The heart of the manufacturing world was the first region to feel the effects of the pandemic. As its effects spread across countries in East and Southeast Asia, manufacturers promptly halted the exports of essential goods. Their priority was to supply domestic hospital networks, authorities, and their own populations before catering to the needs of the rest of the world.
This diversion toward internal consumption resulted in a ban on the export of personal protective equipment (PPE) products, including gloves, face masks and shields, goggles, gowns, hair covers, and essential goods such as sanitizers and disinfectant wipes. It goes without saying that this sudden change seismically impacted all of the supply traditionally meant to be funneled to the international market.
Such a steep turn left many countries scrambling for essential medical items. However, as the effects of the outbreak started tapering down across the region, the world once again turned toward these countries to renew mass procurement. While we have seen some stabilization, many challenges remain in terms of pricing, reliability, and the supply chain itself.
Let's take a closer look at these challenges to better understand how best to navigate sourcing essential products from Asia in the current landscape.
Incessant Demand for PPE
In 2018, the total value of global exports of PPE products was more than US$47 billion, with gloves, masks, and gowns being the most in-demand products. More than 60 percent of PPE exports were supplied by the top five exporters -- and China ruled the ranks. With the manufacture of essential goods limited to few countries, and with the sea and air freight suddenly under notable pressure, a supply chain crisis was practically inevitable.
In the early days of the pandemic, global logistics were struck with chaos. Ports and airports were shut down, prolonging most delivery schedules. Government regulations were neither stable, nor well-defined in terms of customs, quality, or handling restrictions. Companies were left to haggle deliveries at freight auctions -- at times over entire aircrafts -- and some even turned to private aviation to secure the continuation of PPE supply.
Over time, sea freight scheduling and supply has more or less stabilized, but air freight still faces uncertainty. The borders of many countries remain closed -- and so do their air spaces.
Not only did the coronavirus outbreak raise transportation costs, but the prices of essential products skyrocketed as well. With the whole world running low on supply, we have seen many companies turn to suppliers in East Asia, accepting inflated prices out of necessity. Manufacturers were facing labor shortages due to mandatory social distancing together with uncertain and increasingly expensive raw material supplies.
This has led to products such as N95 masks being sold at prices many times higher than usual market rates. The same goes for the iconic 3-ply blue masks: The manufacturing cost might be around 3-5 cents, yet even companies that offered to buy at 40 to 50 cents per mask were left to wait several weeks.
Retailers should know that tier-one medical products are, and will continue to be, priced high. While face masks have seen a slight reduction in pricing in recent weeks, the product remains lucrative. The WHO latest guidance advises the widespread use of masks in public places globally, creating even more demand. The face mask market is poised to expand at a compound annual growth rate of 22.9 percent until 2023, with no major slowdown expected until 2025.
COVID-19 has taught us a lesson at the personal, business, and national levels. For the foreseeable future, people will continue to strongly prioritize personal hygiene, meaning that the demand for products like hand sanitizers, medical gloves, and disinfectant wipes will remain steady. Companies will contribute to this trend further.
Amazon is giving masks to employees and has been installing sanitization mechanisms in all warehouses, workspaces, and offices. If these practices become mandated corporate policies or government regulations, there will be a constant demand for the goods needed to ensure compliance.
Supplier Relationships and Diversification
Developing relationships has traditionally been a vital element when sourcing from Asia. It was a common practice for companies to set up offices in said countries or partner with those that had direct relationships with local manufacturers. Product or factory inspection was a routine procedure -- one that has now been replaced with digital alternatives. Close communication remains key, with emails, phone calls, or video chats occuring on a regular basis. Investing in long-term partnerships has brought benefits to both sides during the pandemic, because established partners often receive priority treatment.
While many of these practices are likely to maintain their importance post-pandemic, there's one aspect all companies should look toward: diversification. Whether in terms of geography, pricing, or supply chains, forging new relationships might be just as important as maintaining the existing ones.
