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Where cash was once king, in today’s bottlenecked global supply chain environment it is inventory that is wearing the crown. This year, one of the biggest challenges facing a mid-market SA business — whether manufacturer, wholesaler, retailer or distributor — will lie in building up inventory from a historically low base.
Inventory building is still well below its long-term average. Therefore, it doesn’t matter how much cash or access to credit funding a business has, it cannot turn over stock for profit if it doesn’t have inventory.
There are pockets of the economy that have been doing extremely well, as reflected by the SA Revenue Service’s announced tax receipt overshoot of R200bn. The macroeconomics of a 1.9% increase in GDP for SA can therefore be deceiving, as it does not tell the full story.
These green shoots are hidden by the average, but in fact they form the engine room of the economy. These are businesses that last year had access to inventory and consequently are now doing well and are sitting with piles of cash. However, those inventories were run down by Black Friday and the year-end festivities and have not been replenished in part because of the global supply chain bottlenecks and changes in trade routes.
With statistics pointing to low nationwide inventory levels, these same businesses will not be able to prepare for the Easter retail season, no matter how much cash or access to credit funding they may have. Therefore, their major challenge for 2022 will be to restock, plan and find the right logistics and banking partners. The low inventories at the moment are across the entire economy: manufacturers, wholesalers and retailers. Therein lies the opportunity for individual companies to not passively wait for restock orders to be confirmed but to rebuild their inventories faster than their competitors.
The advantage will lie with companies that can dissect their supply chains so as to order and reorder earliest. This is best achieved with a partner that understands not just banking but supply chains and the necessity to urgently build up inventory, and who is comfortable to take that inventory as its security. In other words, a partner that is an end-to-end logistics business. A business needs to understand the rising headwinds regarding availability of vessels, containers and their increased record-high pricing, and have someone who is also able to advise of alternative routes mid-voyage, when a ship experiences any delay.
This form of partnership best prepares companies such as retailers for the forthcoming Easter and winter retail cycles, and even looking further ahead to this year’s Black Friday and festive season. This means any stock received ahead of schedule will increase in potential value if one’s competitors have failed to get deliveries on time. This could result in increased market share, adding a different dimension to discussions about the cost of shipping. With adequate stock levels, retailers and businesses have more flexibility with pricing to make increased margins. Therefore, there is a big opportunity for those that plan well ahead.
This may seem premature. However, given last year’s huge Black Friday supply chain catastrophe and growing lead times for delivery — even longer in the case of particular commodities — we see many of our clients already preparing now for much later in the year. They experienced the supply chain issues last year, which had far-reaching implications. Leading retailers in the major economies were out of stock of key consumer big-ticket items, and if developed economies that are usually first in line for orders are going short, the deficit will be considerably magnified in a smaller economy such as SA.
For late movers, this early rush could amplify their supply chain problems. What we are seeing from developed countries emerging from the economic constraints of the Covid-19 pandemic is that pent-up consumer demand is what is driving their economic recoveries. In an environment in which consumers are willing to spend, a retailer will not want this opportunity to pass them by for lack of stock. Even more so for small businesses; the last thing they would want is for demand to be tapping on their doors that they are unable to satisfy.
Small businesses need to be sensitised to the fact that under normal conditions for stock already “on the water” there is a six- to eight-week lead time. Today we are factoring in five- to six-month lead times. The level of supply chain disruption is unprecedented, and we are advising some clients with particular stock needs to order now for stock to arrive in November.
We have already seen a recovery to 2019 levels in the manufacturing and transport sectors, and now is the turn for retail. This is the great opportunity. Consumer spending lagged during the pandemic, but consumers now have access to credit and they are ready to spend it. The exceptionally good results posted by the banking sector mean banks are willing and ready to lend money and increase their asset books.
The challenge facing the retail sector is not just stimulating demand, but whether it has the stock to meet that demand. For the moment, nothing is more important than restocking, and while there are green shoots now, the retail sector needs to take action so those shoots can grow.
• Merafe is head of sales at Investec for Business.
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.