by Lionesses of Africa Operations Department
When times are tough, when times are uncertain, indeed, when times are frightening, let us not make our lives anymore complex - let’s just keep it simple.
We looked previous at ‘Controlling your Controllables’ (here), but what about the ‘Uncontrollables’? Is there anything we can do to at least cover some of the risk? The answer lies in simplifying your life and working through your business to see who, if anyone, has some degree of control over these loose strings flapping in the wind and then work with them to reduce the risk for both parties.
So let’s look at your business to see where you can simplify.
In the past 24 months many companies across the globe have shortened their supply chains. Why is this? Having over the previous decade stretched their supply chains to breaking point whilst insisting on ‘just in time’ results, Covid, brought with it a massive break of supply chains. Containers and ships woke up to find themselves in the wrong ports; a disconnect between the production of China and the needs of the USA; and the overnight collapse of the airline tourist industry, which made many multi-national companies recognize that this left them highly exposed not only to price increases within their logistics process, but on some occasions a complete lack of supply, as the FT reports (here): “As Lars Jensen, of Vespucci Maritime in Copenhagen points out: “Under normal circumstances. a container will go from the factory in Shanghai to Chicago in 35 days. Now it takes up to 73 days, and then the same container has to be returned (usually empty).” Not surprisingly, the spot rental for containers from China to the US west coast has risen from an already high $4,000 or so at the beginning of the year to almost $10,000 in the past couple of weeks…”
Whilst some may be wondering why we mentioned the tourist industry above, the fact is that so much of global trade is carried in the hold of passenger aircraft, indeed around 35% of total cargo volume (by value) “…travels by air each year…Annually, that equates to over $6 trillion worth of goods…” according to AirCargo Weekly (here) - yes, the HoF’s bedtime reading never fails to amaze! The issue being of course, until we all start to fly again, shipping will be clogged further.
How can we control that? Indeed, how can we even plan for the kind of price moves that we are constantly seeing in shipping? As the FT confirm in the same article: “Harper Petersen & Co, the Hamburg ship broker, reports that its Harpex container ship index of shipping rates has risen from 1,154 at the beginning of the year to 3,143.” Usually a price increase is a sign that the world’s economy is growing - these days it seems to reflect a lack of supply (remember our Supply and Demand article here?).
Can we simplify this? Can you find a supplier closer to home? Can you cut out the worries about shipping, of delivery dates, of Port docking slots, of trucks or trains ready on arrival to bring the goods to your warehouse, that have been keeping you awake at night? Assuming you can handle their MOQ’s (Minimum Order Quantities), China may indeed be cheaper, but the world is becoming so uncertain, should you not at least have 50% of your business covered locally? Can you afford to have your production line crunch to a halt simply because the bottles you ordered for your fabulous Gin never arrived or are still just being loaded on a ship in Hangzhou (nearest port to Wuhan), China?
Then there are the rising geopolitical tensions, Afghanistan being first and foremost in our minds as we write this, but that is not the only place with issues currently and certainly the South China Sea is one area to continue to watch over the coming years. China has made no secret of its plans to become the leading global manufacturer of advanced electronics. Advanced electronics need rare earth minerals - one of the major and as yet not tapped regions containing these rare earth minerals? You guessed it - the South China Sea. The world leader in deep water mining? As The Diplomat Magazine states (here): “China has developed the most advanced deep-sea extraction technology in the world, and its ability to harvest polymetallic nodules and the rare earths within them is unparalleled.” Can you imagine what rising tensions in that region will do for world trade. Think the West has a semi-conductor problem now (see here)?
