Much to the chagrin of many of my readers, particularly those who are University of Georgia football fans, I am an alumnus of the University of Notre Dame and an avid fan of its football program. Unfortunately, although it came close this year, Notre Dame (ND) has not won a football national championship since 1988, due in no small part to its diminutive placekicker, Reggie Ho. While Reggie did not have the strongest leg of ND’s placekickers, he was the most accurate. ND’s head football coach at the time, Lou Holtz, indicated that having a kicker like Reggie, who was pretty much guaranteed to make any field goal inside of 45 yards (and very likely to miss any kick beyond that distance), was a great luxury for his decision-making process.
He knew if ND had the ball around the opponent’s 25-yard line, he could depend on three points, but if they were outside the 25, he had to either go for a first down or punt. The certainty provided by Reggie Ho’s accuracy made it much easier for Coach Holtz in terms of play calling and decision making in games, helping lead to an undefeated season and a national championship. Decision-making with reduced uncertainty is even more important when it comes to running a business or any other kind of organization that provides a product or service.
In my operations and supply chain management courses, I provide many examples to my students on how uncertainty and its “cousin,” variability, can make it very difficult to manage an organization’s processes and supply chains. For instance, businesses aim to build processes with expectations of given performance levels for both labor and machines. However, those processes will not execute their function well if labor is unavailable, poorly trained, or has high rights of absenteeism. Similarly, the processes will not perform as expected if machines break down frequently or produce erratic output. Firms reduce these uncertainties by locating where there is a large potential workforce, by training that workforce well, and by purchasing high-quality machines that they consistently maintain. Similarly, firms try to reduce uncertainty in demand by consistently updating their forecasts and limit supply chain uncertainties by using multiple suppliers and multiple means of transportation. However, we all know that we live in a probabilistic world, and therefore, we cannot totally eliminate uncertainty and variability, but in many cases, such as those indicated above, we can do our best to mitigate such uncertainty.
However, sometimes, uncertainty cannot be mitigated because the potential outcomes are too varied to be addressed. This is the case with how the Trump administration is handling tariffs. Depending on what “camp” you may be in, you may be in favor of the very high reciprocal tariffs being imposed by our country, or you may be against them. However, everyone agrees, even the tariffs’ staunchest defenders, that they will cause near-term inflation and disruption of our financial markets. (NOTE: I am writing this column on Monday, April 7, coming off two days in which stock values have gone down a record $6.6 trillion, breaking the previous record during COVID of $4.4 trillion.) Administration officials, such as Peter Navarro, President Trump’s senior trade and manufacturing adviser, argue that these tariffs are the first step in an American renaissance in manufacturing that will lead to a great economy. Most others, including economists and business leaders, believe the tariffs will boost inflation and lead to a recession (e.g., JPMorgan has raised its probability of a recession to 60%). However, the bigger problem is not the tariffs themselves, but the uncertainty they have brought about.
As I indicated above, uncertainty is the most difficult obstacle businesses face. Because of how the Trump administration has handled these tariffs in the past few weeks, businesses face significant uncertainty. Early on, the administration levied tariffs against Canada and Mexico, and shortly thereafter, it suspended them. The administration has indicated tariffs were a tool to improve its negotiating position, and now it is saying it will not negotiate. Vietnam came to the table offering elimination of tariffs, but Mr. Navarro has indicated that is not enough. It seems like the administration might be “moving the goal posts” to reach a settlement on these tariffs, therefore generating more uncertainty.
The administration wants US companies to move manufacturing back domestically. However, it is extremely difficult for companies to make strategic (long-term, difficult to “undo”) decisions such as capital investment, supply chain deployment, market selections, and hiring when there is so much uncertainty. Unfortunately, while the tariffs might be a negative on their own, the uncertainty they have wrought is much worse. If the administration really wanted to increase the domestic manufacturing base, it could have provided much more uncertainty through deregulation and investment and workforce incentives.
A good friend of mine who lives on the other side of the country, but reads my column regularly asked me what advice I would be giving concerning tariffs. I told him that given the uncertainty, I have no other advice (both for your business and investments) other than not to make any knee-jerk reactions…study your options now, but don’t throw switch on any of them until you know more. I hope this helps, and I hope you enjoy a great Masters Week!
