This conversation takes a considered look at what changes in tariffs mean for international companies, what’s at stake, and the challenges and opportunities that the complex tariff environment presents. We discuss some lesser-known impacts of tariffs on different industries and get our guests’ take on how businesses can make changes to transform amid an uncertain business landscape.
In this episode of McKinsey Talks Operations, host Daphne Luchtenberg speaks with Roman Belotserkovskiy, a McKinsey partner and global leader of McKinsey’s procurement and supply-management work within the Electric Power & Natural Gas Practice. The second guest is Liz Hempel, a partner and leader of the firm’s product development and procurement work for industrial clients. Partner Riccardo Drentin joins us from Jakarta, where he co-heads McKinsey’s Procurement and Product Development division in Asia–Pacific. And finally, we speak to Senior Partner Valerio Dilda, a leader in McKinsey’s Operations Practice in France, who serves clients primarily in the chemicals, mining, and metals industries, supporting large-scale transformation programs.
The following conversation has been edited for length and clarity.
Roman Belotserkovskiy: The time to act is now because the world is not going to get any simpler. So, how do you integrate technology, upscale your organization, reorganize toward this more complex work? We don’t need to wait for this to be an even bigger crisis or a burning platform. I think this is the time to start getting ahead of that problem.
Daphne Luchtenberg: That was one of the expert panelists talking about the new reality being shaped by fluctuations in tariffs and trade barriers. You’re listening to McKinsey Talks Operations, and I’m your host, Daphne Luchtenberg. In this podcast, we bring together the world’s C-suite leaders and McKinsey experts to cut through the noise and uncover how to create a new operational reality.
McKinsey thinks of geopolitics as having ten drivers of value. Today, we’re focusing on one: the application of tariffs and other trade barriers. Given the speed at which the landscape is evolving, things are likely to have moved on even in the few days that will pass between recording and publishing this episode of McKinsey Talks Operations. We’re not trying to comment on specific tariffs and barriers or on the markets most likely to be affected. Instead, we’re focusing on how business leaders can protect growth, create competitive advantage, and build resilience in their operations value chain. We’ll consider how they can assess impact, derisk the supply chain, retain customers, and transform for the future.
I’m joined today by a truly global panel from McKinsey’s Operations Practice: Liz Hempel and Roman Belotserkovskiy from North America, Valerio Dilda from our Paris office, and Riccardo Drentin joining us from Jakarta. Each of them is at the forefront of helping companies move past treating tariffs like a passing storm and recognizing that, instead, this is a new reality. Welcome.
Liz Hempel: Hello, I’m excited to be here.
Roman Belotserkovskiy: Thank you so much for having me, Daphne.
Valerio Dilda: Thank you very much, Daphne.
Riccardo Drentin: Thank you for having me here, Daphne. Very excited to talk about tariffs. That is the hot topic of the moment.
Daphne Luchtenberg: Fantastic. Let’s get started. It would be great if we could start by understanding a little of the general context here. What is at stake for organizations right now? It seems that there are a lot of risks on the table, that there’s a burning platform for transformation, and that this is heating up all the time. Valerio, coming to you first, can you talk a little bit about this burning platform?
Valerio Dilda: Look, Daphne, a 25 percent tariff scheme could trigger a multiple-year supply chain reset for many companies. Keep in mind that some companies have up to billions worth of exposure, which clearly creates a burning platform for them and a need for a potential major transformation.
The question is not if these companies will need to transform. It’s more about when and how to trigger the transformation because the name of the game is getting ahead of the curve in terms of the way they operate their supply chain. That will make the difference between who will be winning or losing in many sectors. This applies, by the way, to both the workforce part of it and the capital part of the supply chain. For many companies, if they decide to wait too long to start building new plants, shifting supply chains, striking new deals in terms of toll manufacturing, they could lose valuable options against competitors; hence, the point of transforming—and the timing of doing so—is of the essence for many of them.
Daphne Luchtenberg: Thanks, Valerio. And Liz, there must be opportunities too, right?
