Fastenal is thinking about how to apply lessons learned over the last five years to its supply chain resilience plan.
As a large distributor of fasteners, Fastenal uses a significant amount of steel — a material often targeted for import tariffs. During the Trump administration’s trade war with China, the company struggled under the two-pronged pressure of increased tariffs and rising inflation, Fastenal CFO Holden Lewis said in a April 11 earnings call.
Before the coronavirus pandemic upended supply chains, tariffs and the trade war were top of mind for businesses across industries. As the U.S. presidential election nears, those concerns have started to come back around.
“A question that we continue to get from investors is around the impact of potential tariffs based on the outcome of the November election,” UBS equity researcher Chris Snyder asked Fastenal executives during the call. “[I] would be interested in your guys' perspective and what that could mean for the business.”
The trade landscape shifted under the Trump administration as it worked to pull out of the Trans-Pacific Partnership and replace the North American Free Trade Agreement. Along the way, the U.S. levied hundreds of billions of dollars in tariffs on imports from China and other trading partners in 2018. Economic uncertainty eventually led supply chain leaders to fret over a potential recession and weigh decisions about reshoring.
“Our execution wasn't as crisp as we might have liked during the first period where there [were] tariffs,” Lewis said on the call.
But those challenges yielded lessons learned. Fastenal President and CEO Dan Florness said that the fastener distributor’s main defense against any future tariff-laden environment is supplier diversity.
“For this commodity, for this fastener, for this — whatever it might be — you have multiple sources of supply,” Florness said. “So, if you have a disruption, you can pivot.”
Over the last five years Fastenal has made ongoing efforts to not only diversify the number of its suppliers, but where they geographically obtain products, according to Florness. He further noted that it becomes a trade-off when it comes to balancing those efforts with cost effectiveness. Customers understand they’re paying more for reliable supply.
Fastenal aims to be a large customer for its large supply base. By being a reliable customer and paying in cash, the company hopes suppliers will be more likely to prioritize it in the event of a supply constraint.
The company has also since invested in technology to better “understand the environment” and communicate across the business to better manage pricing and procurement processes.
The impact of tariffs are twofold, the CEO said.
“It changes the math exercise of the trade-off,” he said. “It increases the cost of the customer supply chain, [and] that will manifest itself in our revenue growing [a] little bit faster because we're pricing that as it's coming through. But our covenant with our customer is to always have an incredibly reliable source of supply, impeccable quality in that supply and a cost-effective supply chain and we balance those every day.”
It’s a balancing act, Florness said. And it's one the company said it intends to uphold, no matter what happens in November.
“I don't know what the future holds,” Lewis said, referring to the possibility of a return to a tariff environment. “But to the extent that there's anything that moves up the cost of product, we think we're better served to execute effectively than we were five years ago.”
