Insights

Lockdowns in China: questions to ask yourself to prepare for supply chain disruption

May 09, 2022

Since the end of March, Shanghai has been in either partial or full lockdown: an event that will inevitably have an impact on global supply chains. Given the huge role China plays in international trade and exports, it’s vital to get to grips with what’s happening, and what you can do to insulate yourself from the shockwaves.

What’s happening with China’s lockdowns?

Since the end of March, Shanghai has been in either partial or full lockdown. Only a small amount of the city’s manufacturing sector is operational, and mass testing is in place. Shanghai’s Yangshan port has continued to operate, albeit under a closed-loop system. 

Official data released on 30th April showed that manufacturing and services activity in China was at its lowest level since the start of the pandemic in early 2020. 

Lower manufacturing output has also cut the demand for export bookings out of Shanghai, causing some carriers to blank sailings. Efficiency at Shanghai’s Yangshan port is also low, due to closed-loop working conditions, with delays between 3 to 7 days before ships can call. Some weekly flights out of Shanghai Pudong are also being cancelled as a result of staffing shortages.

Lockdown restrictions may be enforced in other areas; so far Beijing has not implemented a full lockdown, but has introduced travel restrictions and other measures to curtail any spread.

Announcements from the Chinese government suggest that there are no plans to change away from their zero-tolerance policy against Covid. 

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How might lockdowns in China affect logistics?

Depending on how long the lockdowns last, whether they spread, and the response (or lack thereof) from the carriers and the market, shippers could be facing a wide variety of different outcomes. 

Let’s quickly explore some of the potential events shippers might have to counter.

Suppliers might change their order patterns or volumes.

Depending on their location or size, different suppliers may try to rebalance where manufacturing takes place to alternative sites (including alternative sites in South East Asia, as well as elsewhere in China) or they may scale down or stop production altogether. Depending on what they can do to continue production, their financial strength as a business may be affected in the long term.

 

Production reliability overall will likely suffer.

Another issue facing manufacturers in lockdown is the supply of raw materials. Even if factories are able to remain open under less strict regulation, the inflow of raw materials needed for production may be constricted. Similarly, your finished goods manufacturers may not be based in areas under lockdown, or even in China. But if they are dependent on suppliers in stricter lockdown areas for components or other raw materials, their ability to produce as planned may be at risk. 

 

Some activities may shift to different places to avoid lockdown zones.

For example, some consolidation for Shanghai’s Pudong Airport is taking place in Ningbo, where activities can continue with fewer restrictions. This can add additional lead time, however, as cargo is moved between facilities.

 

Sudden lockdowns are announced as the virus spreads.

As this wave of Covid spreads, other cities are likely to be affected at some point. This may result in lockdowns being announced with little warning. If you have suppliers based in China at all, not just in Shanghai, it is worth considering what you need to do should lockdown reach different districts.

 

Illness and lockdown measures reduce the efficiency or availability of staff.

Sickness may result in absent staff, while closed-loop operations can limit the number of workers available per shift. Truckers collecting or delivering cargo are also required to present negative tests to enter and exit areas in lockdown, which might reduce the number of drivers willing to work in those areas, but can also slow down the movement of goods due to additional checks.

 

Congestion spreads to other locations as shippers avoid those affected by lockdowns.

As shippers hunt for alternative routes, an option that may have been a viable plan B at first may become overrun with others looking to get goods out of the country, leading to a loss of efficiency. For example, Guangzhou airport received an influx of air cargo diverted from Shanghai, but following suspected Covid cases in the area has now cancelled all domestic flights with a knock-on effect on international cargo.

 

Rates spike as areas come out of lockdown and restore demand.

As manufacturing productivity returns, there will be a rush of demand again for shipping out of Shanghai. This is likely to result in an imbalance between supply and demand of space that fuels a rise in rates, particularly if closed-loop systems remain and blanked sailings have reduced the amount of capacity available.

 

Congestion and backlogs affect ports internationally as demand returns to the market.

Following a period of reduced movement, ports that usually receive a significant volume of trade from China may find themselves facing a wave of cargo to process as factories fulfil a backlog of orders. This might result in a hit to operational efficiency at ports, as seen earlier in the year and late last year as terminals in the US and Europe struggled to work through large volumes of imports.

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What can you do?

The future is uncertain, and making a bet on exactly what will happen is risky. The most sensible thing to do now, therefore, is to prepare yourself to handle disruptions as best you can.

Here are some actions you can take to make sure you’re in the best position possible to counter the ripple effects of the lockdown in China.