Liz Hempel: I think in terms of opportunities, they come in unexpected places, and organizations have to scratch a little bit deeper to get there. But if you look, for example, historically, tariffs have led to shifts in supply chains—perhaps not in the way initially anticipated or on the same timescales. So, for example, the previous tariffs in 2018: Industrial supply chains shifted to Mexico, Vietnam, and other Southeast Asian nations. It took two to three years to get there, but we saw real, meaningful growth in those types of communities. Another example: China’s apparel exports to the US declined by 12 percent in 2019. The product was still purchased; it just shifted elsewhere.
Another area we see companies taking advantage of is where they potentially already have an advantage—supply chains. Look at the recent announcements around employee pricing from US-based auto suppliers. They know they’re being impacted less than their competitors, so they’re using it to gain market share in the long term and really capitalize on the opportunity there.
Daphne Luchtenberg: And Liz, what about the indirect impacts? Can you give us an example of the impacts in other parts of the value chain?
Liz Hempel: So, we’re seeing a couple of different types of indirect impacts that are coming together. Take, for example, food and beverage. Most of food and beverage is purchased locally. Organizations might think they’re relatively protected. However, the second-tier costs of ingredients, things like chocolate, sugar, packaging, they’re all imported from countries—like Canada, Indonesia—that are facing tariffs. Those impacts will be passed through.
Other types of secondary impacts that we’re seeing, if I flip and take the gross side of the equation, again, going back to the 2018 tariffs as a precedent: Tariffs on washing machines caused demand to rise for US-based producers of both washers and dryers. Even though the dryers weren’t subject to the tariffs, people just kind of assumed they came across in both directions. So, seeing that and being able to take advantage of that from a growth opportunity was a secondary impact that wasn’t anticipated, because it was on a different tariff.
Daphne Luchtenberg: And then, Valerio, let’s talk a little bit more about the global value chains as well. How are they being impacted?
Valerio Dilda: We see that tariffs can apply a shift in how the global supply chain gets shaped. As an example, the US Section 301 tariffs on China significantly increased the manufacturing costs for all the parts that are coming from China.
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When it comes to labor and employment, we can see other secondary effects in which some tariffs are expected to generate new job creation in specific sectors. But, on the other side, they can generate a loss in the downstream, where those tariffs are directly applied. As an example, the US Section 232 tariff on steel and aluminum, yes, created 8,700 jobs in those specific industries, but it reduced remanufacturing employment by 75,000 jobs because of the contraction in demand in the downstream sectors that were making use of steel and aluminum.
Daphne Luchtenberg: Roman and Riccardo, over to you to talk about the key actions. What should leaders be thinking about in terms of their tariff response? Riccardo, let me bring you in here at this juncture. What is it that leaders should be thinking about doing now?
Riccardo Drentin: Very interesting question. Thank you for asking, Daphne. Clients are considering a large array of strategic postures to take in order to answer to tariffs. And let’s be honest, in some of the conversations, some of the leaders I spoke with are considering a wait-and-watch kind of option. But here in Asia–Pacific, the bias is to action—action to protect both margins and market position of the companies. I was genuinely impressed by a client that I’ve been recently talking to in China that has already moved beyond deciding which strategic posture they want to take. They are already in action. They have a half dozen new suppliers, and they’re imagining their operations to act fast and try to get market share in the business they’re operating in.
Daphne Luchtenberg: That’s great. And Roman, what are we seeing on the other side in the Western Hemisphere, in North America specifically? What are your clients doing?
Roman Belotserkovskiy: Absolutely. That’s a great question. Especially when working with clients here in North America, with the volatility we have seen, the many changes in the policy or tariffs that sort of came and went, for most clients, it’s been a bit of a challenge to really understand the exposure, and I think it’s surfaced some of the weaknesses many organizations have as far as having visibility into tier-one, tier-two, tier-three supply chains. So understanding your tariff exposure—and, broadly speaking, it’s not just tariffs, right? It’s trade restrictions. It’s other policy decisions that are being made. Understanding your broad exposure to all those drivers is really fundamental before you can plan any sort of actions, and also so you can create different strategies for the different scenarios, given the volatility we’re seeing.
