Supply chain professionals have long planned around factory shut-downs related to Asia’s spring festivals. A few weeks per year we work around Chinese New Year, Tet (Vietnam), Holi (India), Songkran (Thailand), etc.
Those exercises are minor distractions compared to the months of gut punches that keep coming… and coming… and coming. Planning? Impossible. Caffeinated agility? Mission critical. We are continuously collaborating with clients on creative ways to maximize efficiency. Here are 12 critical strategies we’re focused on in 2022. We welcome your input to expand the conversation.
Strategy #1 Watch inventory.
Demand has been sky-high in many sectors however economists are predicting a shift. ITR Economics is forecasting growth in 2022, however, at a slower pace than in 2021. Businesses continue to see higher backlogs than normal – but beware – many customers put in higher orders out of fear for shortages. So order cancellations may occur. UBS agrees and reported that “2022 is expected to be a year of two halves, with high rates of economic growth and inflation in the first half, giving way to lower growth and inflation in the second.”
ACTION: Take a sober approach and avoid overestimating demand. Don’t wind up with too much inventory requiring discounting to unload it. “Avoid a price knife fight.”
Source: IHS Market
Strategy #2: Lock in financing…early.
December 2021 set an all-time record for ships awaiting berth at LA/LB – 103 vessels with cargo worth just under $6 billion. Wait times averaged 38-45 days. Using a cost of capital of 3.2%, the cost of financing the (just the wait time portion) for these 103 vessels carrying 147,000 containers is approximately $19-$23M.
Everybody is talking about inflation. According to ITR Economics, inflation closed 2021 at 4.6% and is expected to be around 5% in 2022. To keep it in check the Fed is expected to hike interest rates up to four times. Long shipping delays are tying up working capital and constraining cash. Many are resorting to financing inventory. As The Fed combats inflation with hikes in interest rates, the financing of inventory in transit will become more and more expensive.
ACTION: If you must finance inventory, consider locking in interest rates as soon as possible for as long as possible. ITR expects higher inflation to be with us a couple of years.
Strategy #3: Check the fine print of insurance contracts.
Last week the LA Times reported that thieves are tearing into containers at a rate of 90 per day. Tracks are piled sky high with looted goods flowing out of LA/Long Beach’s congested ports including auto parts, lawnmowers, cosmetics, clothing, and toys. Pictures and videos of the tracks look like a tornado ripped through. Union Pacific’s rail yards are unable to find sufficient security staff to keep theft in check.
ACTION: If you are self-insured, confirm that goods are covered during every step of the supply chain. If you’re working with a freight forwarder, check the fine print for gaps in risk.
Strategy #4: Re-think how goods move.
In 2021, the shipping industry posted record profits of $150 billion, up from $25 billion in 2020. Crane Worldwide Logistics noted in their January 2022 Market Update, “International supply chain bottlenecks from Asian load ports to the US receiving ports, to rail, trucking, and warehouse limitations will likely remain a serious problem for at least the first half of the year.”
During Media Times’ Economic Forum last week, ME Dey’s CEO Sandi Sigel described how 1 in 5 carriers are rejecting shipments due to higher prices on the spot market. Freight forwarders who used to buy capacity from carriers and sell it to end customers are increasingly being cut out of deals, with carriers bypassing middlemen and going direct to end customers for a few extra points in profits.
ACTION: The traditional RFQ process may not be reliable. Rates will change by the time you book freight. Submit booking requests a minimum of 4-6 weeks in advance and be prepared for ships to be overbooked and cancellations to follow. Next, drill down to the detail. How are goods routed? What additional fees can you eliminate by rerouting to avoid unnecessary storage time? Double check that you’re not overweight? Rethink how goods move. Can pop up distribution centers be opened closer to ports to avoid weeks of domestic transport delays through congested hubs like Chicago?
Strategy #5: Plan for tighter capacity in air freight.
Inbound air traffic for all international flights into China is just 2% of what it was pre-pandemic. On Friday January 21st Reuters reported the US Government announced the suspension of 44 China-bound flights in response to China’s similar move to suspend inbound US flights due to concerns over Covid-19.
ACTION: Expect turbulence when relying on air freight to fill in gaps for the next few weeks. We’re not expecting capacity to open back up until well after Chinese New Year, and even possibly after the Olympics end on February 20th.
Strategy #6: Keep quality in check with boots on the ground.
We’re not anticipating easing of travel restrictions anytime soon due to China’s strict “Zero-Covid” policy. For international travelers who can obtain a business visa, a three-week quarantine will apply. Two weeks in a state-run facility with meals delivered by robot or fully-hazmatted worker, followed by a self-quarantine in a hotel room or apartment. As noted in CMD’s article published by Industry Week in Fall of 2021, travel is possible…but not practical for the foreseeable future. Without constant oversight, there are numerous potential points of failure: worker turnover, slipping process control, unexpected material changes – all of which can compromise the quality of finished goods and your brand reputation.
Action: Organize ‘boots on the ground’ to monitor your interests and reduce risk of quality problems. In this era of no international travel, enlist a team you trust to check in on suppliers regularly to ensure that they are not checked out on the important stuff.
Strategy #7: Boots need lead time.
