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Supply Chain Resilience: Lessons from the Suez Canal Blocking
For a week in March 2021, the world’s media was transfixed by the plight of the containership MV Ever Given, breached across the Suez Canal and blocking the movement of any other vessel through the waterway.
The incident couldn’t have come at a worse time for European economies struggling to recover from the impact of COVID-19. An estimate by German insurer Allianz suggested that the cost to global trade was between $6bn to $10bn a week, reducing trade growth by 0.2-0.4 percentage points.
The Suez Canal handles about 7% of the world’s trade and in 2018/19 it was transited by approximately 19,000 ships carrying 1.2 billion tons of cargo. With the canal out of action, many shipowners decided to divert ships bound to and from Asia via the Cape of Good Hope in South Africa, adding 8,9000 kilometres to their journey and 8-10 days to the transit time.
There is no doubt that the blocking of one of the world’s busiest transit points had, and will continue to have, a significant cost at a local and global level:
- The Suez Canal lost out on revenue (around $14 million per day) as ships diverted around the Cape of Good Hope.
- Longer journeys around the Cape increased fuel, chartering and other operating costs for shipping lines.
- Shipping capacity effectively removed from the market, leading to a surge in ship rental prices and shipping rates.
- Disruption to the supply of oil led to an increase in barrel prices.
- Some shippers were forced to use far more expensive air cargo for emergency shipments.
- Congestion and delays caused by the wave of ships trying to enter European ports.
- The additional time shipments spent in transit added to inventory carrying costs.
In supply chain risk theory, the event falls into the category of ‘high impact low probability’, otherwise known as a ‘Black Swan’. Although the risks of transport bottlenecks are well known, trying to assess when a disruptive event will occur is impossible.
For example, it is quite a regular occurrence for smaller ships to run aground in the Suez Canal. Most are re-floated quickly and the delays are limited; time which can be made up by faster steaming. You have to go back as far as 2004 for a blockage which caused significant delays leading to major supply chain problems in the run-up to the Christmas sales period.
Of course, there are many more chokepoints around the world including the Panama Canal, the Straits of Hormuz and the Malacca Straits. In addition to this, each transport node – mega-ports such as Shanghai, Rotterdam and Los Angeles/Long Beach – presents considerable risk, not just from blockages by stranded ships, but terrorism, climactic events, strikes and even congestion caused by peaks of demand – as we are seeing right now on the West Coast of the USA.
Of course, ever bigger ships are resulting in the consolidation of risk, not just because more containers are being carried on a single vessel but also because they are only able to call at a small number of very large ports.
Although the incident dominated the world’s media, now that the ship has been moved will the effects result in long-lasting changes to the world’s globalised economy?
The short answer is no. The levels of reliance which European and North American economies place upon Asian manufacturing will take many decades to change if at all.
However, this catastrophic event has added to a growing awareness of risk and will encourage multi-national manufacturers and retailers to adapt their supply chains. The costs of risk – rather than just the trade-off between inventory, transport and labour costs – are now being better understood.
The COVID-19 pandemic has played an important role in this change of management ethos due to the supply challenges faced by global shippers throughout the crisis.
In order to increase supply chain resilience, businesses need to undertake a number of ‘risk agnostic' steps:
- Increase visibility of the supply chain to ensure that single-sourcing for any one component is avoided.
- Ensure, as far as is practicable, that suppliers are located in a number of diverse geographies.
- Consider re-shoring or near-sourcing a proportion of suppliers.
- Develop strong communications and relationships with suppliers which will enable a better understanding of production and purchasing scheduled as well as potential disruptions.
- Consider small batch quantities and using less-than-container load transport strategies.
- Adopt a 'control tower' approach to assess and deal with threats to supply and transport on a real-time basis.
- Take advantage of low-cost sensor technology to increase visibility of shipments enabling contingency plans or re-routing to be put into effect.
- Ensure that appropriate levels of inventory are held to mitigate the impact of disruption to supply as a form of 'insurance'.
In summary, while planning for a specific event is impossible, it is possible to increase general supply chain resilience.
Unfortunately, many of these provisions have associated costs that are highly visible on the bottom line in contrast with the costs of a ‘Black Swan’ event that may occur once in a generation.
What is clear is that even with the deployment of new technologies to enable increased levels of visibility and accelerate decision-making, this latest disaster will encourage many manufacturers and retailers to review alternatives to globalized ‘lean’, low inventory supply chain strategies.