Playbook #026: Supply Chain Financing
🖼️ The Big Picture
We live in an interesting time. Maybe you’ve seen some headlines about issues with the supply chain, and noticed empty shelves at Target. And it’s true: we’re arguably in the most widespread supply crunch since the oil crisis of 1973.
So why is it so bad? Well, there are a few things happening. There are lingering effects of the COVID-19 mitigation strategies that reduced the production of goods. Now, companies are trying to catch up.
Workers, especially minimum wage workers, are quitting jobs or simply not working. In July 2021, the warehouse industry had a record 490,000 openings. There’s a shortage of 80,000 truck drivers to move goods, and backlogs of ships on the California coast (ocean freights from China to the U.S west coast are taking almost 2x as long and are more than 3x more expensive than pre-pandemic.)
As a result of not having enough supply to meet the demand, along with issues transporting goods as efficiently as we did pre-pandemic, prices are skyrocketing (governments printing trillions and driving inflation doesn’t help either.)
All things considered, it’s a mess that’s going to take time to return to normal. But where there are problems, there’s opportunity.
All goods that move from farm to table or manufacturer to retailer go through something called a "supply chain" which includes shipping, storing, and distribution.
How It Works
Imagine you’re a manufacturer of stand-up desks. You have 2 suppliers: 1 for metal frames, and 1 for wooden and glass desktop surfaces. Normally, your suppliers would ship you the products, and send you an invoice due in 30 - 60 days, and you would negotiate to get the best terms you could.
With Supply Chain Financing (SCF), an intermediary party handles the invoice for you, paying the supplier immediately, and extending longer payment terms to you.
As a Buyer, you get more time to pay, which frees up cash flow so you can sell inventory.
Suppliers get paid immediately, in exchange for a small discount, giving them more free cash to produce and sell additional goods.
Supply Chain Investors get consistent historic returns between 6% - 10%, relatively low volatility and risk, as well as limited correlation to other markets like stocks, oil, and real estate.