Dennis Weir

Last updated: April 17, 2023
Dennis Weir

A lesson in managing supplier closures

Every year, China witnesses one of the largest human migrations in the world, as the nation’s workforce put-down tools and return to their home town’s to enjoy the Chinese 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. Given the level of volatility during this time, what can you do to safeguard your operations before, during and after the factory closures?

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 few more weeks until suppliers catch up with back orders, it is vital that steps are taken to minimize the disruption during this time. Failure to do so could result in costly stock outs, missed opportunities and disappointed customers.

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 life-cycle or is replaced by a newer, better item, over ordering in this way could potentially leave your business dangerously exposed to product obsolescence.

In order 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.

Harnessing internal collaboration

Before you can begin to put in place 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 averse to risk and thus unwilling to invest in high levels of stock. Equally, the management may be more focused on maximizing sales or customer satisfaction. In this instance, stock availability will be seen as a priority and 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 the marketing and sales teams in order to plan for any promotional activity that could be affected by supplier closures. Given that the Chinese 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.

Forecasting and anticipating demand

In order to determine your inventory requirements, it is vital that you have insight into future demand. Considering that you may need to plan several months in advance, this will mean utilizing 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 important that you have the tools in place to forecast as accurately as possible.

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 utilizing 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.

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 Chinese 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.

Executing the order

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

While the Chinese 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 or even the extended summer holiday taken by some Southern European nations that may result in supplier closures. Consequently, there must also be a process in place to ensure that such issues are planned for appropriately.

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