Lunar New Year 2014: Can your global supply chain withstand an employee exodus?
Dominic Jephcott, CEO at supply chain consultancy Vendigital, braces for the impact of China's workforce exodus on the UK IT supply chain.
After the extended break that coincides with the Lunar New Year (31 January to 6 February inclusive), as many as one third of factory workers in China will simply choose not to return to the same workplace. While this is a worrying statistic for any UK technology business sourcing goods from China, a little foresight and a plan of action can help them to minimise any impact on their supply chain.
The employee exodus that takes place at the start of February is something that happens every year as factory workers migrate to their hometown for the New Year celebrations. Meeting up with family and friends that they may not have seen for a year gives them an opportunity to rethink their lifestyle. If local job prospects are looking up, or if they hear of higher paid opportunities in other factories, then they may be persuaded not to return to their former employment.
Even though it is a phenomenon that happens every year, some Western buyers may be unaware of the impact this seasonal labour shortage could have on one or more of their key suppliers. Commercial end users within the technology space arguably have a greater appreciation of the lengths manufacturers go to in order to source the right products and components from overseas suppliers. Even so, failing to deliver on time means losing out to the competition.
Some local businessmen believe that the problem could be worse this year. The improving economy, combined with the Chinese Government’s current policy in terms of encouraging the spread of economic wealth across the country – from the wealthy cities of the East to the more rural areas in Central and Western China – could amplify the migration effect. So how should the supply chain prepare?
For a start, Western buyers should not panic. Chinese factory managers are used to dealing with a high level of job churn and the businesses that have thrived during the global economic downturn have been concentrating on delivering quality goods at a competitive price, while paying a competitive wage. They have also taken steps to ensure their production processes are as churn-proof as possible by keeping them simple, so new workers can be trained up quickly when needed. Ironically, this process simplification paves the way for future mass-automation.
Even though these precautions have been taken, the 6th February is still likely to bring a capacity struggle as Western buyers apply pressure to their Chinese suppliers in a bid to ensure their job is prioritised and delivered on time. But to stand a chance of succeeding, they may need to demonstrate to their Chinese supplier that they are less focused on cutting supplier margins and reducing costs and more focused on adding value to the relationship. In fact, the smartest Western buyers will already be doing this by providing management support on the ground. The better Chinese businesses appreciate that Western businesses can help them to drive value by working with them to improve quality standards, reduce waste and control production to ensure a higher yield from constrained resources.
Western buyers can also plan ahead by building in some contingency to offset the impact of any under capacity. When sourcing super-critical components, for example, it is normal for buyers to appoint two suppliers – this ensures competition as well providing contingency. However, in situations where tooling costs are high, for example, it may be necessary to work with just one supplier, which means the risk of a break in supply is greater. In these situations, the buyer may need to ensure they stay as close as possible to their supplier and are present on the ground to help manage capacity shortfalls should they arise. It is also sensible for buyers to take care when deciding who to buy from, as a reliable track record is all the more important.
One of the most common mistakes Western buyers make in managing relationships with Chinese suppliers is to assume that distance doesn’t matter. When capacity shortages or other production issues crop up, it is too easy for the buyer to fly in a representative to hold talks with the factory manager, only to find that nothing has changed by the time they have flown back home again. The reality is that the factory manager has probably been influenced by the next buyer through the door or stronger local relationships. Instead, being present at the factory gates every day and maintaining a dialogue with the factory manager can help to ensure your order remains visible and is prioritised over the rest, particularly if your working practices and payment record mean you are good to deal with usually anyway.
As the Lunar New Year approaches, there are likely to be some Western businesses who are concerned about what might happen come February – particularly if pundits are proved right and the employee exodus has a bigger impact than usual this year. If they haven’t taken steps to get close to their suppliers already, these businesses should be doing so now at the same time as ensuring they have local supply chain support in place.
Whatever happens, Western businesses need to remember that the evolution of China’s manufacturing sector is still at an early stage and there are many years of automation to come and more value to be realised through the introduction of more sophisticated management processes. In some sectors there is no competitive alternative to China and in others, the business case for moving rather than improving does not stack up. So for businesses already in China, now more than ever is the time to work with the best Chinese suppliers to achieve this symbiotic relationship for the benefit of the entire supply chain and ultimately, the end user.