The China Challenge 2020

By: Michael Hotchkiss, Director of Sales, SB&W 

How Supply Chain Professionals Should React to the Latest Developments

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Even the most mature and well-developed supply chain operations deal with constantly evolving conditions. This is normal and anticipated. Each wrinkle in a supply chain adds to the uncertainty, which is the reason experts exist to cope with all the variables. There is training and advanced education and conferences and seminars that deal with this fickle profession of Supply Chain Management, and still it has not been perfected. That is because, as with most aspects of running a business, every company and situation is unique. That’s why companies need smart people to navigate hard-to-predict situations.

If a supply chain starts with a Chinese manufacturing source, the complications become more varied and less predictable. Add in a trade war with a moving target of tariffs on goods defined by multiple ambiguous lists and we now have a situation bordering on chaos. Now, pile on a global pandemic of coronavirus with ground zero located in the heart of a major manufacturing center in China, and we have…our current situation.

How do companies cope with such a complex scenario? The simplest answer would be the same guidance coming from your personal financial advisor: “stay the course.” Trying to adapt to the unpredictable is like herding cats. That doesn’t mean options should not be explored, but that is what any good manager would do even in relatively calm times. Always look for a better way to do things and make a plan to get there. If there is no predictable outcome, then there cannot be a practical plan to get there. This is the present situation for supply chains with ties to China.

It seems like a long time ago when companies importing goods from China struggled with a sudden increase of 25% of the cost of these goods. Customers wouldn’t accept a price increase even though it was merely passing along a government mandated tax, not unlike when UPS added surcharges to deliveries when oil spiked to $100/barrel. The result was tension between buyers and sellers that upset supply chains. With a phase one deal being implemented, there is almost no change except for a reduction from 15% to 7.5% of a limited amount of imported goods. The 25% tariff on $300 million worth of Chinese imports remains and now is not even a sidebar discussion with customers. They have either found a different way by means of a practical plan or have just accepted the new reality.

We now have the novel coronavirus spreading across the globe. If it weren’t for the annual Lunar New Year celebration in China, which shuts down productivity for about a month, the virus issue would have had a much bigger impact. As it stands, the prolonged holiday alleviated the impact of the outbreak. While many supply chains scrambled to make adjustments, as of this posting most Chinese factories are operating near full capacity and goods are being exported on or close to schedule. In a few short weeks, the challenge of dealing with the coronavirus will shift to domestic issues. Many companies will be shutting down, production in large manufacturing facilities will be suspended and all those goods that have just started flowing from China will have nowhere to go.

The best course of action is to stay the course. This too shall pass.