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January 26, 2014

1

Chinese New Year

by mikediliberto

The Chinese New Year holiday is almost upon us, which means that millions of Chinese migrant laborers will be heading home to see their families and companies manufacturing in China will be leaning on their suppliers to ship as much as possible before the Chinese New Year shutdown.

Our clients often have a lot of questions about how to best prepare for the Chinese New Year holidays.  Admittedly for newcomers to China, working around the Chinese New Year holiday can be quite daunting.  Although the actual holiday itself is merely three days long, the Chinese government moves adjacent weekend days into working days, creating a contiguous seven day holiday.

Much of the workforce that powers the coasts of China and the Pearl river delta region originally lived in inland provinces, and the Chinese New Year holiday is often the only opportunity that these millions of migrant laborers will have to go see their parents, husbands, wives, and children.  Many employees will take extra time off either before or after the new year, using their accumulated vacation days to stretch their time off to two or three weeks.  With so many laborers away from work, it is not uncommon for factories to also close early and re-open late, to accommodate these extended holiday schedules.  Although the intervals are getting shorter, as few a three years ago I had suppliers that would close for more than a month of total time around the Chinese New Year holiday.  The demands of western firms and their supply chain managers is changing this, but the changes are happening gradually.

Overall, the impact of Chinese New Year is felt for about forty days, fifteen days prior to the holiday, fifteen days after the holiday, and the seven day holiday itself.  If the prospect of your suppliers shutting down for more than a month of time is frightening, you are not alone.  Managing supply chains in during the annual Chinese New Year holidays is a challenging task, but with the right planning in place, it does not have to disturb deliveries to your customers.

Background 

Chinese New Year, or “Spring Festival” is one of two weeklong holidays in China known as golden weeks, and it is scheduled according to the lunar Chinese calendar.  This means that each year Chinese New Year falls on a different day, anywhere from January to March.  In December of each year, the Chinese government releases a draft proposal of the holiday schedule for the coming year.  Since so many holidays in China are based on the lunar calendar, the Chinese government rearranges the working day schedule to allow observance of holidays, even if those holidays fall in the middle of a week.

What may happen is, for example, if a lunar holiday falls on a Tuesday, the government will give Monday off, but then make the previous Saturday a working day. This way there is never a single day holiday in the middle of the week, but by moving the weekends around it does not impact the actual number of work days in a year.  This gives us some advantages (for example, sometimes customs would be open on a Saturday or Sunday, when usually they are only open Monday through Friday).

One major exception to the lunar holidays is the fall festival (also commonly called national day or the golden week), which occurs each year from the 1st to the 7th of October.  Again, this is a seven day holiday that is created by changing some weekend days into workdays.  One of the aspects of Chinese culture that our expats and traveling executives find most strange is the reality here in China that weekends are not “sacred” the way that they are in many western countries, especially in the english speaking world.  The first time our American or New Zealand expats hear that we have to work a Saturday to make up for a long holiday, you can usually hear the screams from down the hall.  Overall, Chinese staff have only 11 holiday days (weekends not included), which is at the same level or lower than most other countries.

Financial Impact

The majority of Chinese workers are paid using what are commonly called “Thirteen month salaries”, which means that in the month that Chinese New Year falls, each employee will receive an extra month of salary. In lieu of the thirteenth month, some firms give variable bonuses based on company performance, although it would be rare to find a bonus paid that was less than this thirteenth month benchmark.   Chinese accounting laws only allow for a Calendar year fiscal year, so by the time Chinese New Year rolls around many firms have closed out their books for the previous year, and thus are able to pay bonuses accrued in the previous fiscal year if those bonuses are tied to company financial performance.

In preparation for what is a substantial financial expenditure just prior to the New Year, many firms begin implementing cost cutting measures anywhere from thirty to sixty days prior the Chinese New Year holiday.  This means that all of the raw materials used to make your products will start to be re-ordered in increasing lower quantities. Around this time of year, many manufactures engage in a game in which they gamble on how many finished goods they will be able to manufacture before their holiday shutdown. Suppliers in China traditionally want to head into Chinese New Year with no stock of raw materials, and invoices issued for all goods made and shipped before the holiday.  This quickly morphs into a dangerous game of chicken, where customers see dates slipping, materials arriving late, and goods delivered either in lower quantities or with substandard quality.  Remember, your supplier is motivated to get you to take as many of their goods as possible by the time the last containers are loaded.  This may mean that quality aspects that have been no issue suddenly develop problems.  As suppliers get to the bottom of the barrels of powder coat, their last rolls of steel, their tools that should have been sharpened a few weeks earlier, and couple that with a dwindling workforce, the need to increase your diligence skyrockets.

