During the month of February of 2020, we’ve heard a lot of this:
“I’m running out of stock, I’m losing sales, I’m losing customers…and my Chinese supplier factory is not coming back any time soon. My order is delayed…what do I do now?”
Whether you’re selling on Amazon or in your own eCommerce store, there’s nothing more crippling than running out of stock.
How are you navigating through the COVID situation?
Thousands of China’s factories are shutting down, and when they return, they will likely run at a lower capacity.
Given the situation in China, what should you expect, and what can you do to mitigate risks and delays?
My name is Yuping Wang. I use many suppliers in China. In this article, I’ll share the sourcing strategies that I’m using myself to weather the situation. Everything I’ll share with you is based on real-world sourcing experience.
My hope is that this CHECKLIST will help you take better control of the situation in the coming months.
How Bad Is It?
The normal Chinese New Year shutdown usually creates a backlog in China’s factories due to the shortage of the workforce after the New Year – some workers simply don’t return to work after the holiday. But typically, the factories regain their normal capacity after a month or so.
Because of the coronavirus, Chinese New Year was extended, and then further extended, to February 24th, 2020. Most factories are re-opening around March 2nd, 2020.
So how bad is the delayed situation? After speaking with many Chinese suppliers, here’s what I’ve learned:
- Pre-Chinese New Year order backlogs are being delayed 1 month.
- Factories are running at 50% capacity.
- There are raw material shortages, and some associated price increases.
This means that we must deal with these potential challenges:
- Longer lead time
- Higher price
- Lower part quality.
- Higher shipping rates.
What Should You Do?
- Find Out The Bigger Picture With Your Supplier Factory
Do you really know what’s going on inside your supplier’s factory? Are there risks of some small factories closing permanently? Possibly. This is why you need to ascertain the bigger picture of your supplier’s business.
Even if your supplier is telling you that they’re back and operating at 50% or 70% capacity, you need to ask more questions and find out whether the coronavirus impact is going to continue harming their business – and yours – and for how long.
Here are the questions you should explore with your supplier:
- Is their low-capacity issue caused by a shortage of workers from Wuhan area?
- Is their low-capacity issue caused by a shortage of workers from outside the Wuhan area?
- Are there any sub-assemblies or outsourced operations that are impacting their ability to meet order deadlines?
- What are they doing to hire more workers?
- What would be a realistic date for them to return to normal capacity?
Let me briefly explain these questions.
- If the worker shortage is due to Wuhan workers not being able to return to work, it’s a bad situation. No one can say for sure when they’ll be able to return. I happen to deal with a supplier whose workers are mostly from Wuhan area, and so far there’s no indication for when the factory might reopen.
- If the worker shortage is simply due to workers being unwilling to return to work (for whatever reason), this isn’t as bad. They will slowly return to work.
You should continue to ask questions #4 and #5 to monitor the situation. Stay connected with your supplier. Not knowing what is going to happen is risky.
Tighten Your Quality Control
Shortage of workers, increased order backlogs, and shortage of raw materials can all be factors to introduce more defects to the production line.
The factory will probably be running in a more chaotic fashion. Raw material substitutions may happen. New workers without experience in producing your components could be assigned to the line…
If you haven’t been conducting a 100% inspection on incoming parts each and every time already, you should consider moving in this direction within the next few months. Consider tightening your quality control and increasing your product inspection quantity.
Be Prepared To Negotiate Price Increases
As we’ve seen, you should expect price increases. But how can you be prepared when your supplier says your price is now higher?
- Review profit margins and marketing strategy.
Before you receive a price increase, take the time to review your profit margin and to think about your short-term marketing strategy. Can you scale back your marketing spend? Can you absorb a 10-15% cost increase?
- Prepare a negotiation strategy. Can you negotiate and push back the price increases? Everything is negotiable. Think of the reasons that you simply CANNOT accept a price increase.
My Negotiation Guide© outlines strong strategies and clear techniques to guide you through price increase negotiations (get more information about the Negotiation Guide© by clicking here). If you already have a copy of the Negotiation Guide, brush up on these techniques and apply them to your case.
For this particular coronavirus situation, I’ve shared my negotiation strategies with the Mastermind© Students. If you’re a Sourcing Warrior Mastermind student, head over to the Elite FaceBook group and read through my post,“3 Strategies To Negotiate Price Increases Caused By Corona Virus”.
Get Ready To Air More And Pay More
You may not think you’ll need to air-ship products in, but think again. Take a look at your inventory – can it hold out for 120 days?
Why 120 days? With production delays and shipping delays, your total lead time to get your product back in stock via ocean shipping will probably be around 4 months.
If you could possible deplete your stock within 120 days, you’ll need to be prepared to air products in. These steps can help you prepare:
- Gather your product weight and dimension info.
- Determine a small quantity to air-ship that will bridge the gap to your next ocean order.
- Connect with 2-3 freight forwarders and get a preliminary air shipping quote based on today’s rate.
- Understand how this rate – and potential higher rates – will impact your profit margin.
You’re going to see the months of March, April, and possibly May get hit with a rush of increased air shipping volume. And air capacity may be lower than normal, as many airlines are still not operating out of China at full capacity.
For this reason, be prepared to see a higher air shipping rate in the coming months.
It’s not going to be prudent to wait until the last minute to make an air shipping decision. Doing your homework now will allow you to make a call as soon as you see your inventory drop to a dangerously low level.
Get In Line, ASAP
The extended lead time situation is NOT going to be resolved anytime soon. Your order was delayed, is delayed, and will continue to be delayed in the months of April, May, maybe even June…
If you want to avoid higher air shipping rates, you’ll need to prepare your purchase order right now, even if you weren’t thinking to place a new order anytime soon.
A lot of students have learned inventory planning in the Sourcing Mastermind© course, but let me go over a bit here.
If you have 4-5 months of inventory, normally you wouldn’t need to place a new order right away. You estimate 1 month for production, and 1 month for ocean shipping, for a total 2 months, so you can wait.
However, our current situation is not normal, and it’s a lot more challenging than you may think. Total lead time could easily be running around 4-5 months, through ocean shipping.
To avoid the stock-out risks and high air shipping costs, review your inventory level and get your order placed right now.
See Your Own Big Picture
Many people are scared by this situation. Many people are backing out of starting a business, or even continuing their existing businesses.
Being an entrepreneur is not easy. Especially now.
During this challenging time, consider the big picture you’re aiming for.
This business is your dream.
For this dream to thrive, you’ll need to stay the course, trust yourself, and look for opportunities to strengthen your outcome!
See yourself, 5 years from now. See that you’ve overcome the challenges and pulled it through.
Note: I think this is a good and important article – the lessons in it will continue to apply. And people may well look back at this article and wish they’d followed this advice!
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