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Inventory Costs Increase as Merchandise Orders Are Delayed

Inventory costs are cutting into businesses’ revenue as product sits on ships, according to The Wall Street Journal (subscription).

Transit delays: “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.”

Inventory costs: Inventory levels have been hampered since the beginning of the pandemic, but recent delays have also increased the cost of holding inventory. The Logistics Managers Index, a measure of inventory costs developed by Arizona State University, shows that costs increased sharply, reaching a high in June 2021. In December, the index was at 84, more than 20 points higher than it was in December 2019.

Impact on businesses: Shipping delays for a variety of products are leading to losses in revenue and forcing companies to increase prices. Store owners have reported that shipments which normally take a few weeks are taking months to arrive. Some companies, including Delaware furniture seller Monroe and Kent Home, have been forced to close stores and take out loans to offset the losses.

Businesses turn to loans and discounts: Freight forwarder company Flexport’s inventory-financing loans more than doubled between the third and fourth quarters of 2021. Minneapolis-based banking services provider U.S. Bancorp saw its supply-chain finance business, which provides suppliers discounts and gives buyers extensions on payments, double its balances over the past year.

Inventory bind particularly tough on smaller businesses: “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.”

What we’re saying: “Delivery volatility and related inventory costs are further symptoms of the same underlying problems that manufacturers have been forced to deal with since the pandemic began,” said NAM Director of Infrastructure, Innovation and Human Resources Policy Ben Siegrist. “Changes to the way ocean carriers operate at U.S. ports, like those for which the NAM is advocating, can make a difference in the overall landscape, but part of the reason we established our Ports and Ocean Shipping Task Force was to create a forum for members to discuss mitigation methods and other shipping best practices. Manufacturers have a unique perspective on these historic challenges and we want to use that collective knowledge to advance short- and long-term solutions.”

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