Soaring Oil Prices Forced Firms To Reconsider Distribution

Soaring energy prices are forcing companies to reconsider how to distribute products. Speculation that oil prices will rise again after the Olympics will reduce the cost of logistics to the point where manufacturing will be moved closer to consumers or will become a common practice of large garment companies.

Change situation

In June 20th, the oil price increase of about 26% of the total price increased the impact on China's garment enterprises not only to bring up the cost of operation, but also to domestic oil prices.

This may completely subvert the current distribution pattern of garment industry, and bring negative effects to the development of "made in China" and some domestic advantages of manufacturing cluster and industrial pfer undertaking.

The combination of oil prices and international oil prices will likely result in the re assessment of global supply chains by large international clothing companies. Those near the consumer market, which can save a lot of logistics costs, may seize more orders from "made in China", such as Mexico near the US market, Turkey and Romania near the European core market.

In the domestic market, the brand widely distributed in the sales market will also reconsider the design of its supply chain. The garment manufacturing industry in the vicinity of the consumer market is expected to achieve breakthroughs. More and more garment enterprises may not only set up factories in Zhejiang, Fujian or Guangdong, or place orders, but the garment manufacturers in North China, Northeast China and other major consumer markets may usher in new opportunities for development.

The magnitude of these changes will depend largely on the magnitude of the future rise in domestic oil prices. When labour intensive products, costumes, have less cost advantages than logistics costs, these changes will be disruptive.

Some analysts explain the changes in clothing circulation.

"Made in China" adds disaster

After the domestic oil price increased by about 26%, Deng Tao, who worked in Zhejiang Han Bo company, quickly calculated the increase in the logistics cost of the company's export business. "20%, 1 million yuan product has 200 thousand yuan for the logistics cost."

The export business of silk and silk products is mainly for the developed markets in Europe. However, as the silk and silk products are commonly used in the domestic market, the pportation cost will be borne by the Han and the silk.

"The rise in oil prices has a great impact on our export business. However, we can not find a good solution in addition to adopting the relatively inexpensive shipping method that has been generally used."

Deng Tao said helplessly.

This constitutes the most difficult problem for Chinese apparel foundries at present, either to increase the cost of pportation to obtain orders, or to reduce the attractiveness of their OEM.

According to the operation of international clothing brands in the past, these enterprises in the upstream of the value chain will evaluate their global supply chain system every year, and they can design the most competitive supply system in the shortest time. Therefore, China's manufacturing will further lose its original initiative.

Fortunately, however, the current domestic oil price is still "low" compared with the international oil price. Therefore, in the field of garment manufacturing, the strength of China's manufacturing has not been devastated.

Information from the Han and silk shows that although the oil price has increased the production and circulation costs of the enterprises, its foundry business has been developing steadily without significant fluctuations.

However, from the development of garment industry in the developed countries, there is no blowout growth in these areas.

"There is no evidence that China's orders have gone to these areas in large scale."

Deng Tao said, "according to our observation, the clothing industry around the developed markets has not yet shown signs of" warming up ", which is because the artificial cost advantage of China is not comparable to those in those areas in the present environment, covering the logistics advantages of those areas.

But for the expectation that China's oil price will rise again in the future, Deng Tao also said that this is an uncertain factor, which may further weaken the international competitiveness of China's manufacturing.

Most of the supply chain design work of large domestic garment enterprises started ten years ago. At that time, the price of oil in the international and domestic markets was still very low, and the lowest oil price was about 10 dollars per barrel.

At present, the environment has changed, resulting in these gradually expanding and nationwide sales network enterprises in the domestic market must start in the supply chain redesign work to save operating costs.

Even some regional brands have to reconsider their distribution system. In the case of rising oil prices and possible further upgrades, such as Bingham group's main market in northern China, while the main supply of products comes from foreign brands in Fujian, building a more cost saving distribution system at the moment is becoming more and more important.

Despite the data provided by Han Bo, the impact of the first domestic oil price increase on the domestic market this year is much smaller than that of foreign trade. "Now the cost of logistics upgrading is 3% of turnover."

At the same time, compared with the foreign trade foundry business, the domestic garment enterprises will have more room to digest the rising cost at the moment.

"We can avoid the cost of the oil price increase by means of slow delivery, such as cheap railway and so on.

Deng Tao said that the fastest part of the price increase is motor freight. Therefore, enterprises can design and produce goods earlier, and then send them to the main consumer market before the selling season comes by cheap slow pportation.

According to the latest business operation data provided by the company, through the fine adjustment of the logistics and distribution system, the cost of the entire circulation, including logistics, warehousing and wages in this area, accounts for only about 5% of the total turnover.

But Deng Tao also stressed that the development trend of the future is to put production and consumption places together. At present, the domestic sales market of Han and silk is mainly distributed in East China, North China, southwest and Northeast China. The contribution ratio of South and north is 6 to 4. Therefore, the broad sales territory also makes Han Bo worry about the further increase of logistics costs. "In the future, large enterprises with nationwide sales network will be necessary to adjust their distribution system. For example, a certain percentage of enterprises in the north market will set up factories in the north or seek production partners."

For this reason, analysts say that the rise in oil prices will benefit the regions close to the consumer market, and will also bring greater risks to those companies that have shifted their production base to more remote areas and even abroad.

"From this point of view, it is probably not a good idea to shift the production base to the West from the core consumer market at the moment, and to build factories in Kampuchea, Vietnam and other countries."