Strategic Fragility: What New Tariff Volatility Reveals about Supply Chain Stability

By Dr. Iris Heckmann, VP Product Strategy & Industry Solutions

Supply chain stability is an illusion. What used to be considered minor turbulence - seasonal shifts, small disruptions, currency moves - has long become standard operating context. But the latest wave of erratic U.S. tariff policy points to something more profound.

We’re not dealing with noise in the system. We’re witnessing a rewrite of the rules. Many decisions still rest on outdated assumptions about trade predictability. It’s time to question those and to prepare for a reality where volatility is structural, not exceptional.

Not Just Volatility – Structural Instability

Sudden tariff hikes, shifting political agendas, and conflicting policy signals – often communicated through media soundbites rather than official channels – make it almost impossible to rely on past planning logic. And the implications are not tactical. They’re deeply strategic.

Companies are forced to ask fundamental questions: Where should we manufacture? What cost assumptions can we still trust? Which partners, regions, and infrastructures will remain viable over the next five to ten years?

This isn’t just about supply chain optimization anymore. It’s about redefining the foundation of global production ecosystems in a world where the terms can change overnight. Rethinking stability means accepting fragility as a starting point – and building strategies that don’t depend on favourable conditions, but can withstand adverse ones.

The Pharma Industry Case: High Stakes, Low Margins

One example that illustrates the impact particularly well is the pharmaceutical industry. Around 70% of the active pharmaceutical ingredients (APIs) used in the U.S. are imported – and a significant portion of those come from China and India. When the U.S. administration recently announced tariffs that could soon include pharmaceutical components, the sector took notice.

Margins in pharmaceutical distribution – especially for generic drugs – are notoriously thin, with some distributors operating at margins as low as 0.3%. This leaves almost no buffer to absorb cost increases from import duties. By contrast, manufacturers – especially those producing patented or branded products – often operate with significantly higher margins and may have more flexibility to absorb cost shocks or pass them on through pricing. Distributors, however, lack that cushion – making even small changes potentially critical to profitability. Even a 10-15% tariff can destabilize distribution economics, pushing companies to reconsider sourcing strategies, shift production locations, or withdraw from certain markets altogether .

But these aren’t decisions that can be taken lightly. Switching API suppliers isn’t like switching packaging. It can take months – sometimes years – due to regulatory approvals, quality controls, and production constraints. In short: tariffs create a time-sensitive dilemma with long-term consequences.

What Helps Companies Navigate This Terrain?

Rather than relying on agility alone, companies need a more structured, resilient approach to planning under systemic instability. A good starting point is the systematic development of risk scenarios. These scenarios should reflect different types of shocks and their potential impact across the supply chain and business model.

Below are three core scenario types, along with recommended actions. These are high-level strategic directions that need to be carefully evaluated and tailored to each company’s specific context:

1. Scenario: New U.S. punitive tariffs on China or other countries

These often occur with minimal advance notice and can impact hundreds of product categories.

Recommended action: Spread sourcing across multiple countries in Asia ("China+1" strategy) and build buffer stocks for critical inputs during low-tariff windows. The "China+1" strategy refers to diversifying procurement and production by adding one or more alternative countries alongside China—rather than relying on China alone. In the pharmaceutical sector, this often means strengthening partnerships with suppliers in India, which already accounts for a significant share of active pharmaceutical ingredient (API) production for the U.S. market.

2. Scenario: Extension of tariffs to allied trading partners (e.g., EU)

Even countries previously considered "friendly" may suddenly be impacted by policy changing tariff policies.

Recommended action: Explore nearshoring or partial relocation of production to the U.S. or other trade-aligned countries. Nearshoring refers to moving production or sourcing closer to the target market, typically to neighbouring or economically aligned countries, to reduce lead times, mitigate geopolitical risks, and limit tariff exposure.

As the downsides of globalization become more pronounced, some companies – particularly in the automotive sector – are going even further by pursuing full localization. In these cases, all steps of the value chain are concentrated within a single country or region, marking a clear departure from globalized supply chain models.

3. Scenario: Tariffs on critical inputs (e.g., APIs, semiconductors)

These affect the entire upstream chain and can have disproportionate impacts due to limited substitutability.

Recommended action: Identify high-risk inputs and develop regulatory-cleared alternatives early. Establish dual sourcing or strategic partnerships for long-term availability. This is not a quick fix in the current environment – it requires foresight, investment, and coordination across regulatory and operational functions. But this kind of proactive thinking is essential if we want to avoid being caught off guard again.

These fundamental scenarios should be further broken down into detailed scenarios and tested for variations in scope, timing, and exposure. This includes assessing thresholds (e.g., tariff rate vs. margin), compliance timelines, and geographic alternatives.

Rethinking stability isn’t about abandoning long-term planning. It’s about anchoring planning in reality: a reality where trade rules are unstable, tariffs arrive without warning, and decisions have to hold up under pressure. For industries like pharma, that reality is already here.

In the next post, I’ll explore what meaningful disruption scenarios look like when stability is no longer a given – and how we can use them not just to survive uncertainty, but to plan through it.