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Supply Chain Disruptions Are Threatening Amazon Businesses – And they’re putting the entire economy in danger

News / October 6, 2021

From the onset of 2020, the plight of the COVID pandemic threatened many aspects of our lives: our health, our jobs, our social support, our relationships, etc. But something else almost unforeseeable happened. While the rest of the world faced crushing debt and loss of income, those that sold online (particularly Amazon) amassed a surge of profits due to high demand. Problem was, due to the coetaneous effects of a surge in product demand with lack of resources from supply chain to meet those demands, a perfect storm afflicted both manufacturers and sellers. And, almost two years later, issues with the supply chain have been conflated.

Inflation is just over 5%, posing the biggest annual jump since 2008, and economists agree that it’s largely driven by importing and manufacturing. The cost run-up is primarily due to logistical challenges.

Why is there nothing on the shelves?

Walk into any grocery store, restaurant, liquor store, or gas station and you probably notice a shortage of products. Things are missing. In some cases, one might conjecture they were on-set of an apocalyptic movie filming. You half expect Negan from the walking dead to come strolling up the aisle. And the shortage of goods doesn’t stop with items such as toilet paper and bleach wipes (which was often the case during the onset of COVID.) The deficit of products extends to goods such as chicken wings, vodka, face masks, diapers, and other household products. Supply-chain congestion is the leading cause for this shortage, leading to unprecedented shipping lag-times, skyrocketing shipping costs, and ports along the west coast of California being clogged. This has resulted in a longer wait time for consumers, a fervent panic for sellers, as well as an increase in unit prices for both parties involved. 

Why Are There Shipping Delays in China?

For ecommerce and brick-and-mortar retailers, turnover times that used to hover around 6-8 weeks are now taking 4-6 months. This is the ramifications of Covid lockdowns, staffing shortages, and now, China’s new implementation of rationing gas and electrical power. As a result, shipping costs have risen, exponentially. In 2019, a container from Shenzhen to the port of Los Angeles would cost around $3500, whereas today, that same container can set a seller back $28,000 – $42,000. (Although, it should be noted that those numbers are projected to go down significantly as we round into Q4). This amassment of problems is so problematic that larger conglomerates like Home Depot and Costco have decided to take matters into their own hands by renting out entire container vessels for more control over shipping from Asia to the US.

While this burden is undoubtedly afflicting retailers across the board, it is especially problematic if you are an Amazon FBA seller for a few reasons. Firstly, Amazon limits how much inventory they will hold for you, as their storage units are not fundamentally meant to “store” items, but help with the transfer of items. So, you can’t over-manufacture products to avoid running out of stock in hopes of dealing with shipping delays. Secondly, when sellers are out of inventory, the product listing is suppressed, which hurts both your Amazon listing ranking and your profits.

A Shortage in the Freight Trucking Industry

As if overseas shipping wasn’t enough of a plight, the trucking industry in the U.S. has taken quite the hit as well. According to Yahoo News, data from the Bureau of Labor Statistics signified that in the depths of the COVID-19 pandemic, the truck transportation industry lost 6% of its pre-pandemic labor force of 1.52 million workers. As of July 2021, the trucking industry has recovered only about 63,000 of those lost jobs.

So, the agglomeration of all these supply-chain issues has provoked what undoubtedly could be considered a pandemic in its own right; an economic peril, if you will. 

Electricity Rationing In China

At the turn of 2021, the demand for coal in China skyrocketed in response to “post-pandemic” travel, going out, and an influx in consumerism. As China’s export machine roared back to life, factories that operate largely on coal took on the weight of the world, with a massive shift in supply and demand. Environmental regulations that had been put into place pre-COVID loosened their constraints on coal-intensive sectors as a way to help breathe life back into the economy, specifically exportation.

Now, thermal coal has tripled in price on some commodities exchanges. About 90% of coal used in China is domestically mined, but mining volumes from some of China’s northern provinces have dropped by as much as 17.7%. 

Normally, those higher coal prices would be passed on to energy consumers, but electricity utility rates are capped in China, threatening power plants to the brink of financial collapse due to skyrocketing coal prices forcing them to operate at a loss. Bottom line: power plants have had no choice but to shut down.

Roughly 57% of China’s power comes from burning coal, placing China in quite the quagmire. In an attempt to reverse the damage (or at least control it), small governments are rationing electricity in both the public and personal sectors of the country.

Because of limited coal sources, manufacturers have felt the effects of these new laws, shutting down operations for days – sometimes weeks.   

What is the trajectory for future shipping operations and Amazon Sellers?

Operating an online business and streamlining operations is difficult enough; navigating these areas during world circumstances that eerily resemble that of the Great Depression is an entirely different beast. 

Supply Chain Financing (or SCF) has become a backup plan for many companies to mitigate some of these supply-chain issues. Suppliers can receive early payment on their invoices and it helps reduce the risk of supply chain disruption, enabling both buyers and suppliers to optimize their working capital. Some refer to it as reverse financing, however, it should be noted that this specialty financing is often reserved for the largest corporations in the world. Smaller companies are left with business loans which can be difficult to get approval for, given the inherent risk. The cash crunch is very real and very acutely affecting Amazon FBA businesses.

Conclusion

While all of the external constraints have negatively affected nearly everyone in retail, Amazon SMBs that rely on Amazon FBA as their primary warehouse and distribution solution have taken a big blow, addled with issues like juggling inventory, listings suppression, losing the buy box, and net profits diminishing. While the seemingly, most obvious answer would be to redirect traffic to your personal e-commerce site and utilize 3PL warehouses, this is not always the right avenue to take if you are a no-name brand with lack of capital for advertising, coupled with the skyrocketing costs of UPS.  

Business insiders and consumers alike are closely watching the trajectory of overseas exporting moving into this holiday season. What should be a highly-grossing, peak time for online retailers is instead leaving sellers with a lot of trepidation and anxiety. Nike stock is down 6% on their announcement that “We expect revenue growth to be flat to down low single digits versus the prior year as factory closures have impacted production and delivery times for the holiday.” This is coming from Nike. NIKE. One of the world’s most recognizable and on-demand brands. If Nike is feeling the effects of international economic turmoil, it speaks a lot to the peril many small and medium businesses are facing. 

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