Maintaining Liquidity Amid the Supply Chain Woes
If you fly out of LAX, you can see the parade of ships lined up outside the Ports of Los Angeles and Long Beach. We’re used to gridlock on the roads in Los Angeles, but seeing a traffic jam in the ocean is a new experience. It’s a stark visual reminder of the supply chain woes plaguing international trade.
The two ports account for about one-third of U.S. imports and serve as the main source of trade with China. Through August, the Port of Los Angeles had moved 30% more shipping containers
than usual, while Long Beach has moved an extra 24.3% through September. Pre-COVID, it was unusual for more than one ship to wait for a berth in the Southern California ports. One day in mid-September, a record 73 ships were forced to wait to enter the ports. The Biden administration has been working with key players in the supply chain to help alleviate the strain. The Ports of Los Angeles and Long Beach are now operating 24 hours a day; UPS, FedEx, Walmart and Samsung all announced they would increase their overnight operations. But those measures will only do so much.
The ripple effects of several factors have led us to this point. COVID-19 lockdowns in China shut down a major shipping terminal, leading to slower traffic at other ports. The lockdowns also closed major manufacturing plants in Southeast Asia, slowing the production of goods. More recently, power shortages in China have cut into production. Meanwhile, the U.S., the U.K. and Germany are all experiencing a shortage of truck drivers to haul goods to distribution hubs.
On top of all that, demand for consumer goods in the U.S. is particularly strong. According to the Census Bureau, retail sales for July through September rose 14.9% from the previous year. Consumers continue to buy more things (as opposed to services), but there’s only so much capacity to unload, warehouse and transport all those goods, especially at a time when the supply chain isn’t equipped to operate at peak capacity.
All told, many economists believe the strain will last into the middle of 2022, and that doesn’t bode well for businesses trying to plan for next year.
Avoiding a liquidity crunch
We’ve dealt with supply chain backlogs on the West coast before, most notably during the 2012 labor strike at the ports, but this is different. Now, global challenges are being compounded by a domestic labor shortage, from manufacturing to dock workers to truck drivers, and there’s no clear solution in the near term.
Some of the clients we’ve spoken with have built up their supplies of components like lumber, knowing that demand continues to be strong. Some large companies are spending a lot more money hiring their own vessels and shipping them into different ports, knowing that it's going to take longer and that they're going to pay more.
During the 2012 strike, we saw many companies had trouble meeting client demand, which led to liquidity issues. Companies face a similar problem today, whether it’s delays in meeting contractual obligations, paying more to get products in on time, or paying more for labor.
The current supply chain challenges could lead companies to change their projections. How it will affect your company is unique both to your industry and your business model. But this is something that is impacting industries across the board. One way to help your business avoid near-term challenges is to start having discussions with your suppliers, customers and financial partners about modifying some of your payment terms, which can help avert a liquidity crunch.
Part of that process could involve having conversations with people outside your network to hear ideas on how your company can navigate this predicament. You may want to discuss with financial institutions how letters of credit and treasury management solutions can help bridge the gap between paying suppliers and receiving payment from your customers. It’s about seeking out new perspectives and developing new relationships that you can leverage to devise creative solutions.
Even if your liquidity position is strong now, these conversations would ideally take place as soon as possible. You don’t want to start after you've found yourself in a hole. The backlog could carry over well into 2022, and with so many facets of a global supply chain, it’s difficult to predict if other issues could come along to exasperate the problem.
Like the pandemic, the supply chain disruption is an unexpected shock on a global scale, and it probably won’t be the last one. Engaging in proactive dialogue with your suppliers, customers and bankers about payment terms and your liquidity structure can help keep you afloat. Having those conversations now can help you navigate not just this crisis, but other shocks that may arise down the road.
Chris Kaberle is a Director in BMO Commercial Bank’s Southern California commercial banking office.
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Chris Kaberle, Director, Commercial Banking
If you fly out of LAX, you can see the parade of ships lined up outside the Ports of Los Angeles and Long Beach. We’re used to gridlock on the roads in Los Angeles, but seeing a traffic jam in the ocean is a new experience. It’s a stark visual reminder of the supply chain woes plaguing international trade.
The two ports account for about one-third of U.S. imports and serve as the main source of trade with China. Through August, the Port of Los Angeles had moved 30% more shipping containers than usual, while Long Beach has moved an extra 24.3% through September. Pre-COVID, it was unusual for more than one ship to wait for a berth in the Southern California ports. One day in mid-September, a record 73 ships were forced to wait to enter the ports. The Biden administration has been working with key players in the supply chain to help alleviate the strain. The Ports of Los Angeles and Long Beach are now operating 24 hours a day; UPS, FedEx, Walmart and Samsung all announced they would increase their overnight operations. But those measures will only do so much.
The ripple effects of several factors have led us to this point. COVID-19 lockdowns in China shut down a major shipping terminal, leading to slower traffic at other ports. The lockdowns also closed major manufacturing plants in Southeast Asia, slowing the production of goods. More recently, power shortages in China have cut into production. Meanwhile, the U.S., the U.K. and Germany are all experiencing a shortage of truck drivers to haul goods to distribution hubs.
On top of all that, demand for consumer goods in the U.S. is particularly strong. According to the Census Bureau, retail sales for July through September rose 14.9% from the previous year. Consumers continue to buy more things (as opposed to services), but there’s only so much capacity to unload, warehouse and transport all those goods, especially at a time when the supply chain isn’t equipped to operate at peak capacity.
All told, many economists believe the strain will last into the middle of 2022, and that doesn’t bode well for businesses trying to plan for next year.
Avoiding a liquidity crunch
We’ve dealt with supply chain backlogs on the West coast before, most notably during the 2012 labor strike at the ports, but this is different. Now, global challenges are being compounded by a domestic labor shortage, from manufacturing to dock workers to truck drivers, and there’s no clear solution in the near term.
Some of the clients we’ve spoken with have built up their supplies of components like lumber, knowing that demand continues to be strong. Some large companies are spending a lot more money hiring their own vessels and shipping them into different ports, knowing that it's going to take longer and that they're going to pay more.
During the 2012 strike, we saw many companies had trouble meeting client demand, which led to liquidity issues. Companies face a similar problem today, whether it’s delays in meeting contractual obligations, paying more to get products in on time, or paying more for labor.
The current supply chain challenges could lead companies to change their projections. How it will affect your company is unique both to your industry and your business model. But this is something that is impacting industries across the board. One way to help your business avoid near-term challenges is to start having discussions with your suppliers, customers and financial partners about modifying some of your payment terms, which can help avert a liquidity crunch.
Part of that process could involve having conversations with people outside your network to hear ideas on how your company can navigate this predicament. You may want to discuss with financial institutions how letters of credit and treasury management solutions can help bridge the gap between paying suppliers and receiving payment from your customers. It’s about seeking out new perspectives and developing new relationships that you can leverage to devise creative solutions.
Even if your liquidity position is strong now, these conversations would ideally take place as soon as possible. You don’t want to start after you've found yourself in a hole. The backlog could carry over well into 2022, and with so many facets of a global supply chain, it’s difficult to predict if other issues could come along to exasperate the problem.
Like the pandemic, the supply chain disruption is an unexpected shock on a global scale, and it probably won’t be the last one. Engaging in proactive dialogue with your suppliers, customers and bankers about payment terms and your liquidity structure can help keep you afloat. Having those conversations now can help you navigate not just this crisis, but other shocks that may arise down the road.
Chris Kaberle is a Director in BMO Commercial Bank’s Southern California commercial banking office.
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