Get the facts on how your suppliers are affected

Depending on where your suppliers are and their size, you may find each taking a different approach to the lockdowns: continuing production under a closed-loop system, reducing or temporarily stopping production, or relocating production where possible.

Make sure you understand which direction each of your suppliers are taking, and whether they will be able to fulfil your orders as usual or whether things need to be adjusted. Once you have a good understanding of the constraints you are facing at the manufacturing end, you can communicate the facts internally and use them as the basis of your plans.

Questions to ask:

  • How might the ability of manufacturers to fulfil their obligations to me change? 
  • Are all product lines affected, or only some?

 

Factor in additional lead time now

Regardless of what happens, a change in plan will likely result in picking up some additional lead time. 

That additional may come from factors you can control and work to streamline, such as how long it takes to decide a change internally. But it may also come from factors beyond your control, such as landside issues with available drivers or cargo loaders at airports. 

Adding extra expected lead time into your plan now will help you to set more realistic expectations with the teams who rely on you, and soften the impact of changes as they occur.

Question to ask:

  • What are our current lead time assumptions at each stage, and how might those change?

 

Review the status of orders and shipments across your supply chain

When changes can happen quickly, you want to know exactly what your options are. Do you have inventory waiting to be consolidated, that you may want to expedite now? Are there items due to go into production that you can do without for a little longer, and others you might want to pull up the priority list? 

Especially for goods in areas that are at risk of moving into lockdown, mobilising to adjust any existing plans now might help you get extra product out before more restrictions come into force.

Question to ask:

  • Are there any quick changes we want to make now to ensure we get items out of China?

 

Prioritise with internal teams

Limited space or production capacity will necessarily incur some difficult decisions. To make these decisions easier, speak with your internal teams to understand what is most important to them. Are there promotions that can’t be rescheduled, or high-margin items that shouldn’t be missed off?

Once you are all aligned internally, with your joint priorities and preferences documented, you’re equipped to make decisions that work for as many people as possible.

Questions to ask:

  • If I can only move 50% of what we usually need, what items are most important to you?
  • What are the fixed events in the sales calendar, and how much of which items are absolutely needed for each?

 

Understand your financial limits

In a volatile market, costs can change rapidly, so make sure you know what additional costs you have the authority to approve. Having to wait for your CFO or financial team to sign off can mean losing a booking and extending lead times further.

Additionally, while your budget amount may be flexible, make sure you can easily move it to different categories, such as warehousing. For example, you may want to counter unpredictable transport out of China by keeping certain core items at ‘save points’ closer to your sales market. 

Question to ask:

  • What is the maximum freight cost I can accept on each of the items I need to move?
  • What procedure do I need to adhere to to reallocate my spend e.g. to additional warehousing?

 

Strategise with your forwarding partners

When change is constant and unpredictable, the relationship you have with your partners is more important than ever, not only to respond quickly, but also to explore new routes.

Work with your forwarders to understand what additional services they can offer. For example, if you are available to switch supply to South East Asia, can they support those lanes as well? Expert forwarders can also recommend alternatives that meet your priorities, whether it’s ensuring supply of best-sellers or maintaining strict cost control.

Questions to ask:

  • Where else can you support me, outside of the work we already do together?
  • If I need to make sure that X happens, how might I do that?

 

Understand your plan B, C, D and E – and when you’ll use them

Having a plan B is vital, but given how quickly congestion and Covid can spread, you need multiple back-up options, not just one. 

Not only that, you need to know exactly what needs to happen for you to deploy your secondary plans effectively; the more thinking you’ve managed to do in advance, the quicker you can act and, therefore, the sooner you can switch away from a congested port.

Questions to ask:

  • What can I do if my usual routes are disrupted?
  • How will I know it’s time to switch? What are the triggers, and who needs to know what, and when to make the switch happen?

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All the questions in one place

  • How might the ability of manufacturers to fulfil their obligations to me change? 
  • Are all product lines affected, or only some?
  • What are our current lead time assumptions at each stage, and how might those change?
  • Are there any quick changes we want to make now to ensure we get items out of China?
  • If I can only move 50% of what we usually need, what items are most important to you?
  • What are the fixed events in the sales calendar, and how much of which items are absolutely needed for each?
  • What is the maximum freight cost I can accept on each of the items I need to move?
  • What procedure do I need to adhere to to reallocate my spend e.g. to additional warehousing?
  • Where else can you support me, outside of the work we already do together?
  • If I need to make sure that X happens, how might I do that?
  • What can I do if my usual routes are disrupted?
  • How will I know it’s time to switch? What are the triggers, and who needs to know what, and when to make the switch happen?

Prepare your plan

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