Right now, shipping disruptions in the Red Sea are at the forefront of distribution, logistics and manufacturing leaders' minds. A global supply chain crisis that began in Autumn is only escalating: what will be the impacts of this in the long and short term? And how can you assess your risk?
What is causing the current Red Sea disruption?
Over the last couple of months, the Houthi, an Iran-backed Yemeni group, have been attacking container vessels in the Red Sea, a key shipping route entered by the Suez Canal. They are ostensibly aiming to attack ships travelling to Israel in support of Hamas in Gaza. In December, the world's largest shipping group Mediterranean Shipping Company announced they were stopping Red Sea routes due to the Houthi attacks, and the situation has further escalated this week with a military response led by the US.
What are the immediate impacts?
The disruption has resulted in the majority of ships being diverted to a Cape of Good Hope route which adds around ten days to the voyage. The number of container ships on their way to or from the Suez Canal is down 90 per cent. As these ships take the longer route, the result are delays in stock arrival, added costs as shipping skyrockets in price and a build-up of containers in ports, which in turn causes further delays.
Much of the global supply chain operates under a just-in-time principle, where supply chain partners move materials right before they are needed to avoid expenditure on long-term storage. Therefore, adding over a week’s unexpected duration to voyages - not to mention further delay from backup at ports - is likely to result in goods shortages. Manufacturers may suffer from undelivered or late parts and raw materials, and freight forwarding, transport and fulfilment services might see shipments failing to arrive on time – disrupting schedules and sending out operational shockwaves. Retailers IKEA and Next are already warning of product delays, indicating that businesses involved in last-mile delivery are likely to be affected.
Insurance will also increase, especially as those ships making the crossing are having to turn off their tracking systems. Increased fuel, insurance and people costs combine to raise prices – a fact many manufacturers and logistics services providers will eventually have to take out on the client or customer.
Will you be affected?
Companies dealing with larger items like TVs, machinery and vehicles are most likely to be affected, as these are more often shipped via sea than air. Even if your business does not directly trade through the Red Sea, take into account your wider supply chain. It is vital you have all your supplier information and contracts logged in a single system, allowing you to discern potential weak points.
Comprehensive supplier management software will also allow you to easily see which contracts are up for renewal, meaning you can move towards suppliers that use unaffected routes, or cut superfluous contracts altogether for cost-savings.
What will be the longer-term impacts?
Much will depend on if the crisis continues, or if it inspires copycat attacks on other logistics chokepoints, such as the South China Sea. If it does, experts are already predicting an increase in onshoring and nearshoring, the processes of moving manufacturing closer to the location or back to the country of sale. In a US and UK election year, expect reducing risk in the supply chain to become a top priority in policymaking. Over the past few years, inflation has slowed down, but analysts are predicting that this crisis may instigate a rise.
For those watching their carbon footprint, ESG targets will be harder to reach due to the extra fuel expenditure of the longer Cape of Good Hope route. Investing in technology is also likely to move even higher up the priority list for businesses, as those with already robust solutions – like the supplier management tools mentioned above – are best prepared to cope with sudden change.
Although the crisis poses risks to all companies involved in the manufacturing, processing and transporting of goods, the lessons of the Covid-19 pandemic have built a level of resiliency into the supply chain. With a forward-thinking approach and strong operational infrastructure, businesses should be able to take steps to mitigate profit and efficiency losses.
