Tariffs & Trade: Raw Materials (Part 1 of 3)
eliza hl
Published Date
Income|Outcome has always been about modeling real-world business dynamics—and right now, tariffs are reshaping corporate decisions in real time. For many companies, the cost of raw materials is rising, supply chains are constricting, and pricing strategies are under pressure. To reflect this reality, we are updating our 'tariffs' content to align with what executives are facing in the field.
This week, we’ll explore the ripple effects of tariffs across business decisions. Today’s post focuses on raw materials—what happens when tariffs hit your supply chain, and how that pressure shows up in sourcing, supplier relationships, and competitive strategy. Tomorrow we’ll dig into cash flow implications. On Thursday, we’ll close with longer-term issues like CapEx and market positioning.
Tariffs and Raw Materials: Navigating Rising Costs
When tariffs are imposed on raw materials or components, businesses feel the impact immediately. Price increases ripple through the supply chain, forcing adjustments in sourcing, pricing, or margin expectations. In some cases, suppliers pass on more than the actual tariff cost—adding a markup that quietly eats even further into the profitability of their customers. Recalculating landed costs, challenging supplier pricing, and rethinking sourcing strategy become part of daily Purchasing operations.
Passing Along the Tariff Cost
One of the first decisions for management is whether to absorb the cost, pass it on to customers, or try to offset it elsewhere. Each path carries trade-offs:
- Absorbing the Cost can help protect customer relationships but puts pressure on margins. It’s often a short-term fix, not a long-term plan.
- Passing It Through—for example, as a line item on invoices—can preserve profitability, but opens you up to scrutiny. Customers may question whether the increase is justified.
- Offsetting Internally by cutting costs or finding efficiencies may soften the impact, but that’s only viable if you’re not already running lean.
The Competitive Signal
How you handle tariffs sends a message—to customers and to competitors.
Say you’re selling a $30 component for $100. That’s a solid margin. Now imagine a 50% tariff hits, raising your cost to $45. What do you do?
- Option A: Absorb the cost.
You keep the price at $100, and your margin drops from 70% to 55%. It might feel like the safest move for customer retention—but it invites questions. If your customer knows tariffs were imposed but sees no price change, they may wonder how you’re covering the difference. Are your margins that wide? Are you cutting quality? Are you desperate to hold market share? - Option B: Pass the tariff through directly.
You add $15 and sell for $115. Now your customer can reverse-engineer your cost: they know the tariff was 50%, and they’ll quickly deduce that your pre-tariff cost was around $30. That puts your original pricing in a new light. Why were they paying more than triple your cost? Suddenly, you're defending your entire value proposition. - Option C: Keep your markup intact.
You apply the same margin to the new $45 cost, and now you’re charging $150. That preserves profitability, but it may price you out entirely. Your customer might walk.
In all three cases, your move doesn’t just affect the sale—it may affect how your competitors respond. If you hold prices steady, a competitor might use that to undercut you or signal “price stability” to the market. If you raise prices, they may take the hit themselves to gain market share. And if you’re transparent about tariffs, others may follow your lead—or exploit your openness to position themselves as a better deal.
Tariffs aren’t just about cost—they’re about positioning, trust, and how much of your internal structure you’re willing to reveal.
Adjusted Pricing: Justified or Inflated?
When suppliers raise prices due to tariffs, how do you know the increase is legitimate? A 10% price jump might reflect a 5% tariff plus an unexplained bump. Without asking, you may end up normalizing inflated costs—and eroding your margins in the process.
Approaches vary, but here are a few of the more strategic responses we’ve seen or discussed:
- Asking for a breakdown of cost changes
- Negotiating partial offsets or rebates
- Adjusting contract terms
- Exploring alternative suppliers
Your approach under pressure can reveal a lot about your team’s operational resilience—and your ability to protect long-term profitability.
Ripple Effects Beyond the First Purchase
Tariffs don’t just raise prices—they create knock-on effects throughout the business:
- Inventory decisions: Do you stockpile raw materials in anticipation of further increases?
- Sourcing shifts: Can you move quickly enough to replace high-tariff items with alternatives?
- Customer trust: Are you communicating pricing changes clearly—or leaving room for misinterpretation?
- Forecasting challenges: Are your landed costs and pricing assumptions still valid?
What starts as a tariff on a single component can ripple into supplier renegotiations, internal budget cuts, and difficult conversations with customers.
What Happens Next?
Tariffs don’t just affect raw material costs. In Part 2, we’ll look at how they strain cash flow, disrupt supplier payments, and create new risks around receivables. In Part 3, we’ll explore how tariffs influence long-term decisions around capital investment, pricing transparency, and competitive positioning.
Learning About Tariffs & Their Impact
When you want to introduce targeted, real-world pressures like tariffs, we can bring them in as discussion points or as simulation dynamics—depending on your audience and goals.
Tariffs can be run as:
- A discussion module inside any workshop 6 hours or longer
- A discussion module inside IO | Second Exposure*
- A standalone simulation: IO | Tariffs (1–1.5 days)
- A simulation overlay in IO | Second Exposure* + Tariffs (1–1.5 days)
Each approach connects tariffs to financial literacy and decision-making—not as isolated content, but as pressure that interacts with pricing, sourcing, margins, and cash flow in real tim
*IO | Second Exposure: For teams who’ve completed an initial IO workshop, Second Exposure offers a deeper run through the simulation. It builds on what they've seen—bringing more context, more confidence, and higher-stakes decisions. Teams encounter competitive shifts, resource constraints, and evolving priorities in real time—all without repeating the basics. The experience deepens their financial thinking, sharpens their judgment, and stretches their ability to adapt under pressure.
