The tightening of supply chains are threatening businesses globally due to the continuing pandemic; attaining “preferred buyer” status with suppliers through a supply chain finance program can help keep production – and profitability – moving forward.
The Delta, then Omicron variants brought a screeching halt to the lifting of production and shipping restrictions, just when we thought the COVID-19-driven supply-chain woes were getting resolved.
Manufacturers globally are trying to manage shortages of key components, higher raw material costs, and bidding wars on shipping in order to keep production moving. “We can’t get enough components, we can’t get containers, costs have been driven up tremendously,” Christopher Tse, chief executive officer of Hong Kong-based Musical Electronics Ltd., told Bloomberg in an August 2021 interview.
China’s diligence in attempting to slow the spread of the variant has led to the closure – or partial closure – of two major ports this year.
“Port congestion and a shortage of container shipping capacity may last into the fourth quarter or even mid-2022,” said Hsieh Huey-chuan, president of Taiwan-based Evergreen Marine Corp., (one of the world’s largest container fleet companies), at an investor briefing. “If the pandemic cannot be effectively contained, port congestion may become a new normal.”
Skyrocketing Shipping Costs
According to data from the freight-tracking firm Freightos, container shipping rates from China and East Asia to the United States’ East Coast climbed above $20,000, compared with about $4,000 a year ago. The cost of sending a container from Asia to Europe is about 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has grown by more than 600 percent, according to the Drewry World Container Index. Those attractive high prices for shipping companies are leading to the abandonment of other routes, causing the problem to spread. The shipping issues have been exacerbated by related imbalances: boats are backing up at ports, and as demand for goods booms in the United States, empty shipping containers haven’t been able to get back to China fast enough.
The impacts are being felt across industries and are even leading to liquor, beer, and wine shortages.
Preferred Buyer Status
For many years, sellers have strived to become a buyer’s “preferred supplier.” However, with the COVID-19-induced supply chain challenge, the balance of power lies with the suppliers and buyers are adopting an approach of presenting their company as a “preferred buyer.” In this situation, the buyer is seeking a more beneficial partnership with suppliers, such as access to research and development, intellectual property, white papers or technology road maps, delayed implementation of price increases, preferential pricing or, most important in this context, avoidance of allocation rationing in times of shortage or other limitations.
Simple procurement and contracting processes, on-time payment, clear documentation, the avoidance of unduly onerous terms and conditions, ethical behavior, and transparent processes may help differentiate the buyer’s organization from other buyers.
Supply Chain Finance and Preferred Status
Another way buyers are incentivizing sellers to do business with them is through supply chain finance (SCF) programs. These programs help align the buyer-seller relationship and maintain healthy and resilient supply chains even in times of disruption.
Suppliers control how and when they get paid with SCF. As mentioned above, onerous payment can turn a buyer off from doing business with a company. SCF represents the opposite of that. Even if a company agrees to industry-standard terms with a supplier, say 30, 45, or 60 days, an SCF program can cut those terms to two-to-three days. Because SCF programs rely on third-party financing, buyers can help provide the working capital to their suppliers without sacrificing their own liquidity.
“If buyers want to keep those small pharmaceutical companies or small apparel or footwear companies working for them, then they want to do everything that they can to help them,” said George Lawrie, an analyst at Forrester Research. “And, if that means helping their working capital, making sure they don’t go out of business, well, that’s to the (buyers’) advantage in the long term.”
To learn more about how we can tailor a program that can improve your company’s status with your suppliers through LSQ FastTrack®, visit https://lsq.com/platform/accounts-payable/supply-chain-finance/.