Action Plans 

Most common recommendations state that in the month or so prior to the Chinese New Year, customers should increase their supervision of vendors by fifty percent.  I would advise an increase more like one hundred to two hundred percent.  For those of you working from a small representative office within China, it may be better and more convenient to utilize the services of a third part vendor management company, which can provide daily updates on production for either an hourly or job-based rate.  Alternatively, plan to have extra support staff from your overseas offices come to China for the few weeks leading up to the new year.  Your investment in increased vendor supervision prior to the Chinese New Year holiday will pay off heavily.

The time to find out that there are quality issues is not when you are loading the last containers before the shutdown;  suddenly your supplier will look at you and say that you either accept the current quality of the goods or there will be a one month delay.  Nobody wants to be in this position, but I see it happen every year to unsuspecting and inexperienced buyers and project managers.

While speaking with a colleague last night, I mentioned that if now is the time that they are starting to worry about Chinese New Year, they are about two months too late.  The time to start making your plans for the Chinese New Year is generally about two months before the last containers will leave your vendors, if not more. Increasing your diligence should be something that you plan for, whether that means bringing on third part monitoring firms, hiring additional staff, or sending in project managers from overseas offices.

The Hawthorne Effect, a type of Observer Effect, refers to the observation, made in the 1950s, that factory workers became more productive when they knew that they were being observed.  Not that we needed a scientific study to confirm this effect; I would bet that every manager has observed that workers are more productive when the boss is nearby.  It is especially important at this time of year that you maximize the effect of proximity on your suppliers by sending extra people to each supplier to “observe”.  Most times it does not matter who is at the factory as long as they look the part.  Give your overseas manager a clipboard, a calculator, and stopwatch and send them to factory;  productivity will rise, guaranteed.  In addition, sometimes juggling orders between different customers becomes a zero-sum game for suppliers;  they have only so much resource, and some customer orders might slip at the expense of others being on time.  You want to make sure that you have eyes at the factory that can tell you immediately when the production schedule falls behind.

I believe in treating suppliers as partners, and that means helping them plan this holiday period as easily as possible; they also would prefer not to have all of their workers take three weeks or more off from work, but that is the reality.  Where I have had very good luck is sitting down with these suppliers early, and reviewing my production needs, and looking over their schedules for staffing during this time.  Be realistic about production time and staffing needs, and a lot of issues can usually be handled at the beginning instead of at the time of loading the containers.  If you know that certain materials or parts are critical or have long lead times, you might consider paying the supplier to order a five or ten percent more than you need for production, just to avoid getting caught without sufficient good material to make all of your products.  Like I mentioned earlier, their reluctance to order extra material is strictly financial, so if you take the cost out of the equation, it is a lot easier to get them to stock some extra for those unforeseen issues.

Lastly, a word on logistics.  It pays to remember that you are just one of millions of firms that are preparing to run production until the last possible moment and then get those goods out of China and on their way to your customers.  With such a mad rush to get all of these goods loaded and shipped, sea and air shipment space is definitely going to be at a premium.  The last thing you would want would be to have your goods complete but with no way to get them shipped before the start of the new year holiday.  Book your space early; my advice is always to take whatever lead time you usually use for freight shipments and double it (or more!). Again, you cannot be too cautious at this time of year.

Chinese New Year can be daunting, especially for new managers in China or people in your overseas offices that just don’t get how a whole country can shut down for a month of time.  I often say that our jobs as expat managers is to obscure the complexity of our operations from home offices that want to focus on cost and delivery time.  To obscure complexity is to understand it.  The more time you take to understand the complexity of the Chinese New Year holiday, the better equipped you will be to mitigate it’s effect on your company operations in China.

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1 Comment Post a comment
  1. Oct 29 2014

    “Most times it does not matter who is at the factory as long as they look the part. Give your overseas manager a clipboard, a calculator, and stopwatch and send them to factory; productivity will rise, guaranteed. ” How true. I’ve seen it happen in US and Mexico plant too.

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