Canadian businesses are facing a painful dilemma as they enter the second half of 2021.
A study released by the Bank of Canada in early July shows business confidence has soared across the country as vaccination programs have rolled out and reduced restrictions on public movement. Business leaders reported strong sales outlook, unprecedented levels of planned hiring and plans for greater investment. In fact, the monetary policy overseer’s quarterly survey showed confidence at its highest level since 2003.
There is good reason to be buoyed about the future. Canadian consumers have saved an estimated $220 billion during the pandemic that they are now looking to spend. Another Bank of Canada survey showed near unprecedent intentions amongst consumers to spend their savings once the economy opens. That is the good news.
The bad news is retailers, wholesalers and service-sector businesses reliant on the movement of goods are also facing unprecedented supply chain woes. Shipments of goods critical to the success of these businesses have been delayed by months due to backlogs at ports in Asia stemming for a global container shortage. In its survey, the Bank of Canada found 60% of businesses would have some difficult or significant difficulty meeting demand if there was a sudden increase. Commodity prices have soared to their highest levels since 2014 while factory-gate prices in China – where many manufactured goods are produced and exported to Canada – witnessed a year-over-year increase of 6.8% in April 2021. Shipping costs from China to the coast of British Columbia have tripled.
‘Just in Case’ Becoming the Norm
The delays and escalating costs of shipping are prompting businesses to stockpile inventory at rates not seen in recent years. The just-in-time supply chain model that has characterized the movement of goods throughout most of the 21st century is now being traded in for a just-in-case model. But the market has responded accordingly with warehouse lease rates up 25% and warehouse availability almost non-existent with little new capacity slated in the near term. In some cases, businesses have had to invest far more heavily in warehousing than they had planned when inventory arrived at port on time, along with delayed inventory and the oversupply that could not be contained within existing warehouse space. In addition, fiscal stimulus programs have tightened the labor market, driving down labor availability and driving up labor costs.
All the added expense is fuelling concerns about inflation as businesses pass down the additional costs to consumers. A spike in inflation could dampen consumer demand, which would then resolve the supply chain woes, but would also stagnate economic recovery. This leads to the greater challenge of whether to plan for a consumer boom or a more temperate market.
What is a Business Decision Maker to Do?
As the old saying goes, necessity is the mother of invention. Businesses have been finding creative solutions to supply chain problems as they have arisen – from alternative transport routes and methods to new suppliers and even alternative materials to build their products.
The reality, however, is there is no one-size-fits-all solution to the supply chain woes being faced by Canadian importers. Solutions will vary based on industry, pain points, sourcing markets, ports of entry and several other factors.
Gain Visibility: One of the key actions being taken by businesses is digging in to learn more about their suppliers’ suppliers. Doing so allows them to better identify potential disruptions where materials may be scarce, or transit routes are congested.
Call for Backup: Even businesses that have reliable suppliers should consider finding alternative sources of supply and ideally from a different country. In most cases, delayed supply is the result of congested ports or a regional dearth of cargo container availability. Finding backup suppliers in other markets means not only having an insurance policy for supply but also for transport.
Make Accurate Supply Projections: It is a tall order to know how consumers intend to spend in the wake of a global pandemic. But businesses that use analytics to gauge future demand will suffer fewer supply chain headaches as they will be able to plan better for anticipated inventory arriving from overseas.
Secure Freight: Cargo capacity is at historic lows as businesses around the world fight for space on ocean freighters. Even inland transport has become challenging. For businesses that have not secured space, finding available transport can be near impossible. Working with a freight forwarder can help not only to identify available capacity but also to secure space for future supply. This is particularly true for businesses that have a stronger gauge of upcoming demand.
Lower Landed Costs: Businesses searching for alternative suppliers can often find cost savings by leveraging free trade agreements to reduce duty outlay. Canadian businesses may find refuge in trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which gives importers free trade access to markets like Vietnam and Singapore. Other opportunities may be found with suppliers in Europe via the Comprehensive Economic and Trade Agreement (CETA). Of course, Mexico is a viable alternative to sourcing in Asia and is party to the recently enacted United States-Mexico-Canada Agreement (USCMA) that replaced NAFTA. Using Mexico could also remove the need to use ocean freight where congested ports are forcing weeks-long delays to bring goods to market.
When will it End?
Canadian importers are anticipating the day when business can get back to normal. After years of uncertainty over the fate of free trade in North America, conflicts with the U.S. over steel, aluminum, and lumber, and conflicts with China over agricultural goods, there is a desire to see things stabilize. The reality, however, is that Canadian importers will have to compete with their counterparts in the U.S. and other markets with recovering demand for cargo space. While more containers are being brought online, the shortage is anticipated to continue into the early part of 2022 or even later. That means rates will remain high for the foreseeable future, particularly for Asia-origin goods moving to North America’s west coast.
Michael Zobin is a Canada-based director of global trade consulting at Livingston International. His expertise includes supply-chain optimization; duty deferral and drawbacks; conducting compliance program reviews; developing compliance procedures; voluntary disclosure; and post-entry review.