Personally, and professionally, the impact of recent U.S. government policy around trade and tariffs is felt by all of us. From a business perspective, tariffs represent a major concern for companies looking at corporate goals and metrics in both the short and long-term. It has now become unclear exactly what the cost of doing business will be, and how consumer demand may shift, based upon personal preferences and spending ability.

But this is not really uncharted territory. Over the last decade, the world has faced many disruptive events: Brexit, COVID, the Suez Canal, geo-political conflicts, climate changes, and so on. Each one is unique in its nature, but they all have similar impacts on supply chains and manufacturing, causing breaks in global supply, extreme fluctuations in demand, and unknown costs and barriers to competing.

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Tariffs & Virtual Twins

The need to react to unexpected global disruption is now a fundamental requirement for all companies – tariffs are only the latest incarnation of what manufacturers have to face. In each case, business leaders in supply chain and manufacturing are forced to face with the same basic questions:

1. What is the impact of the disruption?

2. What should I do now?

3. What can I do to be better prepared in the future?

Prior to globalization of trade and the increase in product and supply chain complexity, the first two questions were difficult, but not impossible to solve. Because of that, the third question was largely ignored or de-prioritized. Today (with COVID being the pivot point, in my opinion), all three questions have become a) critical and b) impossible to answer without the help of technology.

This is where virtual twins and AI capabilities have become essential to helping companies become agile and resilient to disruption. Let’s look at how they help with each of the basic questions.

What is the Impact of the Disruption?

This was the biggest (certainly the first) question from companies at the start of COVID, and led to much analysis and investment in the “control tower” concept. A control tower is only part of the solution. What people were actually asking for was a precise digital representation of the entire supply chain with end-to-end and top-to-bottom detail and real-time operational status of facilities, resources and products – also known as the virtual twin.

With tariffs, the virtual twin acts as a source of truth that enables companies to see the current state of production and fulfillment, the source of all materials, and the process by which inventory and products are moved across borders before reaching customers. Additionally, it allows companies to immediately identify vulnerable points of supply, new costs and opportunities to leverage existing contingencies based upon real-time availability and capabilities.

What Should I Do Now?

Even with a precision virtual twin, the complexity of global supply chains and the number of possible business permutations are beyond human comprehension to evaluate and analyze effectively. However, traditional AI methods are now adept at considering competing business priorities to balance supply and demand along with any number of physical and logical constraints. Used with the virtual twin model, manufacturing and supply chain leaders can use AI to experience unlimited what-if scenarios to determine tactical responses.

Tariffs don’t represent a physical constraint, but cost is a major driving factor in the optimization of the supply chain and production plans. Experimentation also allows companies to play games with the possible limits. For example, what tariff percentage might we be able to absorb costs to protect margin without having to pass all the costs along to the consumer and impacting demand? These are logical questions that are extraordinarily difficult to answer without technology.

What Can I Do to Be Better Prepared in the Future?

One of the stated goals of recent policy is to bring manufacturing back to the United States –essentially on-shoring production that has developed in areas previously seen as economically more cost-effective. Without debating the policy, let’s look at the basic decision process to evaluate strategic changes to mitigate the impact of tariffs on production locations:

a. What is the increase in operational costs most likely to be based upon movement of inventory and products?

b. What would the reduction in operational costs assuming similar production capabilities in the U.S.?

c. What is the capital investment required to expand or build new manufacturing capacity?

The virtual twin of the supply chain will help us answer questions a) and b) by applying AI to the existing model of the enterprise and a variety of what-if models that can rapidly be created. Question c) requires a virtual twin model of production systems, so that we can accurately evaluate what our new or changed facilities and manufacturing process should look like. These virtual twins need to work in orchestration so that we can ensure confidence in what is likely to be billion-dollar decisions.

The precision of the virtual twins is so important because there are so many factors to consider. For example, it’s unclear whether there will be enough skilled workers to support a resurgence in manufacturing, so robotics and automation need to be considered as part of the manufacturing process. The smallest of details can have such a major impact on the final result.

There are also other ways to address the challenges in the short and mid-term. One strategy might be rapidly redesigning products to reduce the reliance upon supply and parts that need multiple border crossings, another great leverage of the virtual twin and what-if simulation.

Today’s uncertainty will undoubtedly be the biggest barrier to making an investment in digital transformation as budgets become frozen pending a more confident outlook. The challenge is that the next disruption is right around the corner, and from another unexpected direction. There is rarely a “best time” to wait for, but there is never a “wrong time” to make a start.