Second, some of these tariffs may be temporary, as potentially there may be negotiations happening around the policy, and policy will evolve, which is what a lot of our clients are saying and assuming right now. Therefore, using inventory in a smart way could be a good move. We’ve seen that in prior 2018 tariffs, where companies used front-loaded shipments, used low-tariff regions and inventory buffers, increased safety stocks. So there are real options for leveraging inventory for near-term mitigation of tariffs until the policy settles into something more long term.
And finally, creating optionality is fundamental. Even if you’re not changing your supply chain today—because we’re always advising clients not to overreact—it is important to start to prequalify suppliers, create options, at least identify potential alternative sourcing opportunities. If you really need to change, you have options started. You identified some suppliers. You maybe had initial conversations. Maybe you’ve done some of the prequalification certification actions, and you have a plan for how you could potentially shift some of your supply when the time comes to execute that.
Daphne Luchtenberg: Roman, many of the things you’re talking about, you would expect to be part of the standard operational excellence tool kit. What’s different now?
Roman Belotserkovskiy: That’s a wonderful question, Daphne. And, yes, optimizing our supply chain always has been, I think, best practice, if you will. But we optimize for different things, and I feel like a lot of supply chains have been built optimizing for a somewhat steady geopolitical environment, where you had relatively stable trade policy across most of the Western world, and you had relatively clear economic kinds of differences that you were managing for. So, a lot of companies have not really been building supply chains for a wide range of potential geopolitical scenarios.
I think what’s really different now is that it’s not that clear what to optimize for, because the goalposts of trade policy and geopolitics are shifting so much, and the tariff rates, which used to be within reasonable bounds, to some degree, are now in some cases triple digits. Granted, that may change, but it’s really changing the outlook of what your sourcing strategies could be. So you need to, I think, plan for a much wider range of scenarios and consider options that maybe you weren’t really considering before, as far as what does nearshoring look like with the evolving USMCA [United States-Mexico-Canada Agreement] renegotiations coming up. The shift—say, from China to other Southeast Asian countries we have seen before—may not be as viable now if the US trade policy sort of considers all of those as part of the same issue to some degree. So you need to plan for a much wider range of potential outcomes and create more options for yourself.
Daphne Luchtenberg: Thanks, Roman. That’s really interesting. Riccardo, I’d love for you to talk a little bit about what’s different now.
Riccardo Drentin: Let’s face it, Daphne—at times, operational transformation lacks that ultimate sense of urgency from the clients or from the executives. This time it’s completely different. The sense of urgency is clear to everybody within the company and in the outside world. So now the operations and the executive working operations have the mandate and the obligation to make things different, ultimately to improve their end-to-end processes. And this is becoming a reality.
A client in Vietnam is, for example, shortening their testing of their components from a month to weeks, or even days, to make new sourcing from other parts of the world. We saw some clients here in Indonesia that are building capabilities and digital solutions to create much better transparency and resilience for their businesses. And we saw companies all around Asia connecting their information flow to be able to have much better transparency end to end for better compliance with tariffs.
Daphne Luchtenberg: So, actually, they’re really making decisions more quickly. They’re upping the game both in their workforce capabilities but also in technology to be able to make those decisions in a much more agile fashion.
Riccardo Drentin: Correct.
Daphne Luchtenberg: What does this mean for workforce planning and technology implementation? What are the opportunities, perhaps for speed, accuracy, and the single source of truth in this complex landscape?
Riccardo Drentin: The whole tariff situation revealed the importance of having—as you mentioned, Daphne—speed, great data, accessibility to information in an unprecedented depth and speed. The real shift is now toward smarter, tech-enabled roles within operations in every function of operations that enable such a change.
Daphne Luchtenberg: And then there’s also an implication, isn’t there, for the technology and the solutions that you might need that you may not have leveraged to date? What kind of changes to workforce planning should be considered at this stage?
