Record consumer demand, unexpected bottlenecks in supply, and delays in shipping from China have created a perfect storm for global supply chains.
Joe Donnachie, Supply Chain Finance Manager at Octet takes a look at the key factors affecting supply chain disruptions in Australia and beyond.
The supply chain crunch
Facing major delays and increasing costs, Australian businesses in almost every industry are feeling the impact and have warned these challenges are unlikely to be resolved soon, amid soaring shipping costs. And with the local economy further reopening, consumers are set to spend more than $11 billion on Christmas presents alone. Businesses should be planning for another V-shaped recovery.
Shipping container spaces are now priced at a premium, costing up to four times as much as they did a year ago. This doesn’t bode well for Aussie businesses that are hoping to be well-stocked for the current holiday season and beyond. The fact that the ACCC has launched an investigation into shipping prices is a stark illustration of the cost and supply issues that Australian businesses have faced during 2021 and will continue to face in the coming period.
However, it’s unfair to generally point the finger at Australian ports and shipping operators for what is predominantly an international problem. COVID has caused major issues in China and other export countries, where just one positive case can lead to a knock-on effect of port closures.
At the same time, shipping suppliers are naturally going to prioritise larger customers who can afford to pay higher fees. With so much lag in supply chains, shipping operators are more likely to send containers to the US than to Australia, for example. This is simply economic buying power in action.
Unfortunately, this means that Australian companies may find they are at the back of the queue for some time. It will be worse for smaller firms as larger firms will use their muscle to cement their place in the supply chain pecking order. So how should businesses prepare for continued uncertainty, even as things at home start to look more positive?
Financing your way through the supply chain disruption
Australia’s economy has emerged from the latest bout of COVID in mixed fashion. Some sectors have been boosted by sustained consumer spending and government stimulus, whilst others have been held by the headwinds. According to a recent report, there is as much as a 200-day difference in the working capital cycle between businesses in some sectors. This means that some companies will be well placed to deploy capital quickly to pay suppliers in advance and on preferential terms to secure stock quickly. Other companies that are not being paid quickly or are already holding a lot of inventory may not have the cash on hand to put themselves at the front of the supply chain queue.
Regardless of whether a company needs funding to grow and take market share from competitors, or cover outgoings to regain a foothold, it can be hard to come by. Traditional bank lending has dried up for many small Australian businesses, particularly for ecommerce firms that don’t have physical assets to act as security. Subsequently, the popularity of non-bank lending solutions has increased.
Funding methods such as Supply Chain Finance, whereby a customer uses a financier to pay suppliers early and at a discount, and Trade Finance, whereby a customer can pay a supplier in advance of receiving the goods to potentially access better terms, have been around for generations. These techniques are now being taken up by high growth ecommerce companies because they are so suitable for modern businesses with lower physical assets, yet strong balance sheets.
Trade Finance can help businesses safeguard against inventory shortages and greatly reduce payment times. By introducing a financier into your supply chain transaction and creating a business line-of-credit funding facility, you can procure your goods (or services) now and repay over an extended period. This is particularly helpful for businesses that have global suppliers, needing immediate cash flow to help pay for overseas stock.
Supply chain uncertainty is the new norm
The post-lockdown economic impact on the Australian economy is forecast to be significant, as Australians prepare for a summer of pent-up holiday spending. It’s been estimated that Aussies have squirreled away $230 billion extra savings during the lockdown and optimism is in the air for a lockdown-free Christmas. But the opportunity for Australian businesses to capitalise on the reopening economy and post-lockdown bounce is not guaranteed for those reliant on weakened supply chains or international production. And this uncertainty is likely to be with us for some time.
This means that companies can only really budget on selling timelines once goods are on the enroute, but would be savvy to consider innovative funding solutions to ride out these rolling periods of disruptions.