According to the United Nations Statistics Division, in 2018 China accounted for 28 percent of global manufacturing output, more than 10 percent higher than the U.S. Despite that, sourcing from China has been associated with notable uncertainty. The prolonged trade war and sanctions on Chinese products have made pricing, compliance, and supply chain management a nightmare. Many companies had already been looking to explore opportunities in other countries -- and this shift has been further accelerated by the pandemic.
As a result, countries such as Singapore, Japan, and South Korea have emerged as significant suppliers of equipment to contain COVID-19. Added to that, Thailand and Vietnam have traditionally held a strong foothold in the export of gloves, goggles, gowns, and hair covers, while Cambodia and Indonesia have been in a great position to produce gloves, gowns, and hair covers. With Malaysia being a net exporter of gloves and goggles, and Myanmar prioritizing gowns and hair covers, retailers can identify a plethora of diversification opportunities across the region.
While the focus on PPE may be somewhat temporary, its consequences will have notable impacts. Companies across the globe are already shifting to new regional players who will have a unique chance to present their products in terms of quality, competitive prices, reliable supply chain management -- and much more once the curve flattens enough.
In terms of price, competing with China seems unfavorable, but there are other factors to consider, such as the lower cost of logistics when sourcing supplies from countries such as Mexico. As you look to mix up your portfolio, aim your attention toward countries with developed manufacturing infrastructure, be it in Asia, or even Latin America and Africa.
China's prime position is unlikely to be dramatically shaken in the immediate future, but the world has certainly learned its lesson. Companies will look to avoid putting all their eggs in one basket, turning to diversification as an essential strategy to mitigate risk -- whether caused by natural, medical, economic, political, or societal crises. Retailers should know that it's no longer enough to have just one layer of options -- make sure to have the second or even third layer of options readily available.
When it comes to sourcing, companies will be more future-oriented and less risk-tolerant. The just-in-time inventory model and ordering only the predictable demand in short time frames could be replaced by safety stock and strategic distribution of partner networks. Such a cautious approach is likely to manifest in contracts as well, with companies looking for more flexible conditions, giving them the much-needed space for adjustments.
Stay One Step Ahead
Agility has been the defining aspect of success when sourcing from Asia during the pandemic. For example, big players in the B2B e-commerce space have seen disruption, with their processes slowing down and adaptation taking longer than expected. In the meantime, mid-size and small companies have proven nimbler and more apt to find ways to fill the voids. Smaller companies are striking more aggressive pricing agreements with faster contract negotiations, and opt for processes including Net-5 payment and payment on receipt of shipments of product -- which is unprecedented.
According to a UPS survey published in May, 86 percent of businesses reported some aspect of supply chain disruption, with top reasons being the inability to replenish inventories and supplies, and the closure of manufacturing partners. With vast amounts of data coming both from internal and external sources -- including the health industry, the government, and the financial markets -- companies have been forced to reassess their sourcing strategies almost on a daily basis. The PPE sector is particularly susceptible to change and having insights into how to best adapt is key.
To maintain a sense of business continuity in volatile scenarios, turn toward planning and forecasting. Now more than ever you should constantly assess your performance to swiftly pinpoint any disruptions and pivot when necessary.
Sourcing is science, which is why your entire process -- from pricing to inventory management -- should be completely data-driven. By seeing how price fluctuations could affect your business, or how to best coordinate your sourcing strategy with real-time supply chain scenarios, you can navigate potential disruptions with greater constancy.
Strategic insights can also strengthen your collaboration both within partner ecosystems and your company structures, including sales and marketing, to ensure that your sourcing plans are best designed to meet the most urgent needs.
Sourcing essential products from Asia will undergo further changes in the months to come. However, merely following the trends will not be enough to ensure success. The key to harnessing opportunities lies in stepping out of existing structures toward more diversified frameworks, while constantly leveraging data to maintain a sharp eye on your sourcing strategy.
July 1, 2020 at 07:27AM
via https//www.brucedayne.com/
Rohan Thambrahalli, Khareem Sudlow
