The Coronavirus - Disruption of the Supply Chain
The outbreak of the coronavirus has been out for a couple of months. However, the uncertainties of what will develop next are still unknown. One main uncertainty is how the coronavirus will be affecting the supply chain. If the supply chain in China will be disrupted, how should you proceed?
Let’s start with the good news, the number of people being affected by the coronavirus in China is decreasing. You can see less and less people getting infected which can signal the worst is over. As a result, more factories are starting to open which theoretically should mean the supply chain will be improved.
With having a factory, I would like to share our experiences of what we have done and where we are going in the next few months. After the Chinese New Year, we were supposed to open up on February 3rd. However during the holiday, China was on lockdown and people were not able to move freely like they were before. This meant delaying the re-opening of the factory.
Luckily, due to our reputation and being able to quickly evolve to the tight safety standards, we were the first factory to be granted permission for the local government to open. We officially re-opened our doors on February 10th, about one month ago.
Being able to open weeks and months before everyone was very humbling but it was also a huge responsibility to keep 100% of our employees safe. If one of our workers were infected by the virus our factory would be shut down and perhaps it would still be shut down.
During this time, we have taken drastic steps to keep our 350+ workers safe. For an example, we had to re-organize our offices, meeting rooms and production lines to ensure that no one was within 1.5 yards from each other. Also, how people move around and transported parts had to be re-designed. We had to limit the amount of people in the warehouse and also limit the number of people on the elevators to just one! We even had to ensure that appropriate space was given going up and down the stairs. If you have been to China, you know that lines aren’t the norm, huddling around elevator doors and pushing is very normal, but not now.
Opening up our doors early was a huge success. However, as a contract manufacturer that develops and manufactures some of the most complex projects in the world, there was very little we could do. Since we don’t have all the production lines for all the different materials, we are dependent on the support of our suppliers to provide us with parts and subcomponents. If we don’t have all of those subcomponents, we can’t assemble. If we can’t assemble, we can’t ship. If we can’t ship, you can’t sell.
As usual, before Chinese New Year, we built up inventory because we knew that our suppliers would be delayed and that it was healthy for us to have some inventory so we could assemble without our suppliers producing parts. However, no one, especially us, expected factories in the manufacturing hub of the world to be shut down for more than a month.
Most of our clients have a force majeure clause in our contract which will take into account if something terrible happens to us, such as a fire. But no one asks what would happen if our facility and 100% of your suppliers also have a fire, or a virus.
During a time like this, there is not much anyone can really do. I guess this will verify whether or not you did an acceptable job of auditing your supplier.
If you are selling a commoditized item with little tooling investment, the correct thing is always to diversify. This is the right thing to do anyways as one factory might get shut down for failing to comply with environmental standards, lose critical workers, etc… For this case, you might have one factory open earlier which can start producing more orders for you.
However, this is not the case if your product is a bit more complex and requires a larger investment for tooling. If you have a unique product that requires multiple tools, diversifying your supply chain might not make sense due to the investment.
To proceed, you will need to figure out when it makes sense to open up production with more than one factory. If you have not scaled up your sales, investing into more tools won’t make sense. However, if you have scaled up sales, investing into additional tools at different factories can make more sense.
Mostly everyone that does not keep a lot of inventory is getting close to being out of stock or are already out of stock for their product. The question now turns into, when can I get products and can we produce a little more to take into account for the lost time?
The good news is that most factories do not operate at 100% efficiency. If you have been to an average Chinese supplier, you will see why. This means that scale up is quite simple to achieve if the owners have a little understanding of management and planning.
Since I can’t vouch for all suppliers, I’ll talk specifically about us. My factory is known for scaling up production. For an example, we moved into a new factory in August of 2019 that was 5x larger than our old factory. We are also buying machines once or twice a quarter. We understand that when we are nearing full optimization, we need to invest into facilities, production lines, talent and more to reach future demand. This is why right now we have already 100% guaranteed each of our customers that we will easily be able to ship out their 2020 sales forecasts.
This will not destroy the supply chain, it’s just a minor bump in the road. You can use this time to reflect on whether or not your supply chain needs to be re-analyzed. The top suppliers should be doing anything to get up and running again. If you feel like your supplier is not going that extra mile then it might be a good time to start from scratch and speak with some others.