The novel coronavirus has impacted the global supply chain in an unprecedented fashion. The largest companies in the world are being affected by the impacts this is having in the supply chain.
Whether it’s not being able to get parts to their downstream suppliers, their current suppliers not being able to get products from their suppliers, and even suppliers not having access to a laptop to communicate with their clients.
What is the Novel Coronavirus (2019-nCoV)?
The Novel Coronavirus is a virus that is the cause of a respiratory illness that emerged in Wuhan, China. It’s thought to have originated in a large seafood and animal market and has been spreading person-to-person at a rapid rate.
This has caused the Chinese Government to extend Chinese New Year from February 1st, to February 9th to prevent the further spread of the virus.
How is it Impacting the Global Supply Chain?
It’s affecting it in many ways and one of the key things to remember while reading this is that the supply chain relies on the link before it to be strong enough for the next to hold up.
With no labor force, factories can’t produce.
With no raw material suppliers, factories can’t produce.
With no factories producing, there’s no demand for logistics.
When there’s no demand for truckers, the capacity is limited so the trucking companies don’t lose a ton of money.
With no truckers, lots can’t be transported to ports.
When there’s no containers at the ports ready to be shipped, the capacity for sea freight is cut drastically.
When the capacity for ocean freight is slashed, there are less vessels leaving China.
You get the point.
Every piece of the supply chain is heavily reliant on the former. It will all start with factories getting back into production mode. We don’t know exactly what the future has in store, but we do know a few things..
Factories & Production
In order to recognize how it’s impacting your supply chain, it’s important to know the facts of what’s going on overseas.
Major Cities on Lockdown
With cities being on lockdown and preventing factory workers from going back to work, there is no labor force to physically produce the products. While major cities keep quarantine spaces and limit the amount of travel, it’s impossible for manufacturing to start back up.
Some provinces have extended the lockdown from February 9th, to February 17-20th. However, many provinces have rules for some factories in those provinces to open back up earlier (i.e. having a local workforce may help them get back to business sooner.)
Gradual Factory Rollout
It’s estimated about 20% of all factories are already back to work in areas that weren’t as affected by the virus. In the weeks to come, it’s expected that more and more will be opening back up to resume operating.
Week 6 ~ 10-20%
Week 7 ~ 30-40%
Week 8 ~ 60-70%
Week 9 ~ 80-90%
These dates are subject to change as we learn more about the virus and if the government continues preventative measures.
Upstream Supply Chain
Chinese raw materials and parts suppliers are the most vital factories for all production around the world. There is always a big spike in demand right after CNY that most of these suppliers plan for, however, this is an unforeseen issue that will certainly impact the supply from them.
They’re suppliers for the some of the leading global manufacturers and will certainly be prioritizing the most profitable orders first.
With such a big spike in demand, you can anticipate prices to spike short-term during these first few months back. Plan for the pricing to possibly be higher for your products and for MOQs to possibly be raised.
Manufacturer Labor Force
It’s estimated that about ~10% of all factory workers choose to not return back to the factory that they were working at prior to CNY. Often times it’s because they’d like to stay closer to their families or find new opportunities closer to home.
It’s unknown how much the coronavirus will impact this number and in doing so, affect the factory rollout mentioned in the last point. With higher employee turnover rates expected, lead times may be longer as they need to take time to train new staff.
Factories have been closed down for over a month which means they’ve had no income for over a month.
Although many times, they structure their production queues on more of a first-come, first-serve basis, that will likely not be the case here. They will be prioritizing orders in an order of largest, most urgent clients first – for example orders that have been accumulated and promised.
Recurring business and highest profitable orders next. Then will come business that they’ve accepted orders for already and can make easily/quickly.
Lastly they will take on new business – particularly business that requires that they focus any efforts outside of running the production lines.
That includes orders with new tooling/moulds, clients they’ve never worked with in the past, orders that require further product development.
It’s especially important to approach new potential suppliers with all the required information to properly quote and produce your product. You can receive a downloadable checklist by going to www.noviland.com/#live.
It’s important to remember that every piece of the supply chain relies on the upstream supply chain to work smoothly. Taking out a single link to the chain can damage the overall supply chain greatly.
In this case, it’s relying on factories getting back to work to manufacture as much as possible.
Trucking in SE Asia
The trucking industry in China is heavily reliant on having enough demand from products needing to be moved to warehouses and ports to support the trucking industry.
