Yantian Port Congestion Demonstrates The Need For Supply Chain Diversification
Due to covid cases rising in and around Yantian port in China, this critical shipping hub for the heart of toy manufacturing has been closed and although now reopened is not working to full capacity, causing an inevitable backlog of containers and ships. In a year where we have already seen demand for shipping significantly exceed supply, causing container prices to rise this not a good thing at all. Even more so as we are now heading into the peak shipping window for toys heading to North America and Europe for peak season sales in Q4.
Back when the covid crisis first hit China, our company had a flood of enquiries about toy manufacturing in India as panic gripped sourcing teams in the toy business. Then India’s covid wave hit and suddenly people were not that interested at looking for sourcing outside China. And now due to this issue with Yantian port, our phone lines have begun ringing again.
If you look at the sourcing strategy of the major corporate companies, risk reduction plays a big part in their approach. The bottom line is that if you don’t have any stock, you can’t sell anything, and therefore you aren’t in business. For this reason, even for smaller to mid-sized companies we recommend a diversified approach to Sourcing in terms of locations. A successful sourcing strategy today probably includes a majority of stock still sourced from China, but with perhaps 10-20% additionally coming from Vietnam and India to diversify risk. For some product categories, it may be realistic and even prudent to source even closer to home. Board games for example can be sourced in North America & from across Europe, albeit with a bit of a price premium. There are factories in or near to Europe producing compounds like dough. But for plastic toys & plush, Asia still remains the primary source for the toy business.
Larger companies have a bigger risk for diversifying production, because if you need to relocate $1billion of toy manufacturing you can’t do that quickly, but for smaller companies quicker moves should be possible. This though doesn’t mean that you should just knee jerk react every time there is an issue. One thing that is obvious is that China will lose toy production capacity as factories either go out of business or advance into more complicated and higher cost product types. So, any business which wants to avoid the cataclysmic risk of having no stock to sell should have already tested the waters and started to source some products from outside China.
The issue with Yantian port should clear quite quickly, and in the end should not have a significant impact on sales for toy companies in 2021, but from a strategic perspective it makes sense to have live alternatives which can be ramped up as required.
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