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May 02, 2022

Spreading China Shutdowns to Delay Promo Inventory Replenishment

Suppliers say lockdowns in Shanghai and other areas of China are likely to delay restocking of promo products in North America.

By  Christopher Ruvo

Intensifying COVID-driven societal lockdowns in China are causing supply chain nightmares for North American promotional products suppliers and are poised to delay replenishment of inventory levels at the domestic industry firms, executives tell ASI Media.

“Our industry will be negatively impacted by these shutdowns – 100%,” says Jeffrey Nanus, CEO of Norwood, NJ-based hard goods supplier AAA Innovations (asi/30023).

Nomura, a Japan-based financial holding company, estimates that as many as 45 cities in China are now under full or partial lockdowns – a tally that reportedly accounts for 26.4% of the population and 40.3% of its gross domestic product.

Jeremy Lott, bald man wearing white button-down shirt and jacket over shoulder, smiling“Significant slowdowns in China have ripple effects for product made everywhere in the world.” Jeremy Lott, SanMar

The restrictions include a stringent already four-week-long shutdown in Shanghai, a manufacturing and exporting hotspot that’s home to 26 million people and the world’s largest seaport. Shutdowns are also being reported in places like Fujian, Guangdong, Zhejiang, Jiangsu and Shandong. The COVID picture is darkening in the capital of Beijing, too.

The lockdowns are straining logistics across supply chains in China, which accounts for nearly 30% of the world’s manufacturing output and is the nation where the majority of promo products sold in North America are produced.

Certain factories that promo relies on are non-operational or functioning at reduced capacity. Truck and train movements have been stymied due to COVID-curbing protocols, making it more difficult to move materials and products within China and then to port for shipping abroad. Cargo containers are stacking up at Shanghai’s port and there’s reportedly a massive back-up of ships waiting to unload/pick-up there.

Inventory Aggravation & Rising Costs

For promo, an unfortunate consequence of the logistics mess is that it’s getting more complicated, difficult and, some say, expensive to get product made and shipped. In cases, items simply can’t be produced or, if built, can’t get out of China efficiently.  

“The shutdowns obviously affect many products, and it’s getting worse as other areas are shutting down and that will cause even more delays,” says Trevor Gnesin, CEO of Tustin, CA-based Top 40 supplier Logomark (asi/67866) and a member of Counselor’s Power 50 list of promo’s most influential people. “This will increase costs as we’re trying to move product across country to ports other than Shanghai.”

Jeremy Lott, a Power 50 member and president/CEO of Issaquah, WA-based SanMar (asi/84863), promo’s largest supplier, says that product manufacturing occurring in other countries is also affected by the situation in China, given that nation’s dominant role in global supply lines.

As Lott explains, a supplier may be manufacturing a jacket in Indonesia with fabric from South Korea and a zipper from China. “If you can’t get the zipper from China because of the issues there, you’re going to have a tough time making your jacket,” says Lott.

There are other knock-on effects. Perhaps a company is making a T-shirt in Honduras with U.S. cotton, but the dye to give the tee its color comes from China and can’t be obtained.

“Now everybody starts going to India for dye, which causes a run on the product there,” explains Lott, whose company has geographically diversified its sourcing in recent years, producing a growing number of products outside China. “Significant slowdowns in China have ripple effects for product made everywhere in the world.”

A bottom-line result of all the supply line imbroglios is that it will take longer for suppliers to restock products. “There will be inventory delays,” asserts Nanus. 

Says Lott: “We’ve been in inventory growth mode, aggressively building our inventory after the challenges we faced in 2021. If China were to say today that everything could go back to normal at once, we would probably see some relatively mild delays with inventory getting here. But the longer the shutdowns continue, it will stretch out the time before we can return our inventory to historic levels.”

Trevor Gnesin, man with gray hair and glasses smiling“The shutdowns obviously affect many products, and it is getting worse.” Trevor Gnesin, Logomark

Of course, proactive suppliers like SanMar, AAA Innovations and Logomark have factored disruption into their supply line modeling and sought to bring more product stateside further in advance than what would have been the norm prior to COVID-19. AAA Innovations, for instance, is carrying 30% to 40% more inventory than it would in what Nanus describes as a “normal year.” Still, even that’s not a catch-all for bulwarking against potential stock gaps, suppliers note.

“The biggest problem for us occurs when a distributor has a really large order that depletes our entire inventory of a SKU,” Nanus explains. “Now, it’s four months before we can get it back into stock.”

Suppliers say it’s a little early to say definitively what, if any, effect the latest shutdowns and supply chain fiascos will have on product prices. SanMar notes that it plans to hold current pricing on its in-house and retail brands through the year. Even so, suppliers report that cost pressures are mounting – a fact that, taken with other inflationary burdens on fuel and raw materials, could presage more price hikes on promo products in the months ahead.

“Freight forwarders are saying once this phase of shutdowns passes and the ports start moving again, there will be so much freight needing to move that the ocean carriers will price-gouge even further, which means higher freight rates,” Nanus shares.

With empty containers backing up at the ports, Nanus continues, the ports have been making companies wait to return containers. “It’s a vicious cycle as we’re paying for extra days of ‘chassis fees’ – $35-$40 per day – even when we ‘live unload’ the containers,” he says. “This adds hundreds of dollars to the cost of every container. Finally, they charge us a per diem ($200 per day) for holding the containers that they don’t have room to accept. It’s a struggle.”