I caught up with Sofeast’s COO, Fabien Gaussorgues, to discuss supply chain endangering risks importers from China are very likely to face in January 2021. Together we compiled this post based on our observations which includes the issues you face (for example, shipping capacity constraints), what causes them, their effects on your business, and our tips for how to mitigate each issue’s negative effects.
1. Shipping capacity constraints
- Causes: high demand for shipping capacity from China; very poor geographical allocation of containers; container ship rotations slowed by COVID restrictions; lower air freight capacity. Many port restrictions in Europe and the USA, some are even closed, requiring more truck shipment and increasing logistic cost a lot.
- Effects: much higher prices and a lot of instability; many more old containers (with leakages) being used, which may lead to serious product damages.
- Recommended actions: close follow up of production schedule with suppliers in order to anticipate delays; loading supervisions (and special dispositions with the freight forwarder) to refuse inadequate containers; consolidation in a central warehouse before shipping in order to optimize space in containers and advance booking.
2. Raw material price increases
- Causes: Chinese demand is higher than normal for raw materials like plastic, silicone, and steel, but there is also a trade war with the USA and Australia which is not helping.
- Effects: Price increases (10 to 50%).
- Recommended actions: track the relevant raw material spot index price (typically in the Shanghai futures exchange) and get the breakdown of your product’s components in order to control your material costs as tightly as possible.
3. A strong RMB
- Causes: a murky mix of national & international politics and market forces.
- Effects: for importers that pay prices indexed in RMB, or that pay in RMB, prices have risen over 7% over the last 6 months; for exporters that well in USD, a lot of margin has eroded and in many cases they have to force pricing re-negotiation (which, in the end, also leads to higher prices for importers).
- Recommended actions: develop differentiated products in order to make more margin; hedge your exposure by negotiating some prices in RMB and others in USD, or by buying RMB derivatives; reduce your exposure to China by sourcing from other countries.
4. Usual Chinese New Year manufacturing risks
- Causes: capacity crunch and high pressure to rush production before CNY (many customers pushing for shipment; some staff leaving early); lack of skills and structure after CNY (some key staff not returning; many factories in a state of total disorganization for several weeks).
- Effects: much higher probability of quality issues and shipment delays.
- Recommended actions: regular communication with the supplier about production planning; building inventory in advance in order not to rush the supplier; close monitoring of quality and production status (typically through product inspections).
Listen to this podcast episode about Chinese New Year’s impact on importers’ businesses.
5. China exerting tighter control over population movement around CNY
- Causes: large population moves and whole-family meals may lead to a resurgence of epidemic in China.
- Effects: certain cities are currently designated in medium- or high-risk areas; local governments add pressure on companies to implement stricter controls and to try to prevent employees from going back to their home towns.
- Recommended actions: plan ahead and be ready for the (small) risk that one of your key suppliers (or one of their own suppliers) is impacted and needs to remain closed for weeks.
🤔 You may find this blog post helpful, too: How to handle Chinese new year disruptions?
6. Some manufacturers have been heavily impacted by the current pandemic
- Causes: demand for certain products is much higher in 2020 and 2021 than before.
- Effects: manufacturers of office/home/sports equipment are far busier and may be harder to work with; manufacturers of hotel/restaurant/shop equipment have much smaller orders and may go out of business; the USA/China trade war is also hurting some factories that have been relying on a lot of USA business.
- Recommended actions: keep a close eye on your key suppliers’ situation. If possible, send someone there to visit them regularly and report any trends back to you (if you cannot visit China right now, factory audits will be an effective solution). If they’re on your shortlist of potential suppliers, perform strict due diligence on them before proceeding with your new order.
This episode of the podcast about validating supplier capacity from abroad is also relevant here.
What are you seeing?
Are you already being affected by any of these supply chain risks? What advice can you share that we haven’t covered here? Let us know by commenting, please.
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