Rising logistics costs in Asian supply chains for Swiss mechanical and plant engineering companies
Due to all the lockdown restrictions imposed by 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, the current freight container capacities are subject to high additional demand. Shipping companies are currently unable to meet this demand as the supply of available cargo space is limited. This is now reflected above all in the rapidly rising freight rates (freight costs) of the shipping companies. According to Spedlogswiss, the association of Swiss freight forwarding and logistics companies, these have risen in the last six months from around USD 1,000 to the current USD 10,000 (for a standard 40-foot container) and the trend is still rising. This scenario is not new due to the well-known principle of supply and demand, meaning that the falling supply of freight capacity and rising demand will cause freight rates to continue to skyrocket. This has drastic consequences for Swiss machine 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 product margins.
It should not be forgotten that the bottlenecks in freight capacity will lead to massive delays in companies’ supply chains. This issue will be exacerbated by the upcoming “Chinese New Year”, which starts on February 12, and the situation regarding rising freight prices will become even more acute. One reason for this is that experience shows that the whole of China will shut down production capacity for around two weeks during the New Year celebrations.
Further margin erosion in 2021 for Swiss mechanical engineering companies due to higher freight prices
The Swiss mechanical engineering industry has been in a constant battle with margin pressure, and not just since the coronavirus crisis. Logistics costs for goods from Asia are currently continuing to rise and this has a direct impact on the manufacturing costs of industrial products for Swiss mechanical engineering companies, as China is one of the most important procurement markets for the machinery and electronics industry. According to the Federal Customs Administration, the volume of imports from China amounted to around CHF 14.2 billion in 2018. Over the last ten years, imports from China have increased by around 11 percent per year and the trend is still rising (see Fig. 1).
Fig. 1: Import trends in Switzerland’s three most important procurement markets 2008 to 2018
Source: https://www.ezv.admin.ch/ezv/de/home.html
This means that the mechanical engineering industry in Switzerland will be exposed to continuous margin erosion in the coming months, as logistics costs often cannot be tracked transparently in real time and sales prices cannot be increased without further ado. In addition, manufacturing costs at mechanical engineering companies are often analyzed on a quarterly or half-yearly basis and only then are the necessary cost-cutting measures introduced. This approach prevents a direct, transparent and precise cost analysis at the touch of a button in order to make agile decisions and monitor the implementation of strategic and tactical measures.
The current situation of the coronavirus pandemic painfully demonstrates that in future, not only real-time tracking of logistics costs, but also the transparent and interactive derivation of the total manufacturing costs of a product will be crucial in order to better cushion the higher dynamics in the supply chains. In addition, a risk assessment on the part of procurement management is absolutely essential in order to increase the resilience of supply chains in the future.
Improvement in the situation not in sight until spring 2021
The upcoming “Chinese New Year” will not improve the situation on the logistics markets in the short term, but will exacerbate it, as mentioned above. Nevertheless, there are short and medium-term measures that can already be addressed in companies. A cross-functional team needs to be put together that can pool knowledge in order to navigate this dynamic situation more effectively. The information that the cross-functional team brings together is crucial for carrying out scenario analyses in order to manage the supply chain with clear priorities. It is also vital 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 supply chain disruption. In the medium term, companies must emerge from the current crisis mode and transform the current daily “firefighting” into a reliable risk management process. The ideas and experience gathered by the cross-functional team should be implemented in the risk management process and regularly reviewed and tested. In order to strengthen the resilience of mechanical engineering companies’ supply chains in the long term, more investment must be made in real-time analysis of manufacturing and complexity costs.