The global supply chain is currently facing a perfect storm. A confluence of challenges, including a surge in late payments, a persistent labor crunch, and relentless inflationary pressures, is creating unprecedented problems in the flow of goods and services worldwide. From soaring raw material costs to labor shortages in crucial sectors, these interconnected issues are far-reaching, affecting businesses, consumers, and the global economy.
Credit: Eric Wir
A financial chain reaction as late payments rise
Recent data from Taulia, a financial technology company, paints a worrying picture of late payments in global supply chains. The proportion of suppliers affected by late payments has surged, with a growing number reporting delays of more than 45 days. This financial strain is particularly acute for small and medium-sized enterprises (SMEs), which often lack the financial reserves to withstand extended payment cycles.
“In the current landscape of supply chain disruptions and a challenging inflationary environment, it is unfortunate to see late payments on the rise. Now more than ever, access to working capital solutions is crucial,” said Bob Glotfelty, chief growth officer at Taulia. “Not only does it provide businesses with much-needed liquidity and payment flexibility, it also supports them in their day-to-day operations.”
Recently, the European Union, to support SMEs, the most affected by late payments, announced plans to enforce 30-day payment terms for businesses. However, some large groups selling to EU companies are fighting back, naming higher costs that could force them to raise prices. “It does not come for free. It puts the cost somewhere else in the value chain,” said Nick Lakin, head of corporate affairs at Kingfisher, owner of European DIY stores Castorama and Brico Dépôt, which generates more than half its sales in the EU. “This would ultimately have consequences for consumers regarding product availability, choice and price.”
Late payments disproportionately affect small businesses. According to the European Commission, a quarter of all bankruptcies for EU companies are caused by invoices not being paid on time.
The consequences of late payments ripple through the supply chain, creating a domino effect of financial instability. Suppliers facing delayed payments sometimes must curtail production, reduce their workforce, or even face insolvency. This, in turn, can lead to shortages of crucial components and raw materials, further disrupting the supply chain and driving up consumer prices.
Rising wages and scarcity of skilled workers
The global pandemic triggered a wave of labor shortages that continues to impact supply chains worldwide. Sectors such as trucking, warehousing, and manufacturing are grappling with a need for more skilled workers, leading to increased wages and operational costs. The “Great Resignation” and changing worker expectations have exacerbated this challenge as individuals seek better pay, benefits, and work-life balance.
“Employee wages and benefits are one of business’s biggest costs. Wage increases put pressure on a company to maintain margins potentially by increasing prices,” says a 2022 McKinsey report on navigating inflation. “At the same time, wages and benefits are one of the most important levers employers have to attract and retain employees and help them ensure that they can provide for themselves and their families in a higher-inflation environment.”
The labor crunch has far-reaching consequences for supply chains. In the trucking industry, a shortage of drivers is causing delays and bottlenecks, hindering the efficient movement of goods. In manufacturing, companies struggle to meet surging demand due to a need for more available workers. These disruptions contribute to inflationary pressures and create logistical headaches for businesses and consumers alike.
“The labor market is incredibly tight right now,” said Bob Costello, chief economist for the American Trucking Associations. “Based on our estimates, the trucking industry is short, roughly 78,000 drivers. […] We’re seeing record-high turnover rates and significant wage pressures, which are adding to the challenges facing the trucking industry and the broader supply chain.”
Source: American Trucking Associations
The global driver shortage continues to worsen, and the latest forecasts predict that it will double in the next five years. This will make it increasingly difficult for transport companies to maintain their current operations, let alone expand and develop.
Furthermore, the introduction of legislation like Canada’s “Fighting Against Forced Labour and Child Labour in Supply Chains Act,” commonly known as the Modern Slavery Act, or MSA Canada’s Modern Slavery Act (MSA) is placing greater emphasis on transparency and due diligence in addressing forced labor and child labor within supply chains.
The MSA, which took effect on January 1, 2024, requires in-scope organizations to submit annual reports detailing their efforts to prevent and address forced and child labor in their operations and supply chains. The organization’s governing board must approve these reports, which must then be made publicly available and submitted to the Canadian government.
Inflation and the rising cost of doing business
Inflation has emerged as a formidable challenge for supply chains, driving up the cost of raw materials, energy, and transportation. The intricate interplay of factors such as supply chain disruptions, labor shortages, and geopolitical tensions has created a volatile economic environment where prices are rising across the board.
The impact of inflation on supply chains is profound. Companies are grappling with escalating costs for everything from steel and lumber to semiconductors and shipping containers. These increased costs are often passed on to consumers, leading to higher prices for a wide range of products. In some cases, businesses may absorb some of the cost increases to maintain competitiveness, but this can erode profit margins and hinder investment in growth.
Rising inflation is obviously one of the root causes of the rise in late payments. Many businesses use supplier credit to avoid paying high interest rates on loans.
“Someone, somewhere, pays for every uptick in inflation. Customers pay at the end of the supply chain in higher prices,” said the McKinsey report. “Suppliers pay when their customers derisk production by seeking alternatives to their products. Shareholders pay higher costs as the ante for competing and maintaining a viable business.”
Industries need new tools for resilience and profitability
The convergence of these challenges demands that businesses adopt proactive strategies to build resilience and navigate the turbulent waters of global supply chains. Diversifying supplier bases, investing in automation and technology, and prioritizing sustainability and ethical practices are all crucial steps toward mitigating risks and ensuring long-term success.
Governments also have a vital role in supporting supply chain resilience. Investing in infrastructure, education, and workforce development can help address labor shortages and improve the efficiency of logistics networks.
Promoting international cooperation and reducing trade barriers can also facilitate the smooth flow of goods and services across borders.
The challenges facing supply chains in 2024 are undeniable, but they also present opportunities for innovation and transformation. By embracing new technologies, fostering collaboration, and prioritizing sustainability and ethical practices, businesses can navigate the perfect storm and emerge stronger and more resilient.
