Chinese new year – 80/20 Sourcing

Chinese New Year (CNY) is the biggest holiday of the year in China. If you are an Amazon seller or importer and source from China, then this time of year can be a huge headache because Chinese factories will shut down anywhere from two weeks to a month. I’d like to share two stories with you of what can happen and what you can do to minimize the disruption to your shipments.

A friend started up an online business last year and sourced their product from a Chinese factory. They placed the order in November and the product shipped in January and sales spiked in February. However they didn’t have enough inventory in stock so they went to place a reorder. When they tried to contact the factory, the sales representative said that they could not begin the order until March. Why? Because the factory was closed for a full month for CNY. As a result, my friend’s business lost out on over 60 days worth of sales, which meant tens of thousands of dollars in lost profits. Don’t let this happen to you!

Second scenario is a former client of mine placed an order for auto parts from several suppliers in December. The factory promised to deliver before CNY which was late January. One thing led to another, in the week leading up to CNY, huge lines of trucks formed on the roads leading to the Port of Shanghai. In fact during the days leading up to the holiday, many truckers simply give up and dump their products onto other truckers to make the final delivery. Why? Because they are in a rush to get home for the holiday. As a result because of this huge backlog, the shipment missed the vessel cut off date and the shipment was delayed several weeks due to the holiday.

In fact don’t be surprised if factories themselves cannot predict impact of the disruption. There are many moving parts in sourcing and supply chain so it’s up to you to take the intiative to make sure your orders are placed on time and delivered in time before the long holiday. So what can you do to plan for CNY so you don’t run out of stock or have you shipment delayed and delivered AFTER the holiday?

But first to truly understand the impact, let’s take a closer look at the tradition of Chinese New Year.

When is Chinese New Year?

Chinese New Year, also known as Spring Festival, takes place every year between late-January to February (the date varies each year because of the lunar calendar). For example: in 2021 it will begin February 12, 2021 and in 2022 it will begin February 1, 2022. In mainland China, officially it is a weeklong holiday however it reality it will last a lot longer! This is especially true lower tier cities where factories are located. As a rule of thumb I expect factories to be impacted at least two weeks and up to one month or more!

What is Chinese New Year?

Historically Chinese New Year marks the end of a year-long time of hard work and a time for families to unite, celebrate, relax, eat, catchup on gossip, and take their salaries home to support their family. Think of it as Thanksgiving, Christmas, and New Years’ combined. In fact for many Chinese it marks the only time of year they can afford to make the long trip home.

Ties that bind – It’s important to keep in mind that in Chinese culture the families ties are a lot stronger than in the west. It’s considered a son or daughter’s responsibility or even DUTY to return home to visit their parents during Chinese New Year. If they do not they would be seen as disrespecting their parents.

Why is the impact of Chinese New Year so great?

China has 1.3 billion people. Most of the workers working in factories are “migrant workers”. In other words they are not local to the same town as the factory in Shenzhen or Dongguan. In fact during Chinese New Year, an estimated 340 million workers make the annual pilgrimage from their places of work back to their hometowns and villages. It has been called the “largest human migration in the world.” Keeping things in perspective the US only has about 320 million. Imagine everyone in the US getting aboard a train and taking a long trip back home. Can you imagine the traffic and congestion? That’s what Chinese new year feels like.

On average Chinese railways carry 6.4 million passengers per day. During Chinese new year there will be a 50x increase in demand! The infrastructure cannot support this demand. So it means that it’s really really hard to get a ticket home. So what do you do if you’re a Chinese factory worker? You buy an earlier ticket. This is why factories start closing down days and even weeks before the official holiday begins. If they tried to leave the day before the holiday there’s literally no chance they can get a ticket. And the same problem applies with buying a return ticket. In fact most factory workers will return several weeks after the official end of the holiday. Add up the additional time and you have up to a month-long holiday.

In Chinese there is a term called “Zao Zou Wan Hui” (早走晚回), which means “Leave early and return late”. That perfectly sums up the length of the holiday.

What is the impact of Chinese New Year on sourcing from China?

Given the reasons above, Chinese factories will shut down anywhere from two weeks to a month or more during Chinese New Year.

Not only that, the entire supply chain will be affected as well. For example even if your factory promises you then will only be closed two weeks, that does not mean that their raw material and component suppliers will be open. And it doesn’t mean that the logistics providers will be open. If your factory returns to work after two weeks, but their raw material suppliers are still closed until after four weeks, there’s no way they can begin production until the entire supply chain is back online.

The same problem applies to logistics. For example the week before Chinese New Year is a trucking nightmare. Long long lines of trucks will form leading to the ports. In fact, I’ve had cases where the factory has the goods done but because of trucking delays, the goods will miss the closing date to be loaded into the port and as a result miss the vessel.

Long story short there are many many moving parts involved and not a matter of just the factory getting back on track to ensure that your order goes out on time. You’re only as strong as your weakest link and during CNY many of the links in the supply chain will be BROKEN.

