The combination of large orders for goods and long shipping delays ties up cash in supply chains, straining the finances of many businesses as they seek to cover the cost of goods by waiting for delivery.
Billions of dollars of inventory sit on ships waiting at seaports and taking much longer to get to factories and stores as congestion in ports and inland distribution networks slows the flow of goods. Logistics experts say this is pushing buyers and suppliers to extend payment terms and secure new financing that increases the cost of carrying inventory.
“Many businesses’ cash requirements are exploding as transit times have tripled, meaning they need three times as much working capital,” said Sanne Manders, chief operating officer of freight forwarder Flexport Inc.
US business inventory levels have been severely constrained since the onset of the pandemic in early 2020, but the cost of holding inventory has risen sharply as goods have been stuck in bogged down supply chains for longer periods of time. .
The value of retailer inventory fell to a nearly five-year low in June 2020, according to Commerce Department figures. Inventory levels have recovered since then, but the $642.8 billion total inventory that US merchants held in December 2021 was still below pre-pandemic levels and the inventory-to-sales ratio remains close to the lowest point in 30-year records.
A measure of inventory costs in the Logistics Managers Index, a monthly assessment published by Arizona State University in conjunction with other university supply chain programs, has risen sharply since 2020, reaching a high of 89.4 in June 2021, almost 26 points more than the same month the previous year. The inventory cost measure was 84 in December from 63.4 in December 2019, before the impact of the Covid-19 pandemic rocked supply chains.
Inventory costs increased as shipping delays tied up goods for longer periods of time.
The share of container ships arriving on time in 2021 fell to 35.8% from 78% in 2019, according to industry data provider Sea-Intelligence.
Flexport said in its Ocean Timeliness Indicator report for the week ended Monday that it took an average of 109 days to deliver a container from China to its final destination point in the United States, compared to 40 to 60 days before the pandemic.
Monroe & Kent Home, a Dover, Del.-based furniture seller, recently spent $40,000 on gray console tables from China that were due to reach its Los Angeles warehouse in April. They are now due to arrive in August or September due to container shortages.
Delays like this on a range of products, from rugs made in Turkey to decorations produced in India, have cost the company between $500,000 and $750,000 in late or lost revenue, on top of container shipping prices. significantly higher, said chief executive Richard Eib. The tensions prompted the company to close its store outside Philadelphia and take out $150,000 loans at 6% interest over the next three years.
“One day I might be told it’s going to take three weeks for something to ship, and then the day it’s supposed to ship to us, I might be told you’re actually looking at six months now,” Mr. Eib.
Many companies attempt to pass these higher costs on to customers through price increases. “But there can be situations where companies that are already really low on working capital and basically have to force more money into the inventory of things or transportation,” said Brian Sanders, senior financial analyst at the financial analysis firm CreditRiskMonitor.com Inc.,
so “it can get quite difficult”.
Flexport’s inventory finance loans to customers, for which goods are used as collateral, more than doubled between the third and fourth quarters of 2021, Mr. Manders said.
Minneapolis-based commercial banking service provider US Bancorpit’s
the supply chain finance business, in which the bank disburses expected funds to suppliers earlier while giving buyers more time to pay them, has also seen its balances double over the past year, in part due to stockpiling and lengthening of payment terms by buyers, a spokesperson said. .
Many shippers prefer to control inventory as much as possible so they can track it, choose the carrier and combine shipments into a single container, said Chris Caplice, executive director of the Center for Transportation and Logistics at the Massachusetts Institute of Technology. Now, he said, control is becoming more and more expensive as companies “bear all the costs of holding inventory while it’s sitting on the ship.”
The cash constraint is particularly severe for small businesses.
For businesses with revenue between $10 million and $50 million, average inventory rose to 103 days in the second quarter of 2021, from 64 days at the end of 2019, the last period for which data was available. available, according to RapidRatings International Inc., which analyzes the financial health of companies. Companies with more than $100 million in revenue held 81 days of inventory in the second quarter of 2021, about the same level as at the end of 2019.
The average cash-to-current liabilities ratio, a measure of companies’ ability to meet short-term financial obligations, has fallen for small businesses since the recovery from the initial hit of the pandemic, according to RapidRatings, which the chief executive said James Gellert, stems in part from large inventory purchases.
Write to Lydia O’Neal at [email protected]
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