Tariff Exposure and Dual Sourcing at Arbor Modular
Arbor Modular, a U.S. furniture importer, buys $30 million of components annually from one supplier in Vietnam. A proposed tariff could add 25% to landed cost, and a port strike two years ago delayed shipments by six weeks. The supplier has been reliable on quality but refuses to share sub-tier sourcing data. Mexico offers a nearshore alternative with a 12% higher unit cost, four-week lead time instead of ten, and a new supplier that would require $1.5 million in tooling and audits. Vietnam has offered a 3% price cut and a 60-day inventory buffer if Arbor signs a three-year exclusive. Arbor's largest retail customer demands 98% in-stock performance and has begun asking for country-of-origin data. The CFO wants the lowest landed cost; the supply chain director wants resilience; the sales team fears losing the retail account. The CEO must present a sourcing strategy to the board in six weeks.
1. Quantify the tariff exposure and compare the Vietnam and Mexico options on first-year cost.
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Vietnam base spend is $30 million. A 25% tariff adds $7.5 million, bringing landed cost to $37.5 million before any price concession. The supplier's 3% cut saves $900,000, so tariffed Vietnam cost is about $36.6 million, plus the cost of carrying a 60-day buffer. Mexico has a 12% higher unit cost: $30 million × 1.12 = $33.6 million, plus $1.5 million in first-year tooling and audits = $35.1 million. On a simple first-year landed-cost comparison, Mexico is about $1.5 million cheaper than tariffed Vietnam and avoids the 25% exposure. Without the tariff, Vietnam at $30 million is far cheaper than Mexico at $33.6 million, so the tariff assumption is decisive. The Vietnam price cut and buffer do not offset a 25% tariff; they improve cash and service but leave the structural exposure. The board should see a scenario table: no tariff, tariff, and tariff with retaliation or delay. Mexico also has hidden ramp-up risk, so first-year cost is not the whole comparison.
2. Assess the non-cost risks: supply continuity, compliance, customer requirements, and bargaining power.
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Vietnam offers lower unit cost and proven quality, but single-sourcing creates continuity risk. The port strike caused six weeks of delay; a 60-day buffer helps but ties up cash and may not cover a longer disruption. The supplier's refusal to share sub-tier data is a compliance red flag, especially because the largest customer is asking for country-of-origin information. If the tariff is enacted, Arbor may face retroactive or documentary risk, and an exclusive three-year deal reduces its ability to shift volume. Mexico improves lead time from ten weeks to four, which supports the 98% in-stock requirement and reduces safety stock. But a new supplier requires audits, tooling, and quality ramps; nearshoring is not instantly resilient. Bargaining power also matters: an exclusive with Vietnam locks Arbor in just as the tariff threat rises, while Mexico gives a credible second source. The sales team's fear is rational, but so is the customer's origin-data demand. The strategy should reduce single-point dependency without pretending Mexico is risk-free.
3. Recommend a sourcing strategy to the board, including contract terms and a transition plan.
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Recommend dual sourcing, not a full switch. Keep Vietnam for roughly 60–70% of volume but refuse the three-year exclusive; accept the 3% cut only on a non-exclusive basis with the 60-day buffer and a contractual right to audit sub-tier suppliers. Qualify Mexico for 30–40% of volume, starting with the highest-risk SKUs, and spend the $1.5 million on tooling and audits over two phases tied to quality gates. This costs more than pure Vietnam in a no-tariff world but caps tariff exposure and improves lead time for the customer that demands 98% in-stock. Set contract terms: origin documentation, tariff-sharing or price-reopener clauses, capacity commitments, and a 12-month transition review. If the tariff is enacted, shift to 50% Mexico quickly; if it is not, retain Mexico as a qualified second source. The board should approve a capped premium for resilience-for example, no more than 3–5% of total landed cost-rather than an open-ended nearshoring budget. This balances the CFO's cost focus, the supply chain director's resilience goal, and the sales team's account risk.