Source: The Wall Street Journal
February 24, 2022
Transit delays are stranding billions of dollars in goods in congested supply chains, leaving companies in a cash crunch
The combination of big merchandise orders and lengthy shipping delays is tying up cash in supply chains, straining the finances of a swath of companies as they seek to cover the cost of goods awaiting delivery.
Billions of dollars of inventory is sitting on ships waiting at seaports and taking much longer to get to factories and stores as congestion at ports and in inland distribution networks slows the flow of goods. Logistics experts say that is pushing buyers and suppliers to extend their payment terms and obtain new financing that expands the cost of carrying inventory.
“The cash needs of a lot of businesses are going through the roof because transit times have tripled, and that means that they need three times the amount of working capital,” said Sanne Manders, chief operating officer of the freight forwarder Flexport Inc.
Inventory levels for U.S. companies have been severely constrained since the start of the pandemic in early 2020, but the cost of holding inventory has increased sharply because goods have been stuck in bogged-down supply chains for longer periods.
The value of retailer inventories fell to a nearly five-year low in June 2020, according to Commerce Department figures. Inventory levels have recovered since then, but the total $642.8 billion in inventories U.S. merchants held in December 2021 was still below pre-pandemic levels and the ratio of inventories to sales remains near the lowest point in records going back 30 years.
A measure of inventory costs in the Logistics Managers Index, a monthly assessment issued by Arizona State University in collaboration with other university supply-chain programs, has increased sharply since 2020, reaching a peak of 89.4 in June 2021 that was nearly 26 points higher than the same month the year before. The measure of inventory costs was 84 in December compared with 63.4 in December 2019, before the impact of the Covid-19 pandemic buffeted supply chains.
The inventory costs have been growing as shipping delays have tied up goods for longer stretches.
The share of container ships arriving on time in 2021 was down 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 U.S., up from between 40 and 60 days pre-pandemic.
Dover, Del.-based furniture seller Monroe & Kent Home recently spent $40,000 on gray console tables from China that were supposed to reach its Los Angeles warehouse this April. They now are due to arrive in August or September due to container shortages.
Delays like this across a range of products, from rugs made in Turkey to décor produced in India, have cost the company some $500,000 to $750,000 in late or lost revenue on top of sharply higher container shipping prices, said Chief Executive Richard Eib. The strains have pushed the company to close its store outside Philadelphia and take out $150,000 in loans with 6% interest over the next three years.
“One day I could be told it’s going to be three weeks for something to ship, and then on the day it’s meant to ship to us, I could be told you’re actually looking at six months now,” Mr. Eib said.
Many businesses are trying to pass those higher costs to customers through price increases. “But there can be situations where companies who are really already tight on working capital and they have to essentially force more cash into the inventory side of things or transportation,” said Brian Sanders, a senior financial analyst at financial analysis firm CreditRiskMonitor.com Inc., so “it can get pretty difficult.”
Flexport’s inventory-financing loans to customers, for which merchandise is used as collateral, more than doubled between the third and fourth quarters of 2021, Mr. Manders said.
Minneapolis-based commercial banking services provider U.S. Bancorp’s supply-chain finance business, in which the bank pays suppliers discounted funds early while giving buyers more time to pay them, likewise saw balances double over the past year, driven in part by buyers stocking up and stretching out their payment terms, a spokesman said.
Many shippers prefer to control inventory as much as possible so they can track it, choose the carrier and combine shipments into one container, said Chris Caplice, executive director of the Massachusetts Institute of Technology’s Center for Transportation and Logistics. Now, he said, control is growing more expensive as companies are “incurring all the inventory holding costs while it’s sitting on the ship.”
The cash bind is particularly severe for smaller firms.
For companies with $10 million to $50 million in revenue, average inventory grew to 103 days’ worth in the second quarter of 2021 from 64 days at the end of 2019, the latest period for which data was available, according to RapidRatings International Inc., which analyzes businesses’ financial health. Companies with over $100 million in revenue kept 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 smaller firms since a recovery from the pandemic’s initial blow, according to RapidRatings, which Chief Executive James Gellert said stems in part from large inventory buys.