COVID has severely disrupted supply chains for the past year and a half. The pandemic has led to supply shortages of our favourite things, from household products to coffee. Many people hoped that with vaccinations, and the world reopening, those problems would be behind us. Consumers are clearly eager to venture out this holiday season and the resumption of in-person shopping will likely fuel demand across several retail categories.
Unfortunately, the Delta variant has other plans that could upend the holiday shopping season. Factories around the world are being forced to shut down or drastically reduce the number of daily on-site workers. Simultaneously, the strained global shipping industry means that costs are rising for retailers, and many smaller firms may find themselves pushed down the supply chain pecking order.
All of this means that retailers need to be managing their supply chains proactively and ordering stock now to ensure they can satisfy consumer holiday demand. At the same time, they need to be prepared to deal with suppliers that can’t meet order demand and find new ones if required.
Headwinds for retailers
Manufactured home and leisure goods, along with consumer electronics, are likely to be the most affected by the supply chain crunch. Manufacturers in Asia struggled to estimate demand in a work-from-home economy and halted factory production for safety reasons early in the pandemic, which resulted in a shortage of materials.
At the same time, international shipping rates are still soaring after spiking upwards at the height of the pandemic last year. As of 9 September, the Drewry composite World Container Index priced a standard 40-foot container at AU$13,698.54 — up 309 per cent from the same week in 2020. The China Containerised Freight Index shows similar growth over the year for popular global routes, including Shanghai-Melbourne. Meanwhile, the Australian Competition & Commission (ACCC) is investigating the broader shipping industry after allegations of price gouging were aimed at port operators and cargo handlers.
To fund their way through these challenges, business owners may be inclined to take out a traditional bank loan to supplement their cash flow. However, many e-commerce businesses do not have the substantial physical assets that a bank will typically lend against, and the pandemic has seen bank lenders further pull back with tougher standards.
Given the heightened demand, delays, and port congestion, retailers will have to source their supplies early, which means paying cash upfront – funds they simply may not have readily available. Flexible access to working capital is therefore essential. After all, having cash on hand is often the difference between meeting demand and going out of stock. It may be savvy to consider a flexible line of credit finance solution that can be used to stock up on high-demand items and pay for priority manufacturing/shipping.
Financing your way through disruption
Traditional bank lending is harder to come by right now for small Australian businesses, but thankfully, there are other financial solutions that will enable retailers to invest in stock up-front and ride out patches of disruption. Trade Finance can help retailers safeguard against inventory shortages and greatly reduce payment times. By introducing a third-party 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.
As an example, Vinomofo, one of Australia’s leading online wine specialists, has been using Octet’s financing solutions to ride out the market turbulence, including pivoting its business when China imposed 250% trade tariffs. Octet supplied Vinomofo with a $2 million trade finance facility, secured to their balance sheet rather than physical assets, enabling them to negotiate with local suppliers and secure the right stock in advance of the upcoming holiday period.
Christmas 2021 is now less than three months away and is shaping up to be even more of a roller coaster ride for our $340 billion retail sector than Christmas 2020. Retailers are being challenged now to make predictions around buying inventory over the holiday season and beyond. They also face the challenge of stocking up while maintaining their cash flow.Suffice to say, retailers that have a more flexible cash flow status will position themselves for strong and sustainable growth this holiday shopping season and into 2022.
Joe Donnachie is supply chain finance manager at Octet.