All the while we have the Global Warming issue creating storms in Texas wiping out the global plastics industry? Ok, maybe not a complete wipe-out, but overnight supply evaporated and prices for bubble wrap, pallet wrap and shrink wrap as used by all industries to protect their goods in transit, went through the roof. For any business using plastic itself, the last eight months must have felt like a lifetime. No wonder LEGO was so happy to announce that at last they have created bricks out of recycled plastic. Sounds obvious and oh so easy, but previously no recycled brick passed their ‘Can it connect with other bricks?’ test. As they say (here in the FT): “[They had] struggled to find recycled material that matches the famous “clutch power” of its original bricks, which allows them to stay stuck together but be reasonably easy to take apart.” adding “Lego’s task is complicated because not only do all new materials have to interact with each other, they also have to work with all previous versions of bricks dating back decades…Lego had a “dating game” in which it tested all possible new materials with each other to find out, for instance, if a minifigure head stayed stuck on to a body in hot or cold conditions.”
This is a Danish family run company that is without doubt on top of the world, has been for many decades and are constantly looking of ways to either improve themselves (for mere mortals we think there is only so much that one can do with a small plastic brick - yet they constantly surprise!) or to ensure that areas of concern - which has supply of plastic as one of their core concerns - are tightened up.
Here they have recognised an issue, the potential collapse in plastic supply (they have of course been looking at this issue many years before Texas) and from a global issue, ironically, oversupply - certainly in our rubbish dumps, rivers, lakes and seas. They have also seen the opportunity and have reacted fast but carefully, testing and checking all the way. This is not something they were able to do overnight, but once the order was given from on high, you can bet it was all hands on deck to make this work.
For those of us who cannot find a supplier locally or cannot find a way to recycle or reuse, shipping continues to give us headaches.
Look to see who in your supply chain has some degree of control. One of the major issues we have to handle currently are the price swings in shipping as we showed above. No sooner have we got a price that is valid for 72 hours (often shorter), than we find the factory has no delivery slots, or (as the UK is finding to its cost thanks to the perfect storm of Brexit plus Covid) there are no truck drivers. We finally find a time slot available and a truck to take the goods to the port and now the shipping price has changed (for some reason it’s never in our favour!). Back we go to the factory, the truck company has now changed its price or has to time slot…and we are back to square one. Time to simplify. At times of such volatility, keep it simple.
Ask yourself - Why are you still using Ex-Works?
Why not let the factory look after the logistics? They will have far greater access to their own shipper who knows how the factory works and will have tame truck companies with whom they constantly work. You might think that this will increase costs significantly onto your shipping, but in reality if you are constantly having to check shipping costs again and again and having to deal with the forwarder’s demands that the goods have to be ready at such and such an hour - an extra $200 is meaningless if it gives you even a moment’s rest. It is also in the factory’s interest to work with you - an easy way to increase the trust and relationship.
In our view the best Incoterm during times of uncertainty is DAP - ‘Delivered at Place’ (see here). This means that although you think that you will be paying more for all the logistics (but not necessarily so), the headache has gone. Evaporated. You receive the goods where you want them (truck appearing like magic outside your warehouse door?) but still look after the bits that make sense - the import formalities (and the offloading). Remember what a headache it is to sort out all of the export formalities when buying ex-works (even if your forwarder runs the show)? The same is true for your supplier, their factory and their forwarder who may not know the local rules in your country, closing times of the customs office nor have a local team who can queue for the paperwork to be stamped, they will be very happy if you take that responsibility (and costs) off them.
No joke, to use one example, in Mozambique there are three different offices through which one needs to get stamps on import documents, none in the same building, often many blocks and roads apart, stamps are required in sequence, and all offices have different closing times…tea and cigarette breaks are taken often and in an ad hoc manner, whilst Lunch Hour is religiously respected. Oh and don’t forget, if the office closes at 3pm, the queue is closed at 2… ‘Fun’ is not a word that instantly springs to mind if you are a factory owner sitting on the other side of the globe. This is a cost and effort that you or the ‘runner’ in your team can handle.
When times are tough, when times are uncertain, indeed, when times are frightening, let us not make our lives anymore complex.
Let’s just keep it simple.
Stay safe.