'It's one big bloodbath'
Due to the panic that broke out at the start of the corona pandemic, many companies tried to take an immediate advance on it. For instance, major fashion companies like H&M and Zara cancelled orders en masse for the winter season, leaving Asian producers with unsold stock. 'It's one big bloodbath.' This is how Sanjeev Bahl, owner of a denim factory in Vietnam, described the situation in April last year. In the wake of these developments, major ocean freight companies decided to withdraw ships and reduce the number of routes.
Rising demand for products
What few people realised then was that while thousands of shops had to close their doors for long periods of time, consumers were changing course at lightning speed and starting to do all their needs online. In the Netherlands, companies like Coolblue, Wehkamp and Bol.com of this. With governments worldwide coming up with large-scale support measures, the global economy was also able to rebound quickly from the first corona crisis. Demand rose faster than expected while producers had just scaled down their capacity. The most famous example is the chip market. Currently, there are almost no laptops left to get and the automotive industry too cannot meet demand due to the shortage of chips.
The bullwhip effect
The sudden disappearance of demand and the very rapid recovery of that same demand quite soon afterwards created huge congestion in global logistics chains. This is somewhat similar to what happens on the motorway due to some of the road users slowing down and then picking up again. Something we call in the supply chain the 'bullwhip effect'. As a result, it takes weeks, if not months longer to get products from the Far East to Europe. This has increased the cost of container transport by many hundreds of percent. Incidentally, the fact that prices have still not fallen substantially after a year and a half will also have to do with the fact that the container market consists of only three alliances to which normal cartel rules do not apply.
Increase in working capital requirement
Congestion in the logistics chain is causing European trading companies to miss out on sales. The process between closing an order and invoicing takes longer, resulting in an increased need for working capital. This is because the need for pre-financing takes longer and thus increases.
What can you do?
As a business owner, it is important to anticipate this by, for instance, entering orders earlier, making arrangements with customers and entering into timely discussions. This way, you can pass on the increased costs of transport as well as the products themselves in the form of price increases. To finance this supply chain, it is wise, especially now, to examine the extent to which you can supplement the working capital requirement with, for instance, purchase and/or inventory financing.
More information?
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