remain uncertain, and businesses must reevaluate their inventory policies to remain competitive.

Understanding Inventory Cost Drivers

The first step in managing an inventory strategy is understanding the key cost drivers, which fall into several categories:

• Procurement Costs - The cost of purchasing goods, including raw materials and finished products.

• Holding Costs - Expenses associated with storing inventory, such as warehousing, insurance, and the cost of capital.

• Stockout Costs - The cost of lost sales or production delays due to insufficient inventory.

• Ordering Costs - Expenses incurred from placing and processing orders, including administrative and logistical costs.

Tariffs primarily affect procurement costs. When introduced, they increase the landed cost of affected products, making inventory acquisition more expensive.

The Impact of Tariffs on Holding Costs

Since tariffs raise product costs, they also elevate the cost of capital, a significant component of holding costs. As a result, businesses face higher overall inventory carrying costs. This shift leads to two primary inventory management scenarios:

Scenario 1: Selling Price Remains Constant

If a business absorbs the increased procurement costs without raising selling prices, the ratio of holding costs to stockout costs rises. Traditional inventory control theory suggests that when holding costs increase disproportionately to stockout costs, companies should adopt a leaner stocking strategy—holding less inventory to minimize expenses.

Scenario 2: Selling Price Increases Proportionately

If a business passes the tariff-induced cost increase to customers, inventory control theory suggests that optimal inventory levels should remain unchanged. However, this assumes demand remains stable.

Potential Secondary Effects

• Demand Reduction - Higher prices may reduce consumer demand, warranting lower inventory levels to prevent overstocking.

• Competitive Pressure - If competitors maintain lower prices, sales volume could decline, impacting reorder quantities.

Strategic Pre-Tariff Purchasing

With additional tariffs on the horizon, some businesses may benefit from strategic pre-purchasing—buying larger quantities before tariffs take effect. Companies importing from countries other than Canada, Mexico, and China still have an opportunity to front-load orders and stay ahead of potential cost increases. This strategy enables businesses to lock in a lower cost basis and temporarily mitigate rising procurement expenses. In recent months, many companies have embraced this approach. In fact, U.S. imports of 20-foot containers surged in November and December, reaching their highest levels since 2021 (Reuters).

Key Considerations for Pre-Tariff Purchasing

Companies adopting this strategy must account for:

• Storage Capacity - Additional inventory requires sufficient warehouse space.

• Carrying Costs - Increased inventory levels amplify holding costs, which must be balanced against potential savings.

• Shelf Life Considerations - Perishable or trend-sensitive products may not be suitable for stockpiling.

Reevaluating Inventory Control Parameters

Because tariffs alter cost structures and influence customer demand, businesses must reassess inventory policies to stay ahead of potential disruptions. Key considerations include:

• Conduct Market Research – Analyze competitor pricing strategies to determine whether they will absorb the tariff costs or pass them on to customers. The way the overall market responds should influence your approach, guiding decisions on pricing and inventory adjustments.

• Make a Pricing Decision – Decide whether your business will increase prices or absorb the additional costs.

  • If raising prices: Reevaluate demand forecasts in response to the evolving market landscape and proactively adjust for potential shifts in demand.

  • If maintaining original prices: Reevaluate holding and stockout costs to determine new optimal inventory levels.

• Perform Scenario Analyses – Model various pricing and demand scenarios to prepare for uncertainty surrounding the extent and severity of tariffs.

How Glassoff Consulting Can Help

Glassoff Consulting has extensive experience working with distributors of imported products. If tariffs are impacting your business, we’d love to discuss strategies to help you adapt and respond to the changing supply chain landscape.