Managing supply chain risks: 4 ways to avoid trouble
In a volatile business environment, companies must identify supply chain risks and act proactively to reduce the impact of disruption. Here are four key strategies.
The recent conflict in the Red Sea, which started following the Israel-Hamas conflict last October, has caused significant disruptions to global trade and supply chains with no relief in sight.
The geopolitical crisis has led to soaring freight costs and longer delivery times. Experts predict that consumers worldwide will soon feel the impact through higher prices.
Here’s what businesses need to know about this looming supply chain catastrophe and what they can do to reduce the impact on their operations.
The importance of the Suez Canal & the Red Sea route
The Red Sea route is the fastest sea route between Asia and Europe. Any ship passing through the Suez Canal to or from the Indian Ocean must go through the strait of Bab al-Mandab and the Red Sea.
Approximately 30% of the world’s traded consumer goods are shipped through this route, according to CNN. And around 15% of global seaborne trade, including important commodities such as grain, oil, and liquefied natural gas passes over the Red Sea.
Any delay on the route will lead to congestion at ports, causing an imbalance between supply and demand or in vessel availability, personnel, and container supplies.
Swedish multinational furniture manufacturer IKEA announced that the crisis could delay its deliveries and cause availability constraints for certain products, if disruption to shipping continues. Tesla is having issues getting parts to manufacture goods and said that its production plant in Germany, which makes Model Y vehicles and batteries, will be put on hold from Jan. 29 to Feb. 11 due to a lack of parts.
The Houthis have said the attacks will stop if a ceasefire and an end to Israel’s blockade of the Gaza Strip takes place, but Israel remains firm in their stance, which means a huge swath of companies – especially in Europe and on the East Coast – are expected to experience the same as vessels continue to be diverted away from the Red Sea.
Tripling transportation costs and delays
As more shipping companies choose to reroute their vessels due to attacks, the number of vessels entering the Red Sea has nearly halved compared to the previous year. Ninety percent of the container vessels on the route have been forced to change course in the first week of January.
Market leaders like MSC and Maersk have already rerouted numerous container vessels. This adds 6,000 km to the journeys connecting Europe with Asia and potentially adds up to two weeks. All these trades depend on the same asset, containers.
That means that amid the Red Sea crisis, prices are going up because there aren’t enough containers. The higher freight costs, fuel prices, and insurance costs are likely to follow current economic trends and be passed on by businesses to customers.
How can businesses reduce the impact of these disruptions?
Achieving real-time visibility plays a big role by optimizing and effectively managing the route of containers. Integrated transportation management within supply chain operations helps businesses minimize cost increases and ensures smoother operations for the industry and consumers.
By responding to the disruptions with a resolute and agile approach, businesses can reduce the impact of disruptions and keep customers happy by optimizing resource utilization.
Listen to Red Sea Risk-Resilience: Supporting Supply Chain Agility at Scale:
The domino effect on production schedules
The Red Sea crisis has impacted manufacturing operations at ports that are no longer getting the same service levels. The global supply chain operates on a “just in time” basis, where every part arrives just as it is needed for production. Any delay will have a ripple effect throughout the manufacturing chain.
Even though most companies operate with some level of safety stock in place, just-in-time supply chains need consistent services and sea-air links.
Having flexible manufacturing processes is one of the key pillars of risk resiliency. By incorporating flexibility, businesses can better adapt to unexpected market changes and challenges, reducing potential negative impacts.
With Chinese New Year around the corner, the late return of vessels to Asia may result in delays and further cancellations. Roughly, every re-routed ship has 10.000 containers. Each of those containers has a journey of its own that needs to be replanned. This could mean some products will arrive later on the shelves if stocks are depleted.
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Red Sea crisis: What’s next?
Though the issue might seem confined to shipping companies now, experts warn that consumers worldwide should prepare for changes in the market in the coming weeks. These changes could include price increases, shrinkflation (reducing the size of a product while maintaining the same price), or a lack of availability of everyday goods while consumers are also coping with skimpflation, which means that businesses reduce the quality and availability of their services, while keeping prices steady.
All of this means companies must take action now to build resilience in their supply chains in order to protect their business and their customers.
