Lunar New Year Disruptions

7 Practical Steps to Manage Logistics Disruptions During Lunar New Year

Every year, China witnesses one of the largest human migrations in the world, as the nation’s workforce puts down tools and return to their home towns to enjoy the Lunar New Year celebrations. Factories across the country close shop for up to 40 days while businesses across the rest of the world face a huge amount of supply chain disruption.

With extensive lead times of up to several months, importing goods from China can be challenging at the best of times. However, when you consider that you may be left in the dark for over a month during the holiday period and even then, production may still be constrained for a further few weeks until suppliers catch up with back orders, it is vital that steps are taken to minimise the disruption during this time. Failure to do so could result in costly stock outs, missed opportunities and disappointed customers.

In this article, we explore how organisations can safeguard their operations before, during and after the Lunar New Year period given the level of volatility during this time.

1. Inventory Planning: Understanding your requirements

 
In the face of supplier closures, it is important that you plan well in advance. Failure to do so may mean that you are left with an insufficient level of stock to meet demand. The obvious solution would be to buy extra stock to cover you while your suppliers are out of action. However, is this really the best approach?

For instance, if a large proportion of your inventory is sourced from China, this could mean you have to make a huge investment in order to hold several extra months’ worth of inventory to cover demand during this period. This would tie up working capital, thus having a catastrophic impact on cash flow. Equally, can you be sure that the product will sell through at all? If a product is coming to the end of the product lifecycle or is replaced by a newer, better item, over-ordering in this way could potentially leave your business dangerously exposed to product obsolescence.

With the goal to plan your inventory requirements effectively, a whole range of factors have to be taken into account. From aligning purchase decisions with the business objectives to actually executing the purchase orders with suppliers, this article aims to explore what can be done to help prepare your operations for supplier closures.

2. Harnessing internal collaboration

 
Before you begin to devise a strategy to manage supplier closures, it is important that you fully understand the expectations from the wider business. For example, on one hand, the management may be highly adverse to risk and thus unwilling to invest in high levels of stock. Equally, the management may be more focused on maximising sales or customer satisfaction. In this instance, stock availability will be seen as a priority. There may be more willingness to invest in high levels of stock to mitigate any disruption. Either way, the overall corporate objectives should drive purchase decisions accordingly.

Furthermore, the supply chain team must work with marketing and sales in order to plan for any promotional activity that could be affected by supplier closures. Given that the Lunar New Year closures typically occur only a matter of weeks before the spring season kicks off, failure to plan in advance could mean that the inventory required for a promotion is simply not available. In order to achieve the volumes of stock required to launch a promotion, it is advisable to start planning as early as 5 months before any planned campaign is due to kick off.

3. Forecasting and anticipating demand

 
Determining your inventory requirements requires you to have insight into future demand. Considering that you may need to plan several months in advance, this will mean utilising historic demand patterns to create long distance forecasting. Given the extensive range of factors such as trend and seasonality that have to be taken into account when developing a forecast for each item, it is vital you have the tools in place to forecast as accurately as possible.

4. Exploring your option through scenario planning

 
While forecasts will provide you with visibility in to how much demand to expect, deciding how best to meet the needs of your customers is something which requires considerable thought. After all, there are lot of things that can change in the business environment which may impact the accuracy of the forecast.

For mature items with consistent demand patterns, this is probably not too much of an issue. However for new items or items with volatile demand patterns, this is something which must be managed carefully. After all, if you decide to invest in three months’ worth of stock to cover demand while your suppliers are closed, can you be sure that these items will actually sell? Equally, if you decide not to purchase these items, will you leave your customer disappointed?

In order to make informed decisions, you should explore your options fully. Through utilising scenario planning, you can begin to understand how making a purchase order (or not) will impact your business’ ability to meet the overall objectives. Part of this process could include reviewing your product classifications in order to identify key focus areas. For example, you may want to focus more of your attention on securing A-line items as oppose to the C-line items which are likely to be of lower strategic value. This in turn can help when deciding whether or not to place an order.

Whether this be assessing the potential financial return or identifying the impact on the service level, scenario planning will enable you to focus your resources on the most important items and ensure that any investment in stock is in line with the wider business.

5. Building relationships with suppliers

 
Although in a perfect world, suppliers would deliver all orders, on time, in full, 100% of the time, this is simply not possible in reality. Given that the disruption before, after and during the Lunar New Year period may result in longer lead times, supply bottle necks or even missed orders, it is important that your inventory requirements are communicated well in advance to ensure you receive orders in time.

While purchase forecasts are a valuable tool for sharing your requirements with your suppliers, you may also need to work closely with your suppliers to establish any potential issues which can come as a consequence of the turbulent times around the Lunar New Year. For example, in the lead up to this time you may need to order a larger quantity than usual. Consequently, your suppliers may require more time to prepare the order. Furthermore, for many businesses, if 3 months’ worth of stock all arrived at once, this would cause chaos for your logistics and warehouse teams. Thus, you should also work together with your suppliers to agree a suitable delivery schedule.

Considering that your competitors will also be making their orders to cover the Lunar New Year period, your supplier’s capacity may become extremely stretched. Even after the Lunar New Year, your supplier’s reliability may be an issue as they catch up with back orders. In order to mitigate this volatility, you could invest in additional buffer stock to absorb demand until your supplier’s factories return to business as usual. Alternatively, you could provide suppliers with insight into your inventory priorities. This in turn should enable your suppliers to refocus their resources and thus help ensure that your most important products arrive on time.

Bearing in mind the potential disruption that can be caused by supplier closures, effective collaboration can play a major role in bringing peace in what could be a hugely volatile time for your business.

6. Constringency planning

 
Throughout the Lunar New Year period, agreed lead times can easily go out of the window as your suppliers struggle to keep up with demand. This is a problem which is likely to be true for suppliers with poorer performance records. Considering that these suppliers may be deemed “high risk”, it could be beneficial to extend external collaboration beyond your usual suppliers and have in place a backup supplier based in ASEAN.

Yes, utilising suppliers based in other ASEAN countries may be more expensive than those based in China. However when you take into account the additional inventory holding costs as well as the additional level of risk associated with having to hold high levels of stock, the difference may be minimal. Consequently, it may actually be favourable to utilise these suppliers instead.

However, before you make a purchase with a new supplier, can you be sure that they have the capacity to fulfil your order? Furthermore, do you fully understand their pricing structure? What about the minimum order quantities: are these suitable for your requirements? The only way you can go about finding the answers to these questions is to establish solid, mutual relationships with these suppliers. However, like all of the preparation for the Lunar New Year closures, collaborative relationships with any supplier must be established well in advance.

7. Remain vigilant against supplier distruption

 
Only once you have agreed the business goals, established your exact requirements and decided upon a suitable supplier, can you then raise the purchase order.

While the Lunar New Year holiday can have a major impact on global supply chains, this is not the only scheduled disruption that businesses should worry about. Throughout the year, there a range of events such as Christmas that may result in supplier closures. Consequently, there must also be a process in place to ensure that such issues are planned for appropriately.

Get prepared with our Lunar New Year Checklist

 
Given that many businesses are already heavily disrupted by Covid-19, we have put together this handy checklist to help you get your Lunar New Year plans in order!

Speak to an expert about your inventory challenges

Brendenr

Brenden Lucas

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