As more factories start to open back up and produce, trucking companies will start to build their trucker workforce back up. It’s vital to remember that this industry is often an industry that runs at capacity – meaning there’s typically always demand for truckers.
Truckers are also vital to the upstream supply chain – getting commodity goods, raw materials, & parts transported to factories to be able to produce orders.
Not so much while the majority of factories are closed.
This tends to be the most common method of transportation for Noviland clients. Ocean freight is severely impacted by not having any products to ship.
Even as factories start to open back up, they will depend on the trucking companies to return to work to transport those goods. The ocean freight industry limits the number of vessels that operate in China and will allocate those otherwise useless vessels to support demand in other countries.
The latest estimates indicate that 45% of capacity has been removed from the trans-pacific ocean freight lanes. That’s resulting in more blank sailings and more cargo getting rolled.
Although all ports other than Wuhan are still operating, Wuhan is a major port that a significant amount of containers often times go through every year. It has direct access to the Yangtze River which is often referred to as the “golden shipping route”.
Expect major delays at ports and several rolling cargo. Add an extra few weeks to your lead time for the next few months to make up for the possibility of your cargo being rolled onto a future shipping date.
Keep in close contact with your freight forwarder to check for these blank sailings. Blank sailings are sailings that have been canceled by the carrier.
It’s far more common for them to happen during the time where there is less demand for the carrier to utilise one of their ships. It’s currently estimated that about 50-70% of shipments are going to encounter blank sailings during this week.
This may seem like the next logical option to get your goods quickly and avoid blank sailings, however, this has also been choked by the coronavirus.
Much of air freight is done through passenger planes and with travel to and from China being limited, it has limited this shipping option. About 90% of all passenger capacity to and from China has been canceled through the end of March.
Passenger bellies account for 45% of the TOTAL capacity in the TBEB and FEWB trade lanes; this amounts to a significant loss of capacity in these critical trade lanes
It’s simple – no passenger demand = no passenger flights and therefore, no planes to take the goods.
Limited supply of planes to transport goods via air freight means you’re likely to see much higher rates than before for air freight.
What Can You Do?
The coronavirus has taken this out of the hands of every part of the industry. While it continues to develop, you’ll be able to make more educated business decisions – but here’s a few things that are in your control.
Be Hyper Communicative
Keeping an open, honest line of communication with your suppliers is especially important here. If you don’t hear back from them immediately, recognize that they’re taking on a situation that is unprecedented.
This virus has surpassed the 2003 SARS outbreak in China which means everyone is experiencing something of this magnitude.
Here are some tips on how & what to communicate:
- Let your suppliers know your plans for the near and far future. Let them know your forecasts and the crucial deadlines that need to be met. Being transparent with them will ultimately lead them to being more transparent with you.
- Be creative and speak to them about what they can do for your particular orders. Being creative with your orders is especially important here.
- Will they prioritize your production if you increase the quantity?
- Can they complete if faster if you sacrifice some customizations?
- Are they willing to produce your items sooner if you pay 100% upfront?
- Is there a particular piece of the final product that would prevent them from being able to manufacture it?
- Ask them their plans.
- When do they plan to have all workers back?
- Do they need to quarantine orders after production?
- Have their raw materials suppliers been responsive?
- Do they plan to continue making your product? (i.e. many textile manufacturers rely on local markets to obtain the cloth – those may not be operating.)
- Will your MOQ or Pricing be affected in the short-term? Can you work back towards the original pricing in the long-run?
The biggest thing to remember here is that these are all people and not just businesses. Putting yourself in their shoes for a minute is difficult, but a necessary step to empathize with them.
There are over 35,000 infected cases reported & 800+ deaths globally. Although this virus may not be flooding your neighborhood, it’s at the top of everyone’s mind throughout SE Asia.
- Do not be overly aggressive in making them promise guarantees. This situation is unprecedented and they can’t make promises in such a tumultuous time.
- Work with your suppliers through this time; whether it’s increasing prices, higher minimum order quantities, or longer lead times. The global supply chain is feeling the effects of this vicious virus – not just your business.
- Focus on the big picture. It’s unrealistic to think that companies can easily shift the demand from China to a lesser developed country immediately. This is a time to stick together and help get the supply chain back up to speed. Not cause further uncertainty.
Lastly, consider reaching out to other potential suppliers to create your product or packaging. We’d be glad to help you look for other suppliers within the Noviland network. We will be closely monitoring all of the factories in our network to ensure our clients are in the know at all times.
Get started by going to www.noviland.com/sign-up and submitting your request for quote (RFQ).