Supply Chain Impact

As of this publish date, news of the Coronavirus intensifies, while confusion and questions seem to be mounting from a medical perspective. Much like SARS, MERS, and even Ebola, time will tell how this all unfolds. However, it’s becoming increasingly likely that if you’re in the Prize, Incentive, and Award marketplace, or other businesses reliant on consumer products manufactured in China, that your supply chain will be impacted.

Despite some positive metrics revealed at the beginning of March showing that over 90% of Chinese state-owned enterprises (SOEs) have resumed production, the announcement of economic data for February was much weaker than expected, driven by a lack of production that has been sharply curtailed since late January, when Beijing extended the Lunar New Year, coupled with several provinces announcing further extensions into the middle of February.

Many improvements have been made in key sectors, including oil and gas, communications, electricity generation, and transportation industries, which have now realized an operation rate of over 95 per cent.

However, Chinese factories struggle to resume operations as the fight against the coronavirus continues. While state enterprises appear to have been successful at returning to business-as-usual, other official metrics for the virus-stricken Chinese economy are not as optimistic. Current estimates project only 30% of China’s small and medium-sized enterprises (SMEs) have resumed work.

On February 29, 2020 China revealed that its February manufacturing purchasing managers’ index (PMI) had slowed to an all-time low of 35.7, signalling a sharp contraction in factory activity. This level eclipsed the previous low reached during the global financial crisis in November 2008, when PMI dropped to 38.8. By most measures, China is still the world’s factory, so there will be an impact on trade and commerce.

So what does this mean for you and what action should you take with respect to your purchasing strategy?

We’d recommend you check in with your vendors and supply partner’s to assess their inventory situation. Some may be impacted more than others. With uncertainty about tariffs proposed to take effect December 15, 2019, many companies, including PIA Products moved up production timetables, and pulled forward inventory so as not to be subject to an increase in landed cost. In other words many of us who typically would bulk up on inventory in Q1, filled our warehouses in late Q4, positioning ourselves (albeit unintentionally) to weather production and logistical delays.

If you do find yourself in a position of uncertainty, maybe now is as good a time as ever to expand your sourcing and purchasing network. Having more options available, could prove to be a valuable proactive measure should manufacturing and shipping issues continue.

Examining your product mix is also an action you could implement. Evaluating your product use, and introducing new skus or testing some different categories can fill gaps or holes in your assortment plan.

While speaking recently with Gerald Gunn, Director of Retail and Human Resources for Pacific Park on The Santa Monica Pier, he expressed his concerns regarding plush in particular.

“We’re heavily dependent on plush for our midway games operations. I received several communications from vendors that multiple shipments didn’t make it out of China before the New Year Holiday, and that the travel restrictions imposed definitely impacted the labor force, which in turn has hampered post holiday production.

As we move into Spring Break, and the busier portions of our season, we’re definitely monitoring this situation closely. We’re examining some additional vendors, and evaluating some retail, and hard goods as alternatives to plush. Items like your licensed headphones have worked well for us previously, but we may have more gaps to fill, so it’s good to hear that your inventory levels are high.” ~ Gerald Gunn

The good news here is that there are always challenges in any business. In the last 20 years, one can probably remember things like Y2K where all our electronics were going to be rendered useless, or previous viruses like West Nile, SARS, Swine Flu or Zika that were going to keep everyone inside and impact attendance and consumer activity. Diseases like Mad-Cow or Hoof & Mouth were going to prevent us from ever having another hamburger, and the Global Financial Crisis was the impending end of the world as we knew it. By no means are we minimizing these events, or the Coronavirus, but odds are we’ll emerge from this stronger than ever. There’s that old saying; Nobody plans to fail, they just fail to plan. Adopt that philosophy now to mitigate any potential problems in your supply chain.