Increasing logistics costs in the supply chains from Asia for Swiss engineering and plant construction firms
Due to all the lockdown restrictions of the Coronavirus pandemic since December 2020, demand for consumer goods has risen sharply. As the majority of these products are produced in Asia and shipped to Europe by sea, there is currently much higher demand being placed on freight container capacities. Shipping companies are currently unable to meet this demand because there is a limited supply of available freight space. This is now mainly reflected in the freight costs for shipping companies. According to Spedlogswiss, the association of Swiss forwarding and logistics companies, in the last six months these costs have risen from around USD 1,000 to currently USD 10,000 (for an ordinary 40-foot standard container). And the tendency is still rising. This scenario is nothing new, after all it rests on the well known principle of supply and demand. So the decreasing supply of freight capacities and the increasing demand will cause freight rates to skyrocket further. This will have drastic consequences for Swiss machinery manufacturers who procure directly from suppliers in China, as there are hardly any alternatives in the short term The effects are directly reflected in manufacturing costs and the resulting eroding profit margins.
And don’t let’s forget that the bottlenecks in freight capacities will lead to massive delivery delays in corporate supply chains. This issue will be further exacerbated by the advent of the Chinese New Year, which starts on February 12 and will cause further freight price increases. One reason for this is that, as experience has shown, all of the Chinese production facilities will reduce capacity for about two weeks during the New Year’s celebrations.
Further margin erosion in 2021 for Swiss machinery manufacturers due to higher freight costs
The Swiss machinery industry has constantly battled against margin pressure, not just since the Coronavirus crisis. Currently, the logistics costs for goods from Asia continue to rise, and this is having a direct impact on the manufacturing costs of industrial products for Swiss machinery manufacturers, as China is one of the most important procurement markets for the machinery and electronics industry. The volume of imports from China was around 14.2 billion Swiss francs in 2018, according to the Swiss Federal Customs Administration. Over the last ten years, imports from China have increased by around 11 percent annually and the trend is still rising (see Fig. 1).
This means that in the coming months the mechanical engineering industry in Switzerland will come up against continuous margin erosion, as logistics costs are often not tracked transparently in real time and sales prices cannot be increased spontaneously. Furthermore, manufacturing costs at mechanical engineering companies are often analyzed with a time lag of a quarter or half year. Only then are necessary cost-cutting measures initiated. This approach prevents direct, transparent and precise cost analysis at the touch of a button. Thus, it is difficult to make agile decisions or monitor implementation of strategic and tactical measures.
The current state of the Coronavirus pandemic painfully shows that, going forward, it will be crucial not just to track logistics costs in real time but also to derive the total manufacturing costs of a product transparently and interactively. Only thus will the strong dynamics in supply chains be effectively counteracted. It is also imperative that procurement management carry out a risk assessment in order to increase the resilience of supply chains in the future.
No improvement in sight until Spring 2021
As we mentioned above, the upcoming “Chinese New Year” will not improve the situation on the logistics markets in the short term. In fact, it will exacerbate things. Nevertheless, companies can already take some mitigating short- and medium-term measures. A cross-functional team needs to be put together that can pool knowledge to more effectively navigate the volatile dynamics of this situation. The information that the cross-functional team collects will be critical for conducting scenario analyses to control the supply chain by setting clear priorities. Furthermore, it is critical that engineering companies understand the risk of components and their suppliers at every level so that they can calculate the value at risk in the event of a disruption in the supply chain. In the medium term, companies need to get out of the current crisis mode and transform the daily firefighting taking place at the moment into a reliable risk management process. In doing so, the accumulated ideas and experiences of the cross-functional team formed should be implemented in the risk management process and regularly reviewed and tested. In order to strengthen the resilience of engineering supply chains in the long term, this will require increased investment in real time analysis of manufacturing and complexity costs.