Perhaps, even before the coronavirus pandemic, the US-China trade war had already forced you to begin re-engineering your supply chains. Nevertheless, in 2019 about 16% of the world’s manufacturing output came from China. And the reality is that, even with the protectionist US tariffs, many companies continued to depend on China to supply products they believe can best be obtained there. A May 2019 survey by AmCham China and AmCham Shanghai revealed that only forty percent (40%) of their members were considering or taking steps to relocate manufacturing outside of China.
COVID-19 has provided an even more urgent wake-up call to begin re-engineering your supply chains. With almost three million (at the time of writing) confirmed cases worldwide, the world’s major manufacturing centers are either just beginning to emerge from or are still under quarantine and lockdown. First, China quarantined about 50% of its population, shutting factories and decreasing manufacturing output. Then, even as companies scrambled to find alternate suppliers in Europe or Asia, the virus beat them to it. The Just-in-Time approach to retailing means that companies do not have extensive stockpiles. Instead, they must rely on suppliers and trade routes that may no longer function at optimal level or at all, for the foreseeable future. The pandemic has added a new urgency for companies to re-examine supply chains before the next crisis occurs.
Here are five factors to consider as you begin the task of re-engineering your supply chains:
- Map existing supply chains – Do you know where all your inventory and/or their component parts currently are sourced? As this Harvard Business Review article makes clear, the task is challenging but provides crucial information in a time of crisis. Knowing which suppliers or sites, goods or parts are at risk of failing you is a key first step to securing alternate suppliers and mitigating the potential damage from a future crisis.
- Stock more supplies closer to operations – The Just-in-Time approach may still be advantageous. Nevertheless, it is worth exploring whether there are alternate locations that provide opportunities to securely and cost-effectively store supplies that can be shipped as needed. Do not ignore the possibility of utilizing warehouses for stockpiling in other countries. Remember that simply storing products in a country will not impact the country of origin rules which determine how the good is treated upon entry.
- Start building new relationships – A key impediment to switching suppliers are the inevitable hiccups that come with a new relationship. This is why the time to start is now. While too late for the US-China trade war and this pandemic, you will be prepared for the next disruption. Begin now to identify alternate suppliers and to explore diversifying. Invest in the relationship, just as you did at the start of your relationship with your existing suppliers. Leveraging the lessons learnt from those relationships to overcome known challenges will be beneficial during this process.
- Use trade rules – Tariffs and other importation costs are a key consideration when deciding from where to source goods and inputs. Trade rules are used to determine such factors as country of origin, how the product is classified, and whether it will attract a high, low, or no duty upon entry. As you explore new relationships, you will want to focus on those located in countries from which the same or like products can be imported and receive the same or better treatment upon entry.
- Practice patience – The alternate suppliers may not be ready today, but quite likely, neither were your Chinese suppliers, who had to be educated and trained. Making similar investments in new partnerships is an Inevitable part of the process of re-engineering your supply chain. Also, seize the opportunity to negotiate improved terms, and even to explore new manufacturing processes or product lines as these new suppliers position themselves to get your business.
Crises can provide the impetus for creative disruption. So, while it is too late for this pandemic, savvy countries are going to begin positioning themselves to be the next “China”. Smart companies will capitalize on these developments as they take the steps to be ready for the next crisis, whatever form it may take.
DevelopTradeLaw, LLC provides business-oriented advice to the legal challenges that face companies doing business internationally. Contact us for more information or advice on the topic of this article.