China Manufacturing: The Cost of Over-Reliance
For years, Amazon sellers have relied heavily on goods from China, basing their margins on the low cost of manufacturing and anticipating profits based on selling at a high volume at competitive prices. The supply chain difficulties triggered by the 2020 pandemic challenged this model. While China manufacturing downshifted, countries like India and Mexico have reportedly worked to increase their own capabilities.
With rising manufacturing costs, an unexpected war in Ukraine, and no sign of relief from inflation and supply chain hurdles, now may be the time for some western brands to take a serious look at manufacturing in Mexico and other areas. In this blog post, we’ll look at the pros and cons of manufacturing diversification, what influence the China manufacturing slowdown has had in the past couple of years, and whether or not India manufacturing facilities or other areas around the world could take over the demand.
China Manufacturing: From Reliable to Unpredictable
As the source of one-third of global manufacturing, the impact of the China manufacturing slowdown has hit a variety of businesses hard, particularly the automotive and technology sectors. With an outbreak of fresh lockdowns as recently as March of this year and the shutdown of entire factories and ports, the unpredictable flow of parts and goods out of China has left many companies scrambling to source their products elsewhere while simultaneously struggling to cover the unexpectedly higher manufacturing costs of this global disruption.
Although in theory it makes good business sense to reduce dependence on a single country like China, manufacturing in multiple countries does come with its own set of issues. For one thing, there are geopolitical implications to consider, as Apple recently discovered while shifting the bulk of its production to India. Furthermore, while big companies like Apple have the resources to relocate manufacturing facilities at a large scale, smaller companies won’t have the same flexibility. “For most companies, once you have your manufacturing in place, it costs way too much to pick it up and move it somewhere else,” says David Rier, Kaspien’s Global Logistics Specialist. “Even if you’re seeing price increases and delays, it’s still cheaper than creating a new channel.”
How to Offset Higher Costs
A recent Forbes article suggests that with the further hobbling of an already weakened supply chain due to the Russia-Ukraine conflict, now is the time to shift focus to what you can control, specifically improving inventory management to offset high manufacturing costs. Having too much stagnant inventory increases storage fees and warehousing requirements, which most sellers can’t absorb, while being out of stock on products deteriorates hard-earned credibility and rankings on Amazon.
We’ve covered optimizing Amazon global logistics, discussed inventory management technology with experts, and assessed the long-term impact on the supply chain in our 2022 Covid review. It’s clear that proper inventory management is about shortening the supply chain where possible, diversifying to prevent single points of failure, and right-sizing inventory levels by anticipating supply and demand.
Shorter Supply Chains
As we discussed in our webinar, How to Prepare for Prime Day 2022, the ideal scenario for quickly restocking inventory is to keep sources close and try to have as few steps as possible between manufacturing and delivery. “There’s really only three steps between the origin of your products and the inventory being available to sell on Amazon: manufacturing, warehousing, and fulfillment,” says Taylor Smits, Co-Founder of MyFBAPrep. “To stay on top of high demand, try to keep your inventory ready at Step 2 so it can quickly be replenished. You want to eliminate the time between Step 1 and Step 2.”
Rier agrees that having manufacturers closer to distribution is a smart move. “I believe in global logistics,” he explains. “But sometimes the closer, the better.” That said, if moving manufacturing facilities is not a viable option, shifting warehousing options to keep inventory close to key distribution centers is a strategy many smaller companies are taking advantage of to offset rising costs and delays.
Diversified Sourcing and Fulfillment
Another trend to counter the ongoing supply chain hiccups is to put logistics in place for multiple fulfillment options. This can be as simple as creating an FBM option you can turn to right away in case you run out of inventory through FBA. This is especially helpful leading into bigger buying days like Prime Day and the Turkey 5 when demand could exceed supply.
As for where to source goods and products, increased manufacturing closer to home has benefits and drawbacks. “Having your goods made in the US or Mexico vs India, there are pros and cons to either scenario,” says Rier. “Once a country gets good at something, for example textiles in India, the rest of the world won’t be able to compete. More infrastructure in the US is great, but global supply chains help stabilize economies around the world.”
The goal of diversification is to avoid bottlenecks and single points of failure. Whether this is achieved by using multiple fulfillment strategies or sourcing goods and raw materials from different regions, the end result is the same. This is where partnerships with experienced e-commerce strategists who already have diverse and robust sourcing and fulfillment strategies in place can be a huge asset for creating and implementing a diversification strategy.
If the past few years have taught us anything, it’s that keeping up with supply and demand is not always a certainty and anticipating changes in either is absolutely critical. “I think we had it pretty easy — maybe too easy — and we didn’t know how easily things could fall apart,” says Rier. “We were not prepared for what happened (in 2020) and it caught us off guard. Understanding key data points could help us better prepare in the future. I think we appreciate a data-driven approach much more now.”
Smits agrees, citing the recent supply chain issues as a reason to look to technology for solutions. “Technology is not something a successful Amazon business can do without,” he says, which is why his company and Amazon agencies like Kaspien have entire inventory forecasting teams utilizing the most cutting-edge software to avoid disruptions like what we saw in 2020. This ensures the right amount of product is ordered and at the right times to prevent out-of-stock issues and avoiding the extra cost of stagnant inventory sitting unsold on warehouse shelves.
Building A Stronger Supply Chain Future
Whether or not a company has the resources to move manufacturing facilities out of China, they must still be able to reliably acquire goods and products, mitigate transportation bottlenecks, accurately anticipate supply and demand. China’s manufacturing shutdowns exposed weaknesses in the global supply chain, and many companies learned the hard way we are only as strong as our weakest link.
Now, it’s time for companies to rethink their own supply chain management or continue riding the ups and downs of the global supply chain roller coaster. Whether it’s better technology, better forecasting, better transportation, or better warehousing and storage options, it’s up to sellers and their partners to find ways to improve.
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