January 2014 by Aidan Conaty
People often ask me “Is there a good time to buy my products from China?” Actually the question that they should be asking me is “When is the bad time to purchase products from China?”
The Chinese New Year holidays often plays havoc with a companies supply chain and the “hidden costs and charges” also begin to mount up during this period of time.
I recommend that companies consider a blackout period for 4 weeks before and 4 weeks after the Chinese New Year celebrations. That is a total of 10 weeks (including the 2 weeks of holidays) interruption to a supply chain.
However when you analyse the “Hidden Costs and Charges” you will then realize the reasoning for this black out period.
The Hidden Costs and Charges arise in two main areas of your China supply chain:
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The Manufacturer
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The Shipping Company
Manufacturers looking forward to Chinese New Year Holidays[/caption]
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The Manufacturer
There issues with manufactures which be broken down into two periods of time:
A. Before the Chinese New Year Holidays
B. After the Chinese New Year Holidays.
A. Before the Chinese New Year
The issues and hidden costs will appear from the following areas
- The manufacturers are rushing to fulfill their committed order’s so quite often they will not be able to accept any new orders. The cost is lost sales due to stock outs.
- Factory staff starts to get into the “holiday spirit” and as a result the quality of their workmanship can drop. This may lead to a decrease in your profits due to an increase in failed product costs.
- When manufacturers have spare capacity – they will tend to cherry pick orders that pay a premium price. The cost price of your product may risk in order for the manufacturer to fulfill your order.
- The manufacturers tend to become impatient and seek payment quicker otherwise they will not release your Bills of Lading until after the New Year holidays hence you may be left with some hefty port charges while awaiting this paper work.
B. After the Chinese New Year
- Staffing is currently a major issue with Manufacturers. Factories struggle for the first 6 weeks to hire staff to work in their factories. You may experience stock out costs.
- Quality of work is reduced as new staff require time to learn how to make the products. You will be more required Product Inspection by Independent Inspection companies such as Goodada.
- Production time often increases by on average 60% as new staff are trained into the production processes.
- Traditionally prices change after the Chinese New Year. Factories are often reluctant to commit to new orders until they have been informed by their suppliers of any price changes to the cost of raw materials. At the moment prices are going up.
Shipping Charges increase during peak Chinese New Year holidays[/caption]
2. The Shipping Company
You should always treat shipping companies the same way as airlines. This can be explained by looking at your favourite summer holiday destination. In Winter time (off peak) it will have lower airfares while in Summer time (peak time) it will have higher airfares. The same logic applies to Shipping.
It is also worth observing that, while airlines will add more planes to a busy route, shippers may reduce ships on a busy route. They do this to increase the prices. The actions of the shipping companies could be considered by some to be cartel like. People will notice that during the Chinese new year holiday rush shipping capacity drops and can become non-existent.
The following points must always be borne in mind:
- As it is a busy time of year spare capacity does drop so it becomes harder to get your container on board.
- The shippers get a little greedy about 6-5 weeks before the start of the Chinese New Year. They will dramatically increase the rates to the logistics companies who look after your freight.
- There is a huge additional premium added to the cost of a container so that it can be loaded onto a ship. It can be up to 50% of an increase on a normal rate.
- Shipping companies are taking bookings but not honoring them as they cherry pick the most profitable container boxes before any normal priced containers are allowed to be loaded. Hence you will find delays to your supply chain
6 Tips on how to reduce the costs
It’s a very simplistic but very effective solution to avoid all the costs and stresses the can affect your China Supply Chain.
- Get a Black Marker and mark a big black line on your calendar to “black out” the 10 week China Holiday window.
- Aim to have your company stocked for up to 12 weeks from the commencement of the Chinese New Year.
- Ideally have all your goods shipped 5 weeks prior to the commencement of the Chinese new year to get better shipping rates
- However if this cannot be avoided, make sure that all the goods have left the factory 2 weeks prior to the factory closing for the Chinese new year celebrations. This will reduce the risk of your goods not getting shipped.
- Allocate additional funds for independent Inspection companies to inspect your goods during this time. They are also busy at this time of year so it is advise to book the inspection dates with them.
- Use the inspection company to communicate with new staff who commences working in the factory after the Chinese Holidays. Often the inspector can add another voice to aid the training of new staff.
About the author
Aidan Conaty is the founder of Goodada and co-founder of TCI China. Aidan has spent over 15 years assisting companies to trade internationally. He founded Goodada so that it can provide the tools and services that can assist companies to trade internationally.