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Tariff Tactics
How top procurement teams are responding to the steel tariffs.
Issue 043
If you’re in procurement, you’re likely feeling the heat from the recent trade tensions. In March 2025, President Donald Trump imposed a 25% tariff on steel and aluminum imports from Canada, aiming to protect domestic industries.
In response, Canada announced 25% retaliatory tariffs on U.S. goods, including steel and aluminum products.
These developments have sent ripples through supply chains, making cost forecasting more challenging than ever.
But here’s the silver lining: You don’t have to navigate this storm alone. By forging shared-risk agreements with your vendors, you can stabilize costs and build more resilient partnerships.
Understanding Shared-Risk Agreements
So, what exactly are shared-risk agreements? In simple terms, they are partnerships where both buyers and suppliers agree to share the financial risks associated with market fluctuations—be it due to tariffs, raw material price changes, or demand variability. This collaborative approach ensures that no single party bears the entire burden, fostering a sense of mutual trust and commitment.
Why consider shared-risk agreements?
> Cost Stability: By sharing risks, both parties can achieve more predictable pricing, safeguarding against sudden market shifts.
> Strengthened Relationships: Collaborative risk-sharing fosters deeper partnerships, leading to better communication and long-term cooperation.
> Enhanced Transparency: Such agreements encourage open discussions about costs and risks, promoting transparency and joint problem-solving.
Structuring Effective Shared-Risk Agreements
Implementing shared-risk agreements doesn’t have to be a complex endeavor. Here are some practical approaches:
1. Index-Based Pricing
Tie your pricing to a recognized market index. For instance, if steel prices fluctuate, both parties agree to adjust the pricing based on a predetermined formula linked to a steel price index. This ensures that neither party is unfairly disadvantaged by market volatility.
Example: A construction firm and its steel supplier agree to adjust contract prices quarterly based on the average market price of steel, ensuring both benefit from price decreases and share the burden of increases.
2. Volume Commitments with Flexible Pricing
Commit to purchasing a minimum volume over a specified period in exchange for flexible pricing terms. This guarantees the supplier a certain level of business while providing the buyer with more predictable costs.
Example: An automotive manufacturer commits to buying a set amount of aluminum each month. In return, the supplier offers a pricing structure that adjusts within agreed-upon limits, accommodating market changes without drastic price swings.
3. Tariff Adjustment Clauses
Include clauses that specify how costs will be managed if new tariffs are introduced or existing ones are modified. This proactive approach prevents rushed renegotiations and ensures both parties are prepared for policy changes.
Example: A machinery producer and its component supplier agree that any new tariffs will result in a shared cost adjustment, with both absorbing a portion of the added expense based on a predefined ratio.
Real-World Example: Navigating Tariff Challenges Together
Consider the case of a U.S.-based appliance manufacturer and its Canadian steel supplier. Faced with the recent 25% U.S. tariff on Canadian steel, they proactively established a shared-risk agreement to navigate the uncertain landscape.
Approach:
> Index-Based Pricing: They linked their steel pricing to a reputable market index, allowing automatic adjustments in response to price fluctuations.
> Volume Commitment: The manufacturer guaranteed a minimum purchase volume, providing the supplier with business stability.
> Tariff Clause: They included a provision to share additional costs arising from new tariffs, ensuring neither party bore the full brunt.
Results:
> Cost Predictability: Both companies achieved more stable pricing, aiding in financial planning.
> Strengthened Partnership: The collaborative approach deepened trust and encouraged ongoing cooperation.
> Competitive Advantage: By mitigating sudden cost spikes, the manufacturer maintained competitive pricing for its products.
Taking The First Step
Embarking on shared-risk agreements begins with open communication. Reach out to your key suppliers and discuss the mutual benefits of such partnerships. Emphasize the goal of achieving stability and fostering a win-win relationship.
Considerations:
> Assess Compatibility: Ensure both parties have aligned goals and a willingness to collaborate.
> Define Clear Terms: Establish transparent mechanisms for pricing adjustments and risk-sharing.
> Legal Review: Consult legal experts to draft agreements that protect both parties’ interests.
Have you successfully established shared-risk agreements with your vendors? I’d love to hear what’s worked for you. Drop your thoughts below 👇
Gromax Precision Die & Mfg., Inc. specializes in designing and manufacturing precision metal stamped parts and tooling, including progressive stamping dies and custom equipment. With an on-time delivery rate of 99.68% and a defect rate of just 0.066%, the company ensures exceptional reliability and quality.
Gromax is ISO 9001:2015 certified and ITAR registered, serving industries such as medical, defense, aerospace, industrial automation, and automotive with high-quality, innovative solutions.