Firms abandon ultra-cheap supply chains for resilience
Companies are ending their long-standing focus on the lowest-cost supply chains, driven by tariffs, geopolitical instability, and unpredictable disruptions. This shift compels firms to prioritize reliability over cost savings, even when it means higher expenses.
During SIG Group’s first-half earnings call in July, CFO Ann-Kristin Erkens (now CEO) addressed an €80 million inventory increase. She explained that part of this came from higher input costs, while another portion was deliberate safety stock. Whether the Swiss packaging maker reduces this stock by year-end will depend on market volatility. This example highlights a broader trend: businesses can no longer assume uninterrupted supply chains.
Just-in-time inventory, once a standard for efficiency, now carries significant risks. In early 2025, Authority Brands’ franchisees stockpiled HVAC compressors ahead of tariff-driven price increases. Despite bulk negotiations, manufacturers raised prices across the board, leaving the company with excess inventory and squeezed margins.
Trane Technologies has quadrupled production capacity in its applied HVAC business over the past three years, with 2026 capex expected at 2% to 3% of revenue. CFO Chris Kuehn emphasized, “Trane is ‘not going to get behind’ and is ‘not turning away any orders.’” However, some of this expanded capacity remains unused until demand materializes, reducing short-term operational efficiency.
Rare-earth supply chains face affordability crises
Aclara Resources, a rare-earths developer, faces challenges competing with Chinese producers. While its operating costs are comparable, its cost of capital is higher. Governments in the U.S., Japan, South Korea, and Brazil offer long-term financing—up to 20 years—to bridge this gap. CFO François Motte noted that such deals signal stability to customers. Aclara pairs take-or-pay contracts with price caps during repayment periods, transitioning to indexed pricing later. This strategy works only if buyers can afford the terms, which automakers competing with Chinese electric vehicles often cannot.
Yttrium, a rare earth critical for gas turbine coatings, now accounts for about 30% of Aclara’s output value. While turbine manufacturers absorb these costs, automakers under competitive pressure struggle. When customers refuse to pay, suppliers bear the burden. RapidRatings International found that suppliers passing through only half of tariff-related costs saw a 56% increase in high or very high financial risk ratings among public companies. For private firms, the number of struggling suppliers more than doubled.
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RapidRatings CEO Charlie Minutella described the consequences: “Wait for headlines or disruptions to emerge, and the only option left is writing the check.” Manufacturers often face late discoveries, such as a critical supplier nearing restructuring. By then, qualifying a replacement takes too long, leaving no choice but to pay millions to keep the supplier operational.
Supply chain disruptions also stem from regulatory changes. Assent Inc.’s chief innovation officer, Catherine Cormier, observed that manufacturers must retool factories, halt production, or destroy non-compliant goods. These adjustments idle production lines and extend beyond financial costs.
Reshoring costs weigh against speed and tariff savings
Miebach Consulting reviewed a consumer goods manufacturer’s production footprint and found that external shocks consistently derailed annual plans. “Find me a year we’ve had a white swan,” quipped Nick Banich, Miebach’s chief revenue officer. Some disruptions repeated often enough to be factored into long-term strategy. Shifting production from Southeast Asia to Mexico would raise labor costs by 15% to 20% and unit costs by 7% to 14%, but cutting 20 days of ocean transit would free up working capital and reduce tariff exposure.
Post-Covid-19, stockpiling inventory often failed to resolve service issues. Banich recommends segmenting by product and supplier, avoiding redundant capacity for low-utilization lines. Life sciences companies already maintain “strategic stock” for low-probability, high-impact events, a practice other industries may adopt.
Resilience costs extend beyond inventory. Firms may finance suppliers or subsidize operations. Governments offer long-term loans, but companies sometimes cover short-term gaps. This approach protects margins but risks alienating smaller buyers.
Even when risks are clear, the financial case may not justify action. It chose instead to diversify suppliers within Asia, accepting some tariff exposure as unavoidable.
