Kicking off business conversations with banter about supply chain snags and commiserating about the latest crippling supply chain happening has become par for the course. COVID-19 has shown the true fragility of global supply chains as well as the debilitating impact failing supply chains have on society. While humans are incredibly resilient and capitalist principles of supply and demand will eventually solve for supply inefficiencies, businesses cannot just “sit there and take it”.
For the last three decades, Asia was the de facto choice for all types of production from apparel and textiles, to electronics and machinery, to cosmetics and consumer products. Production costs and MOQ flexibility associated with China and Asia have gradually been worsening for years, but over the last 18 months, the situation has exponentially worsened. We very likely have arrived at a turning point where China and Asia will no longer the best options for pricing, timing, and production flexibility. This article evaluates some of the current happenings in Asia and recommends alternative sourcing strategies specifically within LATAM and South America.
Delta Variant Lockdowns, Manufacturing Capacity, Raw Material Prices (Palm Oil & Coffee Examples)
Just as it felt like our world was starting to return to some state of normality, the COVID-19 Delta variant has assured us that this is not the case. In the USA, we have seen our fair share of the Delta variant and each state, city, and business is reacting with different measures. That said, USA controls are quite different from Malaysia, Vietnam, Thailand, and China’s zero-COVID policies. The Delta variant popped up mid-July with cases peaking in August, and here we are at the end of September with ongoing wide spread lockdowns limiting operations for all non essential businesses. Of course tourism industries have been decimated for the last 18 months, but this most recent wave of lockdowns is impacting so many more industries.
Working with many US based apparel and textile brands that produce product in Asia, we’ve seen several instances where sample rooms have more than four months of backlog. This means that if a brand wants to develop a new style or product, it will take a minimum of four months until the factory is able to take a crack at even the first draft sample. Generally, when you have a pre-existing relationship with a factory, they will prioritize your business and accelerate timelines, but due to lockdowns, only so many employees can come into facilities and so only the largest most high-profile clients get priority treatment. In addition to sample slowdowns, many factories aren’t taking on any new business and existing production projects are almost always significantly delayed. Shipping being so inconsistent, it is next to impossible to forecast when product will be back in stock.
Port Closures & Shipping Delays
So, let’s talk about shipping challenges! In the states, we have seen several shipping nightmares recently. The port of LA is still significantly backlogged with some ships waiting WEEKS in the harbor to unload. The Suez Canal closure was a nightmare that has caused many of these delays. Most recently, issues with the port of Shanghai have further impacted global supply chains. While the Port of LA is the USA’s most widely used port, Shanghai has the largest and most used port in the entire world. Each year the Port of Shanghai handles 43,500,000 TEU (TEU is an abbreviation and term used to describe a standard 20-foot container). Covid lockdowns and the new Delta Variant lockdowns have significantly impacted the effectiveness of this port, however, a huge typhoon hit in the middle of September causing the port to completely halt all business operations for several days. Now not only are there multi-week delays to unload ships in LA, but there are also multi-week delays to get products on ships in Asia. Because so many businesses rely on the Port of Shanghai for logistics, businesses are panicked and are frantically trying to find alternative shipping routes. People are airing in product out of desperation and are sacrificing huge chunks of their margins just to fulfil orders and stay in business. Those customers that can book sea freight are astonished to find that the price of a container from China to US went from ~$2,500 to $10,000 (and sometimes far more expensive – one of our customers told us they paid $30,000 for a single container booked at the last minute)!
Commodities – Palm Oil, Coffee, Tin
I will make a bold statement that most people reading this article do not understand how important palm oil is to society. It appears that people will soon learn of palm oils importance. A few brief facts about Palm Oil –
- Malaysia is a majority global producer of palm oil.
- Palm oil is a critical ingredient in many products. Consumer products like lipstick, soap, shampoo all require palm oil. Food products like packaged bread, ice cream, noodles, and pizza dough all rely on palm oil.
- There is a global shortage of palm oil and the price of palm oil is skyrocketing. The cost is up 70% from last year.
Due to Malaysia’s zero-Covid policies, the country is months behind on processing and producing palm oil so we could soon see beauty product stock outs.
I will make another bold statement that most people reading this DO understand how important coffee is to society. I cannot start a day without my cup of coffee, and this is the case for almost everyone I know! Vietnam, like Malaysia, has leveraged stringent zero-Covid policies. Ironically, Vietnam is the world’s 2nd largest exporter of coffee by volume. When I think of fine coffee, I think about Brazilian and Colombian roasts, and sadly this year, the weather has been quite uncooperative in that region. As is the case, Vietnam, Brazil, and Colombia all have shortages and so the price of coffee is going way up. Hard to believe that a $5 Starbucks iced coffee may soon move to $10!
Tin is a sneaky important commodity that has also been significantly impacted by Malaysia lockdowns. One of the world’s largest tin smelting facilities has been closed for weeks. The tin that this facility produces is specific to computer chips and circuit boards so those industries particularly impacted by rising material costs which are then passed onto customers.
Navigating All of This:
The historic heavy reliance on Asian supply chains has driven a reluctancy to consider alternative supply sources, but these problems are sinking businesses. Nike has publicly acknowledged that there will be supply chain shortages around 2021 holiday season. Samsung is frantically opening several new factories in Pakistan and other countries to try and keep up with TV production and demand. The impacts of these supply snags are very real, and they appear to be here to stay. The best thing you can do for your business is de-risk, dual source, and proactively seek out new supply chain partners even if on a limited trial basis.
Each industry and micro-vertical faces unique sets of supply chain impacts, but for companies in North America, a great option to turn to is near shoring. LATAM and South American manufacturing has come a long way – in terms of more competitive pricing, flexible MOQs, faster lead times, and better customer service. The challenge is that many of these factories are already starting to see heightened volumes – they are getting busy! Like in Asia, to get the best production pricing and timelines, you need to be well connected in the area. The more business you do with a factory the better the relationship gets, the better the pricing and timelines. Our team has specialized in aligning brands with premium suppliers in LATAM and South America for years. We also provide a cloud-based platform, the GRID, that is all about streamlining your end-to-end supply chain operations. Each factory in our network is GRID certified and works with your team in real-time. Visibility, customer service, timelines, pricing, and overall experience is different with the GRID. Let’s talk about future proofing your supply chain.
Bobby Hamill is the VP of Sales at Suuchi Inc. With over five years experience at Netsuite, Bobby leads the Suuchi team to help hundreds of businesses take the first step to a digital future for their supply chains. Learn more about Bobby.