The aftershocks of the Covid-19 pandemic continue to rattle global supply chains as retailers and manufacturers attempt to keep up with resurgent consumer demand, tying up vessel capacity worldwide. With transit time increasing by up to 60 days from China and other supplier markets, buyers are forced to hold inventory longer, impacting cash flow.
Only about 40% of cargo ships make an on-time arrival to port compared to 70% two years ago, according to Denmark-based Sea-Intelligence ApS, with the greatest delays occurring at the adjacent U.S. ports of Los Angeles and Long Beach.
The congestion is the result of businesses ramping up their inventory to meet growing buyer demand, causing a shortage in containers and long waits for vessels to reach shore and offload goods. Additionally, outbreaks of Covid-19 among workers on ships and at major ports are also slowing shipping speeds.
The shipping bottleneck is so bad, Home Depot contracting its own cargo ship in an attempt to get products to their shelves and meet soaring demand for home improvement, unexpectedly provoked by the pandemic.
Shipping Delays and Working Capital
For buyers that buy on FOB basis, (or “Free on Board,” a shipping term indicating that the buyer takes ownership of the goods once the supplier ships the product) longer shipping times mean a longer period holding inventory, known as Days Inventory Outstanding (DIO).
DIO is an important component of the cash conversion cycle, a metric that conveys how many days it takes for a company to convert its investments in inventory and other resources into cash flows from sales. It’s a measure of how efficiently a business is using its working capital. With shipping disruptions causing a longer DIO, the cash conversion cycle is lengthened and working capital is affected.
Rising Shipping Costs
With a higher demand for containers and vessels, shipping and container freight rates are sky rocketing, adding unexpected costs to procurement and further eating away at working capital. Drewry Shipping reports the cost of transporting a 40-foot steel container of cargo has increased by up to 547% for some routes.
Working Capital Solution
When chartering your own container ship is not an option, one solution businesses utilize to smooth out cash flow and mitigate disruption is a supply chain finance program. Harbor, a tech-powered trade finance provider, works with middle market buyers to improve working capital. Harbor pays suppliers at shipment and grants buyers up to 120 days credit, allowing for an opportunity to sell goods before a payment is due.
“Companies purchasing goods from overseas are now burdened by longer delivery times which puts a stress on working capital. Having capital tied up in in transit inventory disrupts the cash conversion of the business,” said Katie Newton, head of origination at Harbor.
In a time when supply chains have already been turned upside down by semiconductor and lumber shortages, rising raw material costs and worker shortages, shipping delays and rising shipping prices are only adding to the turmoil.
A supply chain finance program can help add working capital and stability for both the buyer and supplier.
