“Everybody has a plan until they get punched in the face.” Mike Tyson may well have been talking about tariffs. These “economic punches” can drastically alter the cost structures of private equity backed companies, particularly those dependent on global supply chains.
For sponsors, whose success hinges on portfolio company operational efficiency and value creation, addressing these challenges with agility and foresight is not just important—it’s essential.
The following five step checklist can help PE partners and portfolio management navigate a complex and uncertain tariff landscape. Moreover, by following the framework PE firms can safeguard (and grow) the value of their portfolio companies in a dynamic economic environment.
Step 1: Conduct comprehensive cost analysis and benchmarking
- Granular cost breakdown: Deep dive into cost components—direct materials, opex, labor, SG&A, overhead, and logistics—to understand how tariffs may inflate costs.
- Supply chain mapping: Map the entire supply chain, highlighting dependencies and vulnerabilities to tariff-induced cost increases.
- Advanced benchmarking: Leverage industry benchmarks and peer analyses to identify inefficiencies and set targets aligned with best practices. Use cost intelligence tools for real-time insights.
- Actionable insight: Transform findings into prioritized cost-saving initiatives with clear ownership and timelines.
Bottom-line: Conduct a comprehensive cost analysis and benchmarking to identify cost-saving opportunities across the entire value chain, from raw materials to end-customer delivery.
Step 2: Re-engineer and diversify the supply chain
- Supply chain resilience: Assess reshoring, nearshoring, or expanding supplier bases in tariff-exempt countries to minimize exposure.
- Supplier partnerships: Forge long-term relationships with suppliers, negotiate bulk discounts, and explore joint ventures to achieve mutual cost benefits.
- Technology deployment: Use digital platforms like supply chain management software to enhance transparency, reduce waste, and predict disruptions.
Bottom-line: Strengthen supply chain resilience through diversification, strategic partnerships, and technology-driven optimization.
Step 3: Drive operational excellence through lean initiatives
- Adopt lean principles: Eliminate waste in processes, optimize material/resource usage, and adopt best-in-class inventory practices to reduce excess costs.
- Process automation: Implement advanced automation tools, including robotic process automation (RPA) and artificial intelligence (AI), for repetitive tasks and complex workflows.
- Workforce empowerment: Build a culture of continuous improvement by engaging employees in cost-optimization efforts and rewarding innovative ideas.
- Measure performance: Define measurable outcomes such as cost-per-unit reduction and efficiency gains to track success.
Bottom-line: Optimize operations through Lean principles, automation, and employee empowerment to drive cost efficiency and improve productivity.
Step 4: Optimize profit within product portfolios
- Product profitability analysis: Use advanced analytics to evaluate the profitability of each product, factoring in tariff costs, production expenses, and operational overhead.
- Portfolio optimization: Identify high-margin products for growth investment while de-emphasizing or discontinuing low-margin products, particularly those disproportionately impacted by tariffs.
- Cost-to-serve analysis: Assess the total cost associated with manufacturing, distributing, and supporting each product to ensure alignment with profitability goals.
- Resource allocation: Redirect resources, such as marketing budgets or production capacity, to products or lines offering the highest returns.
- Rationalization strategy: Develop a strategic framework to rationalize the product portfolio, streamlining offerings to focus on the most profitable and strategically valuable items.
Bottom-line: Using a bottoms-up approach, optimize product portfolio by focusing on high-margin products, determining way to reduce the cost-to-serve, and strategically allocating resources.
Step 5. Strengthen financial management and risk mitigation
- Scenario planning: Build detailed financial models that simulate various tariff scenarios to prepare for best and worst cases.
- Working capital optimization: Enhance cash flow by accelerating receivables, improving inventory turnover, and extending payment terms.
- Risk mitigation: Hedge currency and commodity risks where applicable and invest in insurance policies to safeguard assets against operational disruptions.
- Cost governance: Establish a cross-functional cost governance team to monitor, adjust, and sustain cost-optimization efforts.
Bottom-line: Enhance financial resilience through robust scenario planning, optimized working capital, determine risk mitigation strategies, and implement effective cost governance.
A resilient PE-backed business, like a skilled boxer, anticipates the blows, dodges the hits, and innovatively counterpunches. Tariffs and other economic disruptions are inevitable punches that cannot always be avoided, but with careful planning and execution, sponsors can help their portfolio companies turn these challenges into opportunities.