During the month of February of 2020, we have heard a lot of this:
“I am running out of stock, I am losing sales, I am losing customers … and my Chinese supplier factory is not coming back any time soon. My order is delayed… what should I do now?”
Whether you are selling products on Amazon or in your own eCommerce store, there is nothing more painful than running out of stock.
How are you navigating through the Corona situation?
Thousands of factories are shutting down, and when they return, it is expected that they will run at a lower capacity.
Given the situation in China, what should you expect and what you could do to mitigate the risks and delays?
My name is Yuping Wang. I have many suppliers in China. In this article I am going to share the sourcing strategies that I use in dealing with the situation. What I share with you are based on my real-world sourcing experience.
I hope this CHECKLIST helps 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 the factory due to the shortage of the workforce after the New Year – some workers don’t return to work after the holiday. But the factories normally would regain their normal capacity after a month.
With the corona virus, Chinese New Year was extended and further extended to February 24th, 2020. Most factories are re-opening around March 2nd, 2020.
So had bad is the delayed situation? After I’ve talked many Chinese suppliers, here is what I’ve learned:
Pre-Chinese New Year order backlog is being delayed 1 month
Factories are running at 50% of its normal capacity
There are shortage of raw materials and some price increases
This means, these are the potential challenges we have to deal with:
Longer lead time
Higher shipping rates
What Should You Do?
1.Find Out The Bigger Picture Of Your Supplier Factory
Do you really know what is going on inside of your supplier’s factory? Are there risks of some small factories closing the business permanently? Possible. That is why you need to find out the bigger picture of your supplier’s business.
Whether your supplier is telling you they are back and operating at 50% or 70% of the capacity, you need to ask the supplier more questions to find out whether the corona impact is going to hurt their business (and yours) for one more month, six more months, or permanently.
Here are the questions you should ask:
- Is the low capacity issue caused by the shortage of workers from Wuhan area?
- Is the low capacity issue caused by the shortage of workers from non-Wuhan area?
- Are there any sub-assembly, outsourced operations, that is impacting your factory’s ability to finish the product on time?
- What is your company doing to hire more workers?
- What a realistic date you think your company can resume the normal capacity?
Let me briefly explain these questions.
- If the worker shortage is due to Wuhan workers not able to return to work, it is a bad situation. None one can say for sure when they can return. I happened to deal with a supplier whose workers are mostly from Wuhan area. So far there is no date was given when the factory would re-open.
- If the worker shortage is due to workers not willing to return to work (for whatever reason), it is not as bad. They will slowly return to work.
You should continue to ask the question #4 and #5 to monitor the situation. Stay connected with your supplier. Not knowing what is going to happen is risky.
2. Tighten Your Quality Control
Shortage of workers, increased order backlog, shortage of raw materials all could be factors to introduce more defectives to the production line.
The factory will be running in a more chaotic fashion. Substituting raw materials may happen. New workers have no skills in producing your product could be assigned to the line…
If you are not doing 100% inspection each and every time in the past, within the next few months, you should tighten your quality control and increase your product inspection quantity.
3. Be Prepared To Negotiate Price Increases
You should expect price increases. How to prepare for it when your supplier tells you the price is higher now?
- Profit margin and marketing strategy review
Before you receive the price increase, it is time to review your profit margin and think about your marketing strategy in the next few months. Would you scale back on marketing spend? Can you absorb additional 10-15% cost increase?
- Prepare negotiation strategy. Can you negotiate and push back the price increases? Of course, everything is negotiable. Think of your reasons that you simply CAN NOT take the price increase.
My Negotiation Guide© has very strong strategies and clear techniques to guide you through price increase negotiations (get more information about the Negotiation Guide© by clicking here). If you have a copy of the Negotiation Guide, review the techniques and apply them to your case.
For this particular Corona impacted situation, I have shared my negotiation strategies with the Mastermind© Students. If you are Sourcing Warrior Mastermind student, head over to the Elite FB group, I posted “3 Strategies To Negotiate Price Increases Caused By Corona Virus”.
4. Get Ready To Air More And Pay More
You may not think that you will need to air products in. Think again. Just take a look at your current on hand inventory, can it last for 120 day?
Why 120 days? With the production delay and shipping delays, your total lead time to get your product back in stock through ocean shipping is going to be around 4 months.
If you could run out of stock before 120 days, you need to be prepared to air products in. Do these please:
- Gather your product weight and dimensions
- Determine a small Air Shipping quantity to bridge the gap of the 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 rate will impact your profit margin.
You are going to see the month of March, April and possibly May being hit by a rush of increased Air shipping volume. And air capacity may be lower than normal as many airlines are still not operating at its full capacity out of China.
Be prepared to see a higher air shipping rate in the coming 3 months.
I suggest you not to wait until the last minute to make an air shipping decision. Do your homework now. Make a call as soon as you see your stock drops to a “dangerously low level”.
5. Get In Line, ASAP
The extended lead time situation is NOT going to be resolved any time soon. Your order was delayed, is delayed and will continue to be delayed in the month of April, May, maybe even June…
If you want to avoid higher Air shipping rate, you need to prepare your Purchase Order right now even if you were not thinking to place a new order.
So many students have learned inventory planning in the Sourcing Mastermind© course, let me teach you a little bit here.
If you have 4 -5 months inventory, normally you wouldn’t think you need to place the new order now (1 month production, 1 month ocean shipping, total 2 months, you can wait).
But the current situation is not normal, and it is a lot more challenging than you think. The total lead time could 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.
6. See Your Own Big Picture
Many people are scared by the situation. Many people are backing out of starting the business or continuing to run the business.
Being an entrepreneur is not easy. Especially now.
During this challenging time, ask yourself of the big picture you are aiming for.
This business is your dream.
For this dream, you must hold your compassion for yourself even if it feels so hard!
See this, 5 years from now, see that you’ve overcome the challenges and pulled it through.
Like this blog?
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