Tangling with tariffs: CEOs share their strategies
The latest round of tariffs are making their mark on small and midsize businesses—and not necessarily in a good way. According to the Q3 Vistage CEO Confidence Index, 52% of CEOs indicated that they were moderately or strongly impacted by trade tariffs.
We spoke with three Vistage members from three different sectors — in manufacturing, construction and wholesale trade — to understand how they are coping with some of the challenges posed by new tariffs. Whether related to negotiating prices or inventory forecasting, here is how these CEOs are answering difficult questions in today’s complicated trade environment.
Q. What’s the best way to communicate price increases to customers?
Arm your customers with the right information. At Skolnik Industries, a Chicago-based manufacturer of steel drums, President Dean Ricker has backed up his price increases with news and data about the rising cost of steel. Each week, he sends his customers a list of steel prices published in CRU, the leading steel benchmark in the U.S. market, and also pulls articles about tariffs from reputable publications such as the Wall Street Journal. “That gives the purchasing person enough ammo to go back to their boss and explain price increases,” says Ricker. “It’s as much about transparency as it is about education.”
Be forthcoming with what’s happening—and why. At i2 Construction, President & CEO Scott Farrell strives to serve as a trusted advisor to his customers, and that means being upfront about issues like price increases. “We’ve always had a philosophy of, ‘I am going to make you aware of an issue, tell you that I’m working on it as we come up with some options,’” he says, adding that price conversations have served as opportunities to build better relationships with his clients. “To me, if you’re not having these conversations, you’re missing out on an opportunity to show your client how vested you are in caring about them,” he says.
Don’t take advantage of the situation. Farrell has encountered companies that are using the effects of tariffs as an excuse to dramatically inflate their prices, but Lavina Lau’s approach is just the opposite. As President and CEO of River of Goods and Terrybear Urns & Memorials, Lau has made sure that any proposed price increases have been reasonable and fair to her distributors. “We know that they work hard for us,” she says. “Our approach is always to explain the situation and be fair with what we’re asking. We let them know that we expect this to be temporary and will adjust the price back when the tariffs go away.”
Raise your prices gradually. Out of consideration for his customers, Ricker has raised his prices incrementally over the course of five months, hoping that this will make it easier for his clients to adjust to the rising costs. “It’s important to understand your customer’s business and what their needs are,” he says. “We don’t want to lose them as customers, and we don’t want them to lose their customers. If that means it takes some time and we do things more on a schedule, so be it.”
Q. How can I plan for 2019 when the impact and extent of tariffs is uncertain?
Make educated guesses. When it comes to inventory forecasting for 2019, Lau and her team are planning for the worst while hoping for the best. Depending on the product category, her companies are making inventory purchases based on the assumption that their sales will be equal to, or less than, sales in 2018. “In the areas where we are planning for sales to be down, we are saying to ourselves, ‘If the business is better than we are anticipated, we are willing to let go of some opportunities so that we don’t take a risk on inventory.’ And in the situations where we are planning for flat sales, we are saying, ‘If it’s going to be lower than we thought, we feel confident that we will be able to work through the inventory in the second half of the year.’”
Create a buffer for a worst-case scenario. In some cases, Farrell is receiving estimates from contractors that are only good for seven days, which “makes them useless,” he says. “I have no ability to sit in front of clients and tell them that I know how to guarantee the cost of, say, a light fixture package that we are bidding on now and will deliver after January 1.” To cope with this uncertainty, he’s clarifying and building in a price buffer—for example, of around $15,000—that serves as a safety net in the event of a price increase. That way, “when we finalize drawings in 45 days, we hope that the parts and pieces of light fixtures that really get marked up don’t increase the total purchase by more than $15,000.”
Scrutinize your costs. While coping with the rising cost of steel, Ricker is also having to deal with price increases across a range of other goods and services, ranging from shrink wrap to freight shipping. To manage those increases, he is taking a critical eye to costs while being prudent with spending. “We’re really paying attention to our costs and making sure our price increases are going through so we’re not exposing ourselves to losing a lot of money,” he explains.
Q. How should I handle negotiations with customers?
Treat each case individually. Even though every customer was expected to share the rising costs, Lau has tried to approach each customer individually, and developed specific programs to address the needs of each of them. “We are willing to come up with specific solution in the retail environments where customers are not in a position to change their retail pricing,” she explains. “In other situations, the customer will have to adjust their retail pricing strategies and share the cost increase immediately. And in other situations, we have told the customer that we are willing to absorb the increased costs for 2018 but expect them to take on all the costs in 2019.”
Negotiate on issues beside price. One of Farrell’s clients had a project go up by $35,000 basically overnight. Instead of scrapping the job, he helped the client work with a millworker and an architect to find an alternative option that met their budget. It ended up being a good solution to a problem “that was beyond our control,” he says.
Know your limits. Of all the raw materials that Skolnik Industries uses to create steel drums, 90% is American-made steel. Since last year, the price of that steel has increased approximately 25%, leaving the company no option than to pass on the rising costs to customers. “That’s a price increase you can’t absorb,” says Ricker. “It’s not like we had a meeting and said, ‘Gee, can we absorb these increases?’ To be able to survive, we’ve had to pass it on.”