Companies not learning supply chain lessons as shipping disruption becomes the norm

Companies need to plan for repeated supply chains disruption as climate change and geopolitical threats increasingly affect critical shipping and trade routes, business continuity specialist Fusion Risk Management has told Commercial Risk. Following attacks on vessels by Yemen’s Houthi forces in the Red Sea, most major shipping companies – including Maersk, Hapag-Lloyd and MSC – are re-routing vessels around South Africa's Cape of Good Hope. The diversion adds over 6,000 km and ten days to a transit between Asia and Europe, significantly increasing the cost of shipping a container. According to Freightos, freight rates for Asia-Northern Europe transits are up 173%, while Asia-Mediterranean prices have doubled. Carriers have introduced surcharges ranging from $500 to $2,700 per container. The attacks on shipping in the Red Sea are also causing disruption to supply chains and longer lead times. Tesla is suspending most car production at its factory near Berlin from the end of this month due to a shortage of components caused by changes to transport routes following attacks in the Red Sea. Chinese car manufacturer Geely, Swedish home furnishing company Ikea and UK retailer Next have all warned of delays to deliveries. The situation in the Red Sea could see a return to wider port congestion and shortages of shipping containers, reminiscent of the post-pandemic shipping crisis. However, these constraints are likely to be short term as ports and shippers adjust to the longer transit times and diversions. “It is surprising that some organisations, large and as sophisticated as they are, had not thought about and planned for these potential threats. Companies need to not think of these events as anomalies, but as ongoing threats that they will have to live with. It’s not the first time this has happened and it won’t be the last,” warned Wes Loeffler, director of third-party risk management at Chicago-based Fusion Risk Management. Supply shortages related to shipping are not new. During the post-pandemic recovery, a surge in demand combined with a shortage of shipping containers, port congestion and Covid restrictions caused big delays to shipping. In 2021, the ultra-large container ship Ever Given grounded and blocked the Suez Canal for six days, resulting in a bottleneck and re-routing vessels via the Cape of Good Hope. Almost a decade ago, passages through the Red Sea shipping route were cut by Somali pirates hijacking vessels in the Gulf of Aden and Arabian Sea. Following a six-year pause in attacks, a merchant vessel was boarded in January by armed individuals off Somalia. Companies appear to have not learned lessons from past disruption, in particular the Ever Given grounding, which is estimated to have cost the global economy more than $400m per hour. “It doesn’t seem like many companies learnt from the blocking of the Suez Canal. The focus is still on profitability and cost. Carrying a backlog of inventory is more costly and has an impact on cashflow. Profitability is still being prioritised over redundancy,” said Loeffler. Shipping is a key, often overlooked, aspect of supply chains. Around 90% of all goods transit by sea, be it raw materials, components or finished products. However, many shipping routes pass through congested or narrow choke points. Approximately 12% of global trade and 30% of global container traffic uses the Suez Canal every year, while 5% of global maritime trade passes through the Panama Canal, a vital link between the Atlantic and Pacific oceans. Major shipping routes like the Red Sea are potential targets amid growing geopolitical political risks. A blockade of Tawain by China, for example, could cause major disruption to supply chains and affect shipping in the Taiwan Strait, where almost half of the global container fleet and 88% of the world's largest ships by tonnage pass. There could also be future disruption in trade and shipping in the South China Sea, where China is currently in dispute with neighbours over territorial claims. “Anywhere there is a geographic single point of failure, there is the likelihood of disruption. Countries tend to be opportunistic and will take advantage of these choke points in the supply chain. Organisations should adapt and build in redundancies to their supply chains. We saw similar disruptions to shipping in the Black Sea due to the conflict in Ukraine, and we will continue to see more of these events going forward,” said Loeffler. “Organisations can no longer take the safe passage of shipping and trade for granted,” he added. Geopolitical risks are not the only threat to global shipping and trade. The Panama Canal has suffered the worst drought restrictions in its 143-year history over recent months. This has reduced the number of vessels allowed to pass through the canal, adding six days to the transit. In recent years, flooding has impacted barge traffic on the Mississippi River, which is used to move 60% of US grain exports. In 2018 and 2022, severe drought reduced water levels in the Rhine, limiting inland shipping and disrupting industry. “With ESG, the increased frequency of natural disasters and climate change, as well as geopolitical risk, these have all converged and led to more and more of these disturbances,” said Loeffler. Loeffler predicts that disruption to shipping from conflict and climate change will continue for the foreseeable future. As a result, organisations should evaluate safer routes that are less exposed to opportunistic threats, even though they may take longer and cost more. Companies should also pro-actively prepare for future disruption and re-routing, holding appropriate levels of inventory, advised Loeffler. “Organisations will need more redundancies in their supply chains and a better understanding of their actual supply chains. We saw it with Covid and the disruption to microprocessors. Companies thought they had redundancies and multiple suppliers to buy chips from, but when they looked deeper into the supply chain, there were only a couple of producers of microprocessors and when they were disrupted the supply chain ground to a halt,” he said. “As enterprises become larger and with more mergers and acquisitions, there are fewer players. And through that consolidation, supply chains are then more at risk from single points of failure,” he added.

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