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Chinese New Year is nearly upon us, with 2022 ushering in the year of the Tiger from February 1. The holiday – known as chunyun – generally runs for two weeks, but long before any celebrations begin, the world’s industries need to start preparing, as most of the country's factories shut down as people take their holidays.
If you’re a business that's likely to be affected by the temporary closure of Chinese factories, here’s what you should be doing now.
Chinese New Year may only officially last a fortnight, but it can take weeks for production to get back on track as factory workers take their annual holidays. The immense pressure on Chinese factories at this time is a key reason why you need to develop a deep and trusting relationship with your supplier or manufacturer, as usually, unless you're a large organisation, your orders are likely to be put on the back burner until production ramps up again.
Paying on time, adhering to the trade terms and being responsive to any queries, is a good way of improving your relationship as you'll become known as being reliable, which is a well-respected quality.
Another way to improve relationships with your Chinese suppliers is by sending them typical Luna Festival gifts, such as moon cakes and taking the time to learn more about Chinese culture and the significance of Chinese New Year. This may sound like a simple approach but it's one that's very effective in strengthening ties.
Do you remember what happened last year around Chinese New Year? If not, you may want to back-test your cash flows from previous years to see how you were affected by the holiday. And after that, you might want to extend this to see what happened at other times of the year so you can start building calendar-year forecasts.
Taking a calendar-year approach to forecasting is particularly helpful as if you're able to forecast what you need in terms of stock over 12 months, you can work with your supplier on any supply chain issues well in advance. This is another way of strengthening your supplier relationship as you can develop longer supply terms with them, rather than just monthly or quarterly terms. Being more transparent upfront with your supplier about your needs works both ways: you can show them the amount of business you can give them over a year, and they can confirm the type of service they can give you in return.
This transparency may also help you get priority when production is squeezed throughout the year as your supplier will already know your requirements and have allowed for them. It's also another reason why it's important to plan longer-term forecasts, rather than segment planning around seasons or busy periods. Changing logistical practices is not something that can be done easily but today's businesses are now required to be far more agile – especially as a result of COVID-induced interruptions.
When you start changing your business processes to include longer-term planning and longer-term cash-flow forecasts, currency risk may be a by-product. If this is a concern, you may want to engage a fintech or financial services company to ensure you have a line of credit available if needed to cope with exchange-rate movements. A finance specialist can not only help you manage currency risk but can also assist with any new cash-flow needs.
You want to avoid a situation where you may, for example, have committed to a forecast where you’re going to spend $2 million on Chinese imports but end up spending $2.5 million because the Australian dollar didn't move in your favour. The right specialist can help by localising and stabilising your foreign import costs.
A legacy of COVID is that shipping freight costs have increased over the past 12 months and as Chinese New Year approaches, importers and exporters should expect them to go even higher. One option to help mitigate these costs is that if your business is able, then instead of purchasing smaller orders, buy enough to fill a container. Buying in bulk is often better than buying as you go or just-in-time as you can negotiate discounts and limit your freight costs.
This approach works well if your business can stockpile goods. The right specialist will be able to work with you to see if you have the required liquidity to buy more goods than you normally do.
While Chinese New Year can cause a number of logistical headaches for importers and exporters, these same issues can occur throughout the entire year, and you need to be ready for them. There are many risks when you start planning for the long term, but you don’t need to do that by yourself. Engaging with the right finance specialists can help you mitigate that risk.
Meanwhile, gong hei fat choy.
