China Supply Chain Considerations 2008

[Bradley A Feuling]

I have given a lot of thought over the past couple weeks to the year ahead in Chinese manufacturing and transportation. Many supply chain professionals are looking ahead to the Olympics as a potential logistics stumbling block. I might suggest we look closer at events that have already occurred this year as well as those that lie ahead. Here are some considerations for Chinese demand-production synchronization and global logistics in 2008.

Regarding logistics adjustments around the time of the Olympics, we see that companies foreseeing potential delays as a result of the Olympics would be well advised to already have demand-production planning accounting for any downtime in manufacturing/transportation. This could be accomplished with an inventory build up prior to the Olympics including the normal production and delivery lead time. Some manufacturers were doing this prior to the snowstorms in late January in anticipation of delayed transportation. This brings me to a larger point to consider.

2008 has the potential for major ramifications in material delivery, not to mention end-to-end supply chain profit loss. From a demand-production synchronization standpoint we are looking at three major factors that will impact material movements within and from China. The first was the snowstorm alluded to earlier. The second are the changes in the Chinese National holiday schedule and the third is the Olympics.

In late January, snowstorms significantly impacted and delayed transportation and manufacturing at a peak time, just before the Chinese New Year Holiday. With the downtime for the holiday, it is almost certain many companies are still awaiting product that lost valuable time during this period. During the holiday, many manufacturers shutdown production for 10 or more days, which means the total downtime in some cases was nearly 30 days. These two events so closely tied will have ripple effects on production throughout the year as companies deal with marginal inventory holding and increasing demand fluctuation based on the unstable global economic environment.

The second factor are the small, but real changes in the Chinese National holiday schedule. As few companies have identified these changes, let alone analyzed the effects on their supply chain, demand and production schedules will be further unsynchronized based on prior year demand schedules that now misappropriate capacity needs, lead times and inventory management. More thoughts on this topic can be found at:

http://www.industryweek.com/ReadArti...rticleID=15584

Lastly, are the Olympics. Although production will continue, there are bound to be challenges especially with manufacturers in the Northeast of China and specifically around Beijing, i.e. product shipped through Qingdao, Tianjin, Dalian etc. Also, we must consider logistics companies whose capacity is limited yet already allocated to transportation for the Olympics. Where will other transportation capacity come from? The Olympics will be a large limelight spectacle for China and the likelihood of this event impacting production schedules is high.

When we take into account these three factors, paired with an increasingly fast appreciation of the Chinese RMB (I recently traveled to the US for only 3 weeks. When I left the exchange rate was 7.3 to $1. When I returned the exchange rate had dropped to 7.1 to $1) the loss of profit earnings per unit of product for foreign customers is large. It is going to be an interesting year that without proper preparation will dramatically impact global supply chains.

[Starbucks Junkie]

Bradley,

Once again an insightful & informative posting.

SJ