President Donald Trump’s 2025 tariff actions, both actual and threatened, present challenges to U.S. businesses. There is a lot of FUD (fear, uncertainty, doubt) among CEOs, Chief Supply Chain Officers (CSCOs), and other executive leaders who fear that rising tariffs will drive up consumer prices while lowering demand and profitability. There is a real urge to take action now to protect market share and preserve margins.
Beware of the Bullwhip Effect
No matter the latest tariff news, supply chain leaders are advised to avoid overreactions that may lead to the bullwhip effect.
The term comes from how the movements of a whip become amplified from the origin (the hand cracking the whip) to the endpoint (the tail of the whip). Even a tiny variation in the wrist and hand of the person wielding the whip can have a much larger effect on the force of the blow the whip administers on the other end.
For example, the bullwhip effect happens when a retailer changes how much it orders from its supplier, based on short-term changes in consumer demand.
Seeing an increased demand signal from its customer(s), the supplier, in turn, submits a larger-than-usual purchase order to its manufacturer.
However, due to lead times, minimum order quantities, and more, the retailer’s increased order to the supplier is magnified into a larger order from the supplier to the manufacturer.
When consumer demand inevitably corrects back to the original value, the supply pipeline is stuffed with excess inventory, raising Days of Supply (DOS) and tying up working capital.
Any small overcorrection by the retailer can lead to massive discrepancies between demand and production, with far too much being produced, then far too little being produced, as retailers slash order quantities to sell down existing inventories.
This happened during COVID-19 when businesses overreacted and ordered too much inventory, particularly from Chinese manufacturers. This happened again in fall 2024, when companies rushed to increase inventories before the anticipated International Longshoremen’s Association (ILA) dockworkers’ strike. When the strike didn’t happen, companies were left with excess inventories, hurting financials (e.g., mass-merchandise retailer Target).
When thinking about tariff rollouts, the key question on the mind of the C-suite is “What the heck are we going to do now?” Opinions vary, depending on the source. There certainly is no shortage of advice coming from the internet. A quick Google search of Actions a business should take now to mitigate the effects of the Trump tariffs revealed over 46 million responses!
Executive concerns related to tariffs and their potential impact on business include:
- How will tariffs affect supply chains and material sourcing?
- Should we evaluate substitutions for raw materials, packaging, and more?
- Will product pricing require recalibration and, if so, how will market share and profit margins be affected?
- Should global tax strategies be evaluated? Is it time to look for new acquisitions, mergers, or strategic partnerships?
- Should inventory be ramped up or reduced?
- Will employee staffing levels have to be adjusted?
The volatility surrounding tariff rollouts has made it difficult to know what actions to take now. Any plans must also consider the related impact of possible retaliatory tariffs which, by the time you read this, may be very high, nonexistent, or anywhere in between!
Data Science Methods Can Help Answer the Question
Fortunately, a data-driven approach can provide business leaders with direction and answers. Using data science methods such as simulation analysis, scenario analysis, and data visualization can help supply chain leaders to evaluate possibilities and devise appropriate action plans.
Data visualization is the process of transforming data into visually appealing and easily understandable formats like charts and graphs, often color-coded, to facilitate analysis and communication. The information helps identify patterns, trends, and outliers in large datasets, making it easier to gain insights and make informed decisions.
Scenario analysis is a process of examining and evaluating potential future events and their possible outcomes. It helps businesses and individuals predict how different conditions might impact their finances or operations by considering alternative scenarios. As an example, scenario analysis might consider this: If both the US and China decide to keep tariffs at a mutual 45%, what will be the necessary adjustments? Another scenario might analyze the subsequent changes required if the tariff were dropped to 10%.
Simulation analysis can be thought of as scenario analysis – but turbocharged. Instead of looking at a few different scenarios, simulation allows an executive team to evaluate a vast number of potential inputs – e.g., tariff ranges, pricing adjustments, and demand destruction potential – and evaluate the key outcomes: revenue, inventory, and profit. While the most complex of the three methods, simulation analysis enables the company to identify the optimum changes required for generating target outcomes.
Used as part of a cross-functional team, these well-known analytical tools can be used to postulate different possible scenarios to estimate demand destruction, guide pricing policies, and inform decisions on production levels and inventory management. In short, those tools assist leaders in evaluating options and making the right decisions needed to mitigate loss while maximizing profits.
In the final analysis, while it is prudent that businesses create tariff-related contingency plans, the planning should involve a data-driven approach to prevent any bullwhip effect and excess inventory. The analytical tools detailed above can guide business leaders as they re-evaluate everything from supplier relationships to supply chain network design (case studies here and here).
For a discussion on how Data Driven Supply Chain can help your company navigate these uncertain times, use the contact form below!