One of China’s major challenges this year will be to hit growth targets while maintaining a zero-Covid policy. According to The China Briefing, “China’s economic outlook for 2022 is predicted to be relatively bright with GDP growth forecast at over 5 percent – higher than the global average. However, sustained pressure from Covid-19 outbreaks and supply chain bottlenecks will continue to have an impact. To counter the economic pressures, China will place particular importance on economic stability and recovery.” The zero-Covid policy results in sporadic shutdowns of factories, ports, industrial parks, and neighborhoods.
What’s it like for our team on the ground? So far, CMD’s office has not been shut down due to Covid. Our field staff, however, is impacted from time to time with restrictions on movement and quarantines in situations where close contacts have occurred or where travel required passing through areas with cases.
For all Chinese citizens, personal status is tracked via a color-coded app. Green indicates it’s OK to travel to other green zones. Yellow indicates one is in a risk zone, but without close contact, and can still move around. Red means stop, drop, and quarantine – and that may be in an office you just visited—for weeks.
Recently CMD had team members in yellow zones where they could work with suppliers but could not leave the zone until the risk passed. As soon as the zone flipped green, our team members could finish up and return home. At this time, all staff travel is managed on a case-by-case basis, monitored daily, using news feeds from the central government on the locations of risk areas.
ACTION: Be prepared for lead times on professional services that varies depending on travel restrictions. Some suppliers may also shy away from outsiders walking into their facilities and putting workers at risk, especially in situations where we don’t have a relationship (yet) with a supplier and need to perform an audit.
Strategy #8: In China for China.
A couple of years ago, the Chinese government announced a “Double Circulation” strategy to reduce dependency on key import sectors, stimulate local production, and kick start consumption. Despite heavy restrictions on travel into China last year, Foreign Direct Investment (FDI) reached an all-time high in 2021 of $179 billion, according to the United Nations.
ACTION: If you’re considering a transaction and require due diligence, you can still get the deal done using CMD’s senior strategists to size up opportunities and risks of investments.
Strategy #9: Vietnam
If there’s a lasting legacy of the pandemic, supply chain diversity is it – with many companies implementing backup suppliers – whether it be on-shoring, Mexico, Vietnam – to reduce risk. According to the Vietnam Briefing, 2021 was rough. The country posted its first negative return in GDP since the early 2000s. During the pandemic business had two options: Either provide room and board for workers onsite, or pay for room and board offsite and provide roundtrip bus service. Many businesses could not accommodate these rules and had to shut down.
Things are looking up in 2022 as the country learns to live with Covid. In just 6 short months, Vietnam went from a vaccination rate of 3% to nearly 70%. The government is forecasting GDP growth of 6% in 2022.
ACTION: If you haven’t taken a look at Vietnam, now’s the time. Trade deals and loosening of government incentives make Vietnam a target for foreign investment in 2022. The USA along with eight other countries have been cleared for inbound air travel. International visitors can self-quarantine as long as they test negative.
Strategy #10– Settle in with tariffs…for the long haul.
The Biden Administration has sent several signals that no major changes in trade policy are planned. East Asia Forum explained why: “Settling on a new, coherent trade strategy has not been a Biden administration policy priority. Policy attention has been dominated at home by recovery from the pandemic and the big infrastructure spend and abroad by the messy withdrawal from Afghanistan and other policy priorities with China.”
The USA was absent from the early January 2022 signing of the Regional Comprehensive Economic Partnership (RCEP) agreement, which eliminates over 90% of tariffs for the 15 participating countries, including China. In a Jan. 19 press conference, Biden indicated that the administration would not lift tariffs on Chinese imports without more compliance with existing trade commitments. There is support on both sides of the aisle in Congress for continuing Trump-era tariffs into the foreseeable future.
ACTION. Tariffs are here to stay in 2022, indicating no changes are required in pricing policy.
Strategy #11: Unbundle total landed cost.
For example, confirm a supplier’s “rising labor rates” argument for higher prices.
In China, each province determines an appropriate minimum wage depending on local conditions. According to Trading Economics, China’s minimum wage labor rates are forecasted to remain steady in 2022, compared to the previous few years. The minimum wage in one of the highest markets in Shanghai, is forecasted as follows:
ACTION: If suppliers use ‘rising labor rates’ as a pretext for a price increase, it’s worth checking into local wage levels (CMD can help with that) to confirm validity.
Strategy #12: Pass along 1 more increase.
According to TD Economics, “production constraints are putting renewed upward pressure on base metals. But with China’s industrial demand growth slowing, prices should modestly ease in 2022.” CMD observed that steel, aluminum, brass – came down slightly in November but prices popped back up in December. For example, Shanghai AOO Aluminum eased by 1.9% in November popped back up in December. Overall CMD does not expect overall price levels to return to pre-pandemic rates. We believe higher rates are here to stay.
ACTION: With slowing demand on the horizon for the second half of 2022, you might be able to squeeze in along one more price increase to end customers. If this is an option, makes sense to do so sooner in the first half vs. later? Markets have never been more tolerant of price increases than now.
The bottom line
This month we celebrate Chinese New Year and welcome the Year of the Tiger. In China, “Tiger Mothers” famously scrutinize every detail in the lives of their children – and that’s exactly what’s needed in Supply Chain today.
Need a “Tiger Mama” for your supply chain? Let’s Talk.