02 Aug 2021 NO END IN SIGHT FOR HAVOC IN CHINA SUPPLY CHAIN
Editor’s note: The following is an updated version of an article we ran in January 2021. Much of this story is even more relevant today. If anything, these issues have continued to worsen and each week there is another event that challenges the notion that things are improving in the near term, and we argue that all executives that have been outsourced their supply chain to China need to re-evaluate their business case strategy.
By Jeffrey Cartwright, Managing Partner | 8 min read
While still in its Infancy (early days of a major resetting of global supply chains), repetitive, chronic Issues including the pandemic, holiday shutdowns, West Coast congestion, labor shortages, longshoremen, Equipment Shortages, Etc. is the new norm.
While everyone had been trying to keep a glimmer of hope that the Chinese supply chain would start to figure out a new normal and go back to pre-pandemic “efficiency” levels, this is not going to happen. We’re not going to spend time rehashing what everyone has been living for the past almost 2 years, but it is important to note that the cracks in the Chinese supply chain were there years before the Coronavirus reared its ugly head. We would be hard pressed to find anyone in the U.S. or other parts of the world that at this point, hasn’t felt the impact of global supply chain issues, other than perhaps in the remotest villages of China. From Personal Protective Equipment to China-produced items that are used around the home/office, to Japanese sake, to exercise equipment, almost every aspect of consumers’ daily lives are being impacted by shortages, and now inflation is starting to occur. These demand shifts – with many items languishing in warehouses and others out of stock and on backorder – continue as companies shift sources and factories increase capacity to address critical needs. The sorting out of these supply chains will continue for the next few years, and if executives aren’t already scrambling to figure out Plan B, they should be.
Shopping Patterns Have Shifted to Digital and Recovery of the Headlines are Full of Supply Chain Imbalances
With the shift of consumers’ shopping patterns being heavily geared towards digital, unprecedented demands are being placed on all aspects of the global supply chain. This has caused a massive imbalance in equipment. Some containers are full of product in warehouse parking lots, while other containers are not being returned empty, which means there is a shortage of containers throughout China, Vietnam, Thailand, Taiwan, etc. Space on ocean vessels continues to sell at a premium resulting in a tripling or even a five-fold increase of freight from China to the U.S. (spot market) —assuming that there is even space available.
Looking beyond increased shipping costs, major delays throughout the transportation sector is also adding, and will continue to add, to worsening backlogs. Congestion at the ports resulting in delays of between 7 to 14 days for containers to be unloaded and reloaded onto trucks are also continuing to wreak major havoc, not only on businesses, but on home owners that live nearby and on marine life. Inland truck rates have also increased dramatically. If the container needs to be moved by rail to one of the major railyards in Chicago, Dallas, Memphis, or Kansas City, add another to 7-to-14-day delay due to lack of available trucking. The overall result is an increase from 30-35 days of transit to over 70 days.
In other words, the inbound supply chain from Asia is a mess and has been since October 2019. Things will not, if ever, go back to what 2018 looked like and because of this, it’s becoming more urgent than ever before that executives look at options closer to home.
What Many Didn’t Realize: Systemic, Chronic Disruptions Are NORMAL for the China-Based Supply Chain
There will eventually be a return to smoother flow of goods from the massive disruptions of 2020/2021.
However, the underlying causes of the West Coast congestion remain, including too much volume in a short period of time, increased regulation to reduce pollution or improve safety, and the Chinese New Year celebrations each year. In a good year, most companies manage these issues. However, the West Coast back up occurs every few years. 2015 was very painful with a shortage of equipment (chassis and low-emission diesel trucks), combined with a 10-month negotiation of a new labor pact with the longshoremen’s union (with a history of slowdowns and strikes). Note that the next contract date is July 1, 2022.
American executives have previously been able to PLAN for these disruptions or “get by” because they knew that disruptions were finite. This time, that hasn’t been the case. Not only is the disruption not finite, but even worse, it’s impacted the entire globe; there’s illness and death that’s occurring AND the cost differential no longer makes these issues worth it.
How can you set your business up for future success, ensure smoother supply chain activity, and cut costs? It’s time to look to our friends in the south: Mexico.
Mexico Supply Chain Issues Are Minimal
Relative to China, there are very minor issues in Mexico’s supply chain. Holiday shutdowns are a week between Christmas and New Year’s Day. Transit times from the industrial area to the border are generally 1 to a maximum of 3 days. Backups sometimes are 4 to 8 hours at the border to the United States. During the threatened shutdown of the southern border, the backup was extended to 2 days.
In short, the Mexican supply chain is far more reliable and considerably shorter, which also results in lower inventory for US companies.
Shoreview Management Advisors and the Mexico Strategic Sourcing Alliance
Having built multi-billion-dollar supply chains in China and having built and operated manufacturing plants in Mexico for major US marketing and distribution companies, Shoreview Management Advisors is uniquely positioned to bridge this divide culturally and close the gap in capabilities and execution. We have assembled a strategic alliance of companies that provides an engineering-based approach to sourcing and has 20 plus years of transferring products competitively to Mexico. We develop a thorough understanding with the client of the specifications and required performance of the product. We perform market research in Mexico to add to our list of highly qualified manufacturers. If necessary, we will reverse engineer the detailed product design from samples and create detailed bills of materials. We work with Mexican manufacturing companies in multiple ways to reduce their costs and achieve competitive pricing. If necessary, we source components from Asia and import them into Mexico as part of the total supply chain. We can handle customs and duties, as well as delivery of product to the customer warehouse in the United States. In short, we provide a complete sourcing alternative to China which nearly always results in a lower delivered cost to your distribution centers.