As the delta variant continues to impact supply chains and everyday business, now more than ever it is important to understand international roadblocks and how to detour from them. Many companies are experiencing significant shipping delays due to factory and port closures, and country lockdowns. These factors, in turn, have more than doubled international containerized freight costs and provoked production and supply chain delays and shortages for many companies.
According to data from Panjiva, the cost of shipping into the U.S. through April surged 207% over a year earlier.
The global pandemic has created both unforeseen challenges and opportunities. Business of all sizes are now leaning more heavily on traditional trade finance instruments like letters of credit to reduce risks.
Is It Time To Reassess and Restructure Your Overseas Vendors and Supply Chain Dependencies:
One strategy for avoiding costly delays is to relocate segments of your companies’ supply chain that are operating in areas across the globe or in areas of high risk. Since early 2020, the pandemic has caused imbalances in production and demand of goods due to the unique lockdown structure and timing of reopening for each country. These challenges have led to shipping container shortages and port congestion or even worse, closure. Like the effects of the Suez Canal blockage in March of 2021, the Meishan terminal at the Ningbo-Zhoushan Port, the third busiest container port in world, recently shut down for weeks after a dock worker tested positive for Covid-19. These shutdowns have created timely and costly delays that are not reported to improve until the end of 2022. While costs are projected to remain high, now might be the time to diversify your supply chain location or consider alternative shipping methods such as air freight where possible.
Best Practices in Assessing the Resiliency of Your Supply Chain:
The following are key questions to review when evaluating your supply chain during these turbulent times:
- Do you conduct regular 'informal' interaction and discussions with your key suppliers? With the global pandemic, companies should consider more formalized reviews of supplier relationships, production facilities, logistics routes and other key supply chain challenges.
- Do you have an early warning system for issues within supply chains?
- Do you have a fully prepared and tested business continuity plan?
- Do you understand and monitor supplier's exposure to the physical risks associated with climate risk, i.e. risk of disruptive weather events? These challenges are not just overseas: Ports in the Gulf of Mexico have been recently closed due to the impact of hurricane Ida, creating devastating losses for US farm exports.
- Do you have risk mitigation against defective goods or non-delivery issues in place?
- Can you rapidly switch production to alternative sites?
- Do you maintain a healthy list of alternative suppliers operating within your industry?
- Do you have backup plans to rapidly switch logistics and distribution routes to adapt to market demands and developments? Are they near shore?
- Do you manage your financial exposure to counterparties, countries and banks using trade finance instruments?
Modify Payment Terms and Improve Cash Flow Position:
During these uncertain times when delays and high shipment costs are all too common, negotiate payments terms with your supplier or buyer. Ask for longer payments terms to improve your cash position while the shipment is delayed. Another method to improve short term liquidity is to establish separate payment terms for domestic and international transactions. If you are the exporter, consider establishing a trade spend incentive. Grant your buyer longer payment terms in exchange for larger orders.
Why Letters of Credit Now?
As the pandemic has disrupted supply chains and in result strained relationships between trade partners, now is the time to explore Letters of Credit and how they mitigate risk. As an importer, consider issuing a commercial letter of credit to act as a safer alternative to Cash in Advance payments. A commercial letter of credit can also incent timely shipment since payment is not sent by the bank to the supplier until proof of shipment is presented.
Letters of credit can also be a cash flow solution for the exporter. Exporters looking to improve their cash flow can offer their buyer’s relief with payment terms but can still receive payment at shipment by discounting the LC. Learn more about other Letter of Credit options such as confirmation in our latest article here.