With recent vessel attacks in and around the Red Sea, major shipping lines are avoiding the Suez Canal and other shipping lanes to Israel. What should shipping companies expect, and what should be their contingency plans? Three supply chain and geopolitical experts from Kearney offer their advice.
Michael Zimmerman, Partner in the Strategic Operations practice of Kearney.
Though shippers probably already have contingency plans in place, given these are well-known chokepoints, the Red/Sea Suez situation is not going to be allowed to continue for very long by the U.S. military. There’s likely to be a significant show of force to dissuade the disrupters. Look for military escorts and direct and perhaps even preemptive interventions, even though, as mentioned, shippers should have contingencies already set up with their carriers where they have direct carrier relationships and/or with their freight forwarders, who are normally very good at this. The weather will fix the Panama drought situation soon enough.
Shippers will continue to be disrupted – if it’s not accidents, war or drought, it will be hurricanes, eruptions or terrorist incidents – hence the need for contingency plans. All commodities that move by ship will be affected: foods, chemicals, industrial products and parts, consumer packaged goods, raw materials… you name it. Only the most expensive goods that move by air, or domestically produced and consumed goods, or goods that can move internationally by truck will remain unaffected.
Shippers have to plan for greater agility and optionality in their logistics capabilities and from their capacity providers. For example, if their contingency plan is to ship around South Africa’s Cape of Good Hope to get to Europe from Asia and back instead of going through the Suez Canal, a Singapore to Rotterdam trip by containership would have to travel an extra 3,500 kilometers. The extra fuel will cost an additional $500,000 to $1,000,000 and shippers also have the inventory on their books an extra 20 to 30 days.
Terry Toland is a Manager in Kearney’s Global Business Policy Council, a strategic service within Kearney.
The recent vessel attacks in the Red Sea serve as the latest example of rising geopolitical risks disrupting supply chains. Kearney research suggests concerns around increased geopolitical tensions are rising rapidly among global investors and that such risks remain a leading wildcard shaping the broader economic outlook. For these reasons, we are seeing more clients explore options to shorten their supply chains through increased near-, re-, and friend-shoring to mitigate these risks.
Kearney’s 2023 Reshoring Index finds that 96%t of CEOs are evaluating reshoring their operations, have decided to re-shore, or have already re-shored—an increase from just 78 percent in 2022. Beyond exploring these options, we further advise shippers to build and implement risk management capabilities to improve response and resiliency in the event of such disruptions. The development of such capabilities, alongside the use of strategic foresight tools, will become increasingly important in a more volatile and uncertain global operating environment.
Per Hong, Senior Partner in the Strategic Operations practice of Kearney.
Shippers are already left with few backup options for quick transit times due to the continued drought and backlog in the Panama Canal that’s still pervasive. Focusing on the crisis of the moment is topical, but the interconnectivity and compounding effect of these crises on global supply chains needs to be very closely watched.
Rerouting containers Eastward to Europe is not economically advisable, given these delays, and for containers heading West and rerouting around the Horn of Africa, this will add at least 1 to 2 weeks’ transit time. If this situation is prolonged, inventory shortages in key Asia-supplied products will once again be the natural result.
