How Dynamic Contracts Help Manufacturers Overcome Tariff Uncertainty

U.S. manufacturing is at an inflection point. In addition to August marking the sixth straight month of industry decline, the country also lost 12,000 manufacturing jobs in a continued slide from its peak in February 2023. As factories and supply chains attempt to recalibrate, there is one factor that continues to loom large over both: tariff uncertainty.

For suppliers, this is more than just a policy challenge. Many supply chain executives have been left scrambling to restructure existing contracts, switch vendors and identify new options that won’t be impacted by regulations. One of the biggest problems is that static contracts are often built for times of stability, and in this industry, these are anything but.

As the manufacturing sector continues its downward spiral, supply chain executives should rethink how they negotiate, manage and evolve their current agreements. That’s where dynamic contracts come into play: frameworks that can adapt in real time depending on new priorities, changes in pricing, geopolitical conflict and much more. 

The ripple effect of global trade

According to a number of U.S. manufacturers, the challenges associated with tariffs uncertainty are close to equaling the beginning of the COVID-19 pandemic. Product isn’t arriving, contracts are canceled, and suppliers need to be switched at the last minute just to name a few. When massive global events make contractual obligations impossible to fulfill, manufacturers and suppliers have often looked to force majeure clauses as a way out.

However, these clauses require very specific language and are also open to the interpretation of the court ruling over the decision. Contracts that spell out “tariffs” or “government-imposed trade barriers” as force majeure events may be protected, but if the specific language isn’t crystal clear, the contract may be impossible to void (and fulfill). Then what do you do?

While trade policy over the past year has been volatile and rapidly shifting, the majority of suppliers' contracts are likely not eligible for force majeure. Meaning?  Both suppliers and manufacturers need to work together to create agile, dynamic contracts that allow for wiggle room and proactivity when outside events occur.

The role of dynamic contracts

Historically, businesses have relied on static contracts to conduct operations. Essentially, what you see is what you get: clauses don’t change, rules and regulations are rigid, and both parties are beholden to them. Dynamic contracts take this a step further by automating contract creation with rules that insert tailored content and clauses into documents based on various external conditions or data. Perhaps the most important aspect of dynamic contracts in this day and age is the ability of AI-powered analysis to identify potential problem areas and provide suggestions to resolve the problem before it even occurs.

One of the biggest ways technology can support this effort is by quickly and accurately spotting these issues before they occur. For example, contract lifecycle management tools can identify all contracts with tariff-related language and compare levels of protection against external events. They can also identify specific policy risks and deadlines on the horizon, thereby providing suggestions on which contracts to re-negotiate and how to communicate these risks clearly with your partner.

So just how can supply chain execs look to implement these capabilities within their tech stacks? There are a few initial steps I’d highly recommend for suppliers to make this adjustment – let's call it the framework for building a resilient supply chain.

o   Audit existing contracts to determine how rigid they are, any changes that can be made, and just much risk they bring to business operations

o   Assess the flexibility of critical partners and third parties. This is a crucial step to help focus efforts on high-impact, adaptable areas within your contracts.

o   Incorporate adaptive clauses such as tariff triggers and pricing escalators where possible. This is the step for suppliers to protect themselves against future regulatory and global changes.

o   Incorporate technology that can provide real-time contract updates and analytics, leveraging the power of AI to help suppliers spot and act on changes to their data, processes, and much more.

o   Develop internal collaboration with legal, procurement, and finance teams. One of the biggest mistakes suppliers make is working in siloed teams that don’t incorporate financial and legal guidance from other business stakeholders. When every piece of the equation is in lockstep, the potential for errors decreases dramatically.

It’s important to note that this list is by no means exhaustive and suppliers should constantly be reviewing their contracts, identifying anomalies and working with their partners to remove issues before they occur. However, it’s also an excellent starting point for companies stuck in the revolving wheel of static contracts that cannot adapt to how the tide turns.

Preparing for the next disruption

Volatility and uncertainty are the “new normal.” But now, it’s not even new – it's just a fact of doing business and shows no signs of changing in the near future. The coming months will inevitably bring more disruptions, more policy changes and more headaches for suppliers who are behind the ball.

However, those who take the steps to future-proof their supply chain operations by ensuring their business can adapt quickly to change.