For two months, millions of dollars worth of designer perfume and cologne sat untouched in a Shanghai warehouse as Covid-related lockdowns rendered the building inaccessible. For Jean Madar, chairman of Inter Parfums, the lost sales validated his decision to break up with China. “We’re doing this even though China is way cheaper,” he said. “How good is it to have cheaper components when you cannot get them? You need to have super stability in supply.”
The NY-based fragrance seller is one of many companies permanently shifting operations back to the U.S. from China and other countries where cheap labor and easy access to factory capacity had far outweighed costs of shipping products across the ocean. Inter Parfums has doubled supplier contracts with U.S. companies; nearly 70% of parts now come from U.S. suppliers, rather than having to depend on Chinese suppliers for glass, metal and pumps. (There is enough profit made on a $50 or $100 bottle of perfume to absorb the higher expense incurred to give priority to reliable supply, even as inflation mounts).
“The pandemic and ensuing global supply-chain meltdown have made businesses—from beauty companies and auto manufacturers to global retailers and small businesses—rethink low-cost importing,” writes The Wall Street Journal (July 11, 2022). Close to 20% of supply-chain executives said they had brought some production back to a nearby country in the past year, double the number from a year earlier. “The equation has changed,” said a McKinsey supply chain exec.
Amid the pandemic, ocean shipping costs skyrocketed. Factory shutdowns and logjams led to major delays and shortages. Demand became difficult to accurately predict as consumers rapidly shifted buying patterns. All those dynamics compounded longer-term shifts already under way: rising cost of labor in China, higher tariffs and worries about theft of intellectual property.
But betting against China carries risk and remains out of reach for industries with narrow profit margins. Companies such as Peloton that set out in the pandemic to uproot their China-based factories and supply chains found doing so was harder in practice. The exercise-bike maker has since scrapped plans for a $400 million factory in Ohio.
Classroom discussion questions:
- In Table 11.3 in your Heizer/Render/Munson text, 10 supply chain risks and tactics are provided. Which impacted Inter Parfums decision?
- List several reasons why it makes sense to reshore now.