You’re only as strong as your weakest link in your supply chain

Moreover from the human resources perspective, Chinese New Year is a huge headache. After the holiday many workers DO NOT RETURN. Many factory workers after taking time off during the holiday to reflect, decide they don’t want to work so hard and be so far away from family and friends. So they decide to look for more comfortable service-industry jobs in their hometowns. Many older Chinese tell me that the younger generation are not willing to “chi ku” (吃苦) or as “eat bitter” and work as hard as their parents. This means that rather than toiling away in a faraway factory, away from their friends and family, they would rather look for a job at a local restaurant or hair salon in their hometown. The work is easier and the pay may sometimes even be higher.

Taking a look at the macro perspective, this is exactly what the Chinese government wants. They are incentivizing ways for China to be more a service-oriented economy and while gradually moving away from it’s role as the “world’s factory.

All this causes a major headache for the factory owner. In my years of sourcing from China factory owners tell me they expect turnover rates of at least 30% in some industries.

The other headache is increasing labor costs to retain their talent. Many factory workers expect year-on-year pay raises of up to 20% in parts of Guangzhou. If they don’t get it they are more than willing to jump ship to the next factory to get a pay raise. In fact this problem persists all across China from blue-collar factory jobs to white-collar corporate jobs.

This means that after returning from CNY, not only do they have to cope with factory workers leaving and absorbing the increase in labor costs to retain talent, but also recruiting and training new workers to replace the ones who left.

From the sourcing perspective, this means that factory productivity slow down before CNY and continue to be low after CNY. It may take another month after CNY before the factory returns to full capacity.

Now that you understand the background and impact of CNY, let’s take a look at what you can do to minimize the disruption to your business.

Chinese New Year Best Practices

Place Purchase Orders early, ideally by mid-November.

By placing your orders no later than mid or late-November the factory will have a full 60+ day lead time before the CNY rush. This improves your chances of delivery before the holiday. Keep in mind that there are many variables in play.

In the months leading up to CNY, the factory will be slammed with orders. This means the factory will have other orders in their pipeline before yours so they delivery times will be longer than normal. If a normal delivery lead time is 30 days, I wouldn’t be surprised if the factory can only promise 45 days in the months leading up to CNY. By placing your order earlier, you can get in front of the line to get your delivery sooner.

Place Orders by Mid-November before CNY rush

Ship early before the rush.

In fact if you are planning on shipping by sea before CNY, book a vessel date at least 1-2 weeks before the holiday to avoid the huge rush and risk of your goods getting stuck and missing the boat!

As a best practice I don’t trust the factory’s own cut-off dates. One of the factories I work with said that they can promise to manufacture and deliver POs received as late as late-Dec. Unless they already have product in stock I don’t believe them at all.

If for some reason they don’t keep their promised delivery date in mid-Jan and the order is not complete before CNY then I wouldn’t expect the order to be shipped out by late-Feb or March at the earliest. From your perspective this additional 30-45 day lead time could result in thousands of dollars in lost sales.

Increase your order(s) leading up to CNY and hold additional inventory in stock

Some sellers plan ahead and will place larger orders leading up to CNY so they will have enough inventory in stock during the CNY factory closures. This strategy can be effective if planned properly. But it carries additional inventory risk if your product doesn’t sell as well as expected. For example if a new competitor enters the marketplace, if competition undercuts your pricing, or if there are problems with your product which affects demand. Another risk of holding additional inventory in stock is the negative affect to your cash flow. In other words you are tying up more of your cash in inventory where it could be invested elsewhere to earn greater returns.

Have a backup plan: China +1 strategy

Many established purchasing professionals have alternate channels of sourcing besides China. In other words they sourcing in China but also from other regions such as India, Southeast Asia, Mexico, or the US.

The takeaway is that than forcing the issue with your Chinese supplier and trying to compete with the pre-CNY rush, consider sourcing from regions unaffected by CNY. India for example may be able to manufacture similar products and sometimes at a lower cost. Manufacturing of products such as textiles and shoes are being shifted to Southeast Asia to take advantage of the lower labor costs.

What NOT to do

If you placed your purchase order too late don’t expect miracles to happen. In other words if it’s not going to happen don’t plan on rushing a shipment out before the holiday. There are too many moving parts in this equation so don’t try to force them to do something that won’t happen. If you do push them overboard, the entire supply chain is already under stress and this increases the risks of mistakes, defects, and even more headaches down the line.

In closing, there is a famous Chinese saying: “With crisis comes opportunity.” Chinese New Year can be a disruption but at the same this can a great opportunity to diversify your sourcing strategy while China is on holiday. Who knows… if you place your cards right you may find a new source to manufacture your product and grow your business while your competitors are waiting for their Chinese factories to come back online.

Tag: Chinese new year

2017 Chinese Holiday Schedule

Chinese New Year Sourcing Best Practices from China