Roman Belotserkovskiy: I would almost take it a level above technology. I think this is an operating model question for procurement and supply chain organizations. The reality is that there is a lot more work to be done, to put it simplistically, and the work has gotten much more complex. What used to be a relatively simple category strategy with known suppliers along known trade routes with relatively known assumptions is not a given anymore. So you potentially are dealing with a much wider set of suppliers with markets you may not know very well, with relationships that are not as mature, setting up essentially new trade routes for your commodities or for categories, and the economics within those categories are also quite different now. So, how do you operate in that environment? It puts procurement organizations in front of a lot more work that’s a lot more complex, that requires a lot more data, a lot more understanding of geopolitics, economics of the different markets, a lot more granular understanding of trade policy, and you need to also be more agile. If I oversimplify it: do a lot more work that’s harder, faster. That is not trivial.
To do that, you need to fundamentally think about evolving your operating model. Yes, you need technology. You need much more data available faster to give procurement supply chain professionals the right insights to make decisions that are fact-based. So, how do you get all the internal, all that external data in front of them in a much more efficient way than a lot of organizations are able to today? How can you execute transactions, RFPs, negotiations much faster? Can you use AI or other technology to summarize data? Can you do negotiation coaching? Can you build cost models assisted by artificial intelligence? Those are some examples where we’re seeing great success in technology, but you need to deploy a lot more of that. Also, where are your people spending their time, and how do you free up their time from transactional work to be able to do this more strategic work, making sure they have the skills to do it? Maybe it requires incremental training, given that the topics they’re working on are now quite different. This is a whole set of considerations that I think procurement leaders need to think about as to how they enable and set up their people for success in this environment.
Daphne Luchtenberg: So if I may summarize, what you’re saying is, in the last couple of years, it might’ve been about stretching the current operating model, trying to do more with the current way of working. But what you are saying is that now is the time really to think about a whole different way of working so that you can accommodate and use all these levers you’ve just described.
Roman Belotserkovskiy: Absolutely. I think that’s exactly right, and it’s an interesting convergence of, if you will, “macro forces.” We have seen this evolution of technology, artificial intelligence, that’s been bubbling up, but not really being widely adopted enough in procurement functions. For the last 18 months, it’s been maturing. There have been lots of use cases. And then you also now have this confluence of geopolitical factors that, in a way, with a lot of the clients I’m talking to, those two forces are converging. So, technology and artificial intelligence, and the deployment of all these new tools, is a solution to the geopolitical problem and the problem of how you create value in this much more complex world. All of this is becoming two parts of the same puzzle. How do we reinvent procurement for this new world?
Daphne Luchtenberg: Beautifully said.
Riccardo Drentin: This is also a transformation about people, capabilities, and the task force. We see now the development of the role from an operational to a strategic aspect of it. It’s not only about making sure that goods, services, move from A to B or are built in an effective way, but ultimately how they connect to the world and to the clients.
Daphne Luchtenberg: And I suppose to some extent—you talked earlier about some people are taking a wait-and-see approach—there’s kind of a wait-and-see approach, but also things you can be doing in the background that you want to build regardless of what happens in the marketplace, right?
Riccardo Drentin: Absolutely. I sense the feeling of guiltiness to have a pure wait-and-watch approach because, in reality, we are missing a great opportunity, and that is what executives have been telling me in the past few weeks. While the posture in the outside world may be passive, in reality, within the company, there is a sense of energy change that I have not seen in the past decade.
Daphne Luchtenberg: Fantastic. Interesting to see. Interesting to watch these developments and see how they help us move forward. So clearly there’s a lot to think about. We could easily fill another few hours talking about this ever-changing topic, but as we’re coming to an end, it would be great to hear from all of you about what you would suggest the starting point is for leaders to navigate tariff exposure. Valerio, let me come to you first. What are some of the things you’re talking to your clients about starting now?
Valerio Dilda: Daphne, I would say the first thing is that waiting is not an option. As a matter of fact, what we see most active players doing right now is defining scenarios and preparing also for the worst-case scenarios with decisions that, in terms of short-term and long-term topics, are important to take today, in light of potential scenarios that could unfold in the future. And with that, taking advantage compared to the competition by activating some of the decisions sooner rather than later.
