An interesting story from today’s Wall Street Journal (Companies Seek to Avoid China New Year Hangover, Feb 21). Basically, the Chinese New Year is complicating supply chain management.
For toymaker The Bridge Direct, Easter now begins in August.
That is when the Boca Raton, Fla., producer of Inkoos stuffed monsters and Justin Bieber dolls has to file orders with its Chinese suppliers to ensure delivery by the spring holiday. It used to place orders closer to the key selling period, which allowed it to get a sharper sense of demand and better manage its cash. But now the greater concern is making sure it doesn’t get left shorthanded because of China’s New Year holiday.
The company is one of many from the U.S. and other countries that are closely watching China as factory workers slowly return this week from the country’s long Lunar New Year holiday. Every year, millions of China’s 250 million migrant workers leave their factories and travel across the country to visit their families at home. The problem for toy and apparel makers in particular is that fewer and fewer workers are returning to the factories when the break is over.
Now now a whole lot happens in Western businesses over, say, the Christmas holiday but a US-based factory generally doesn’t face a large turnover rate tied to Christmas. Having to scramble for staff can cause a Chinese factory to miss shipments or suffer quality problems. And that can impose problems on the factory’s US customers.
Jay Foreman, CEO of The Bridge Direct, said 15% to 30% of the workers at the factory he uses don’t show up after the holiday. “We get delayed shipments because not enough workers return to the factory,” he said.
The company has changed tactics as a result. In 2006, The Bridge Direct had committed to deliver 100,000 Care Bears dolls to a major retailer ahead of Easter. Issues with workers returning to the factory where the Care Bears were made caused heavy delays. In the end, the company had to send the toys by air instead of by boat, spending $7 apiece to ship toys it sold for $8 apiece.
Now, Mr. Foreman places his Easter orders in August, which protects him from dealing with delays related to the New Year because the orders get filled and shipped before the holiday break, but it also has its downside. Vendors used to be able to place Easter orders as late as November, giving them a better understanding of what might sell well. Earlier ordering also means vendors have to pay for their orders well before they can sell them to retailers, which can create cash constraints.
This is a fascinating story. Off the top of my head, I don’t know of any models that examine the interplay between the reliability of getting a shipment with improved information. But in this case there clearly is such a trade off.
This seems like a challenging problem even if one has a clear idea of how the probability of receiving an order changes with when it is placed. In practice, I can see to complications that make this particularly challenging. First, the factory has to have a better idea than the customer of how likely workers are to return from the holiday. That is, the factory can better forecast the capacity hit they are going to take after the holiday. Does the factory manager actually want to share that information? On the one hand, if the factory pays significant penalties for being late, it may want to encourage early orders. On the other, if the factory does not suffer much when its late, it may prevaricate on sharing information if its costs are lower with a less variable order stream.
Second, and in some ways more intriguing, is the interplay between US customers. If everyone orders early, then someone could benefit from ordering late. That is, if nearly all of a factory’s clients order their spring merchandise in the late summer, the factory is going to be underutilized after the holidays even if they lose a significant number of employees. Some customers may win by delaying their orders if enough other customers are moving early.