According to the International Monetary Fund, the cost of shipping a container on the transoceanic trade routes has risen sevenfold in the 18 months since March 2020, while the cost of shipping bulk commodities rose even more. The cost-increasing impact of shipping costs is expected to increase through the end of 2022. In addition, challenges such as delays and strikes make it even more difficult for companies to keep costs affordable and operations more reliable. What does this mean for businesses and consumers? And how can we ensure that these costs can still be affordable and reliable?
Data from Drewry shows that the price of a 40ft container has increased from less than $2,000 in November 2019 to more than $7,500 in June 2022. Earlier this year, it had risen to $20,000. This dramatic increase has a lot to do with the fact that eCommerce has taken over the world. The booming eCommerce industry accounted for an estimated 19.6 percent of global retail sales in 2021, up from 13.6 percent in 2019, and is expected to account for nearly a quarter of global retail sales by 2025. indirectly contribute to stimulating demand for sea freight to such an extent that it exceeds the availability of sea containers. They do this by simply buying more and more products. Ultimately, the costs skyrocket as a result of a number of factors combined.
External factors are changing global shipping
The effects of freight costs on inflation are moving at a different pace than we would expect. Data shows that when freight rates double, inflation increases by about 0.7 percent, the effects of which are significantly sustained. To give an example, the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percent in 2022.
While the fluctuations in inflation caused by changes in global shipping prices are quantitatively comparable to the surge caused by fluctuations in global oil and food prices, the former translates into prices that consumers pay only more gradually – usually peaking after 12 months. That is, the impact of rising freight costs on consumers is growing more slowly compared to what drivers may experience at gas stations within a few months following a surge in global oil prices. However, producers feel the impact faster. Higher shipping costs affect the prices of imported goods at the dock within two months, quickly passing them on to producers, especially those who rely on imported inputs to produce their goods.
For growing eCommerce companies, the rapidly growing costs have a major impact, as a large part of their cash flows and margin is influenced by freight costs. Especially those who depend on freight forwarding will have to deal with rising costs for a longer period of time. Therefore, it is essential to understand how eCommerce companies can adopt flexible strategies to adapt the risk of rising freight costs.
Tackle rising freight costs
Financial planning is one way to deal with rising costs. Companies must calculate how much money they will need to run operations for a full period of 12 months and beyond, carefully considering all applicable costs. To create multiple plans in the event of an emergency, companies can support growth quickly, even in the face of such disruptions. Operating under a budget is certainly not the best way for a company to make the most of certain opportunities.
Strategic inventory planning is another element to consider. While eCommerce companies have traditionally been advised to keep their inventory lean, today’s volatile supply chain situations call for a more contemporary approach to inventory planning. Long delays in delivery times due to supply chain disruptions can result in companies not having enough inventory to meet demand, causing them to miss out on sales opportunities. Therefore, it is always a wise idea to have sufficient inventory to reduce the risk of potential supply chain disruptions that could jeopardize business operations.
eCommerce companies often struggle to keep up with conflicting freight costs. Despite a major bargaining agreement from the forwarder, freight charges still need to be paid in full before inventory is ready for sale. This is where revenue-based financing comes into play. Instead of paying freight in full upfront, revenue-based financing allows companies to use more of their own money to fund their growth. It not only frees them from the struggle to find additional cash flow to cover costs, but instead increases cash flow, allowing them to grow.
Disruptions in the global economy are an ongoing challenge to keep up with as it will take longer than expected for companies to resume operations, as it was during the pre-pandemic era. While these disruptions are beyond our control, the best option for companies is to stay prepared for both favorable and unfavorable fluctuations in the global economy. Careful planning will go a long way in overcoming rising costs while accelerating growth.
This article was written by: Matthijs Onland, Country Manager way flyer Netherlands and Belgium.
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