Liz Hempel: I think, as Valerio mentioned, there are a lot of actions that organizations can take right now that are really no-regrets moves. For example, reducing leakage. I heard a great statistic the other day: 20 percent of auto components never completed their USMCA paperwork from the 2018 tariffs, where they’re actually eligible right now. The paperwork is too onerous, or they never got around to it.
Other examples: things around helping you manage your cash flow, taking advantage of avenues that already exist, bonded warehousing, and free trade zones. We’re still in a period of relatively high volatility around tariffs. So, [it’s about] actually taking advantage of those avenues to help you work through what you can, while you can, and control what you can.
And then I’ll say maybe the other way is to think about your other no-regrets moves, even on a longer-term scale. For example, if you’re investing in facilities for growth anyway, really thinking strategically about where you want to put that footprint in a different way because there is a first-mover advantage.
A great example, in the first few weeks after the tariffs in the February or March time frame, we saw lead times for machine equipment, things like CNCs [computer numerical controls] or lathes, that expanded from 12 months to 18 months. So, in this period where you have relatively high exposure, really thinking through, “Where do I want to be long term?,” and starting to get ahead of those moves can help change your competitive position relative to what your peers may be doing.
Daphne Luchtenberg: Roman, over to you. What are you talking to your clients about? What are the two, three things that you are advising clients to start thinking about and doing right now?
Roman Belotserkovskiy: I think I tend to go back to the fundamentals. I think the world is changing. So, as a procurement and supply chain leader, I think question number one is, “What is your real mission to help the organization, to help the business to be as successful as possible?” I always tend to say procurement supply chain should not have its own agenda. Its agenda is really, “How do I make the business successful? What does success for the business look like in this new world?” That may have shifted. So it’s really important to be close to your business partners, to your executive team, to your board, to understand what those priorities are.
During times of inflation, we saw how, instead of cost, we focused on just making sure supply was available. Is that what it is now? Is it the optionality? Is it the resilience? How do we make sure manufacturing can continue operating on securing supplies while helping with cost, while helping with agility? There are many priorities that you’re facing. So, what is the right set of priorities? And making sure you are aligned on that with your leadership team, broadly speaking, is fundamental.
I think the second question is table stakes. Do your people really understand exposure, and do they really understand the supply chains? There are some fundamentals that you have to build that were not as critical until now, and many organizations operated perfectly successfully without having deep visibility into their supply chain. That may not be viable anymore. So you probably need to understand your supply chain and the economics of it much better now, just to do basic things like react to a supplier’s request for escalation, to which you may not have a response unless you really understand the cost base, you really understand the tariff and how it applies and what it means for the product price. So suddenly, the should costing we always talk about may be a must-have across most of your products if you’re exposed.
And then the third point is what we talked about: the operating model. The time to act is now because the world is not going to get any simpler. So, how do you integrate technology, upscale your organization, reorganize toward this more complex work? I think this is the time to start getting ahead of that problem.
Daphne Luchtenberg: Thanks so much. Riccardo, what are the starting points that you would suggest leaders take?
Riccardo Drentin: Thank you, Daphne. Here in Asia, clients should take the opportunity to work on a clear operational global strategy, getting transparency, and building their capabilities. On global strategies, this is a unique opportunity for Asian players to expand their reach beyond their own countries. As probably 20 years ago, Western companies were entering Asia, now is the opportunity to do vice versa. That is the global strategy that I’m talking about. And with that one, it’s imperative for us to create full transparency of the value chain to understand where to create value for the company. And finally, building those digital capabilities within the organization that will allow a fast and timely implementation.
Daphne Luchtenberg: Thanks so much. This has been a fascinating conversation. Obviously, you know, no one can predict the future. Let’s watch this game as things change. But thank you so much for joining us.
Valerio Dilda: Thank you, Daphne.
Liz Hempel: Thanks, Daphne.
Roman Belotserkovskiy: Thank you so much, Daphne. I really appreciate this conversation, and let’s connect again in a couple of months’ time.
Riccardo Drentin: Thank you, Daphne, and very excited to see what the future holds for us.
