The Fragility of Global Supply Chains, and What Comes Next

Introduction

Supply chains are vulnerable. They exist at the mercy of global circumstances, which are proving increasingly unstable.

The clear and obvious recent example comes from the Middle East, where Iran-backed Houthi militants in Yemen have been launching attacks on commercial vessels crossing the Red Sea on their way to the Suez Canal. The Houthis say the attacks were made as a show of support for the Palestinians in Gaza undergoing an Israeli bombing campaign in the wake of the October 7th attacks. The Houthi attacks have been met with subsequent retaliatory air strikes from the US and UK governments.

As a result of the increased tensions and lack of security, a number of major companies made the decision to divert their shipping routes, opting to take a significantly longer passage by way of South Africa’s Cape of Good Hope. The diversion adds around ten days to journey time, pushing up fuel costs, crew wages, and causing delays.

Given as much as 15% of global trade uses the Suez Canal as a shortcut that connects the eastern world to the west, the effect of such a change is mammoth [1]. Egypt has said its revenue from the Suez Canal plunged by almost half in January, with the number of ships travelling through the key trade route down by more than a third [2].

Regrettably, this is just the most recent example of geopolitical turmoil undercutting the stability of global supply chains.

Buses

You wait half an hour for a bus and then two show up at once. So the saying goes, anyway. Well, for global supply chains, the saying can be amended to: you wait decades for debilitating geopolitical events (or farcical bad luck) to put established supply chains in jeopardy and then four come along at once. It’s not catchy, but it is accurate.

In under four years supply chains have been derailed by the Covid-19 pandemic, Russia’s invasion of Ukraine, the vaudevillian performance art of the Ever Given fiasco, in which a ship got stuck in the Suez Canal, blocking the route off for six days, and now the overspilling ramifications of the conflict in the Middle East. Each event in isolation proved how fractious existing structures are. Combined, they expose the need for a plan B – if not a C, D, E and F – when it comes to navigating global supply chains going forward.

“We have never felt a sequence of events that have been quite so disruptive than over the last four or five years,” says Neal Johnston, a supply chain specialist with consultancy firm EY. “And I think that the geopolitics of the oceans is definitely a factor for the near term” [3].

Impact

Companies from Marks & Spencer and Asos to Tesla and Suzuki were affected by the fallout from the Houthi attacks, and that’s just to name a tiny percentage. The delays to shipping affect the companies themselves, who must face the aforementioned added costs, but their customers will feel the impact as well.

“There have been very significant hikes, in the realm of up to 300 per cent on the cost of a container from Asia into both the Med or northern Europe,” says Johnston [4]. And while some good margin businesses will be able to take that hike on themselves, others will be passing it right along to the customer.

“If the conflict in the Middle East is not resolved in the short term, then we could start to see gaps on the shelves and prices rising within three months,” says Damian O’Reilly, a lecturer in retail management at Technological University (TU) Dublin [5].

Inflation, too, is affected by the change of route. The European Central Bank was hoping to start cutting interest rates this year but it’s no longer clear whether that will be possible. Already being felt in the pockets of citizens, the longer high inflation lasts, the worse off everyone will be.

Oxford Economics noted that while, “a sustained closure of the Red Sea wouldn’t prevent inflation from falling, it would slow the speed at which it returns to normal” [6].

Specifically, Oxford Economics said higher freight costs could add 0.6 percentage points to inflation in a year’s time (the hypothetical higher cost of freights used for the prediction was based on an estimation by the International Monetary Fund (IMF)).

The ECB was expecting euro zone inflation to fall from 5.4% in 2023 to 2.7% this year [7]. The impact of that proposed 0.6% shift would be felt significantly.

Ireland

In Ireland, some businesses reported delayed or missed delivery windows after the reaction to the Houthi attacks while others made the decision to postpone their shipments for a period. The global consultancy Aon reports that Irish business leaders now consider the threat to supply chains to be a bigger risk to business this year than a potential recession [8]. Only cyber attacks and interruptions to business rank higher amongst potential issues.

Aon also reports that two-thirds (67%) of Irish organisations have suffered losses as a result of supply chain or distribution failure and 75% have been financially hit by commodity price risk or scarcity of materials [9].

“We move a lot of material in containers out of Dublin Port,” says David Tobin of Panda Wise, a large recycling facility in Dublin, who had to deal with huge stocks of aluminium, cardboard and plastic that were left stranded on the dock, unable to be collected, as a result of shipping delays.

“The paper and cardboard could go to a paper mill in Finland, the aluminium might go to Norway or Sweden for smelting, but it’s all about moving containers, so issues like the Suez Canal or the Red Sea creates a blockage” [10].

It can be easy to ignore when it’s just words in a headline, but these events affect the day to day running of Irish businesses; Panda Wise is just one of many.

Optimism

In August of 2022, the Woodland Group, a British global logistics group, found that stability was finally returning to Irish supply chains after the pandemic [11]. This exemplifies just how short lived stability has become in recent years – just as a recovery looks possible, another blow is dealt. It’s hardly surprising that businesses are seeking change.

Part of the reasoning behind the optimism in the Woodland Group’s report came from the fact that a number of Irish businesses had started “nearshoring” their supply lines away from east Asia to closer markets like Turkey. They were doing as a reaction to previous disruptions.

Nearshoring is the term given to relocating supplier bases to countries that are closer to the market the supplies serve. It is designed to minimise journey time and leave businesses less exposed to scenarios such as those we are now witnessing in the Red Sea.

It’s just one of the ways in which companies are trying to unshackle themselves from the long-established supply chain structures that left them exposed to such events. Companies are also using inventory regionalisation strategies, in other words building “buffer stocks” closer to home in case there is a delay in shipping. They are also broadening their supply base – getting some new baskets for all their eggs, rather than relying on just the one.

Based on survey responses from March 2022 from companies based in Germany, France, Spain, Italy and the UK, 55% said they had engaged in near- or reshoring in the previous 24 months [12]. Similar numbers were reported in the US.

While this shows that businesses are learning their lesson from the past few years, it takes time to establish a new mode of working. Johnson likens the process to turning an oil tanker.

Change

“People are more aware of one off risks now,” says Ibec chief economist Ger Brady. “We went through 20 or 30 years without any major risks materialising. A lot of people stopped thinking about them. The risks were always there but we got to forget about them for a few decades. Companies are looking at how to structure supply chains in future” [13].

And the future looks different.

“There has been a great focus on tracking and trackability,” says Dr Eoin Plant-O’Toole, associate professor in logistics and supply chain management at Edinburgh Napier University. “Information flow is key for effective supply chain decision-making and having that information flow integrated into internal systems” [14].

To better manage that flow, Pepsi has turned to digitalisation and AI. “We use artificial intelligence-enabled ocean shipment tracking to give our teams real-time visibility of shipments and predicted arrival times for both inbound raw materials and outbound finished goods to protect supply, enhance service and mitigate both cost and risk,” says Pankaj Agarwal, supply chain vice-president, PepsiCo Ireland [15].

“This means our teams now have earlier, better information on shipment arrivals. It’s a huge step forward from having to estimate what vessels were north or south of Suez during the blockage two years ago when we needed to quickly assess supply impact.”

Meanwhile, with climate change an ever-growing concern, it’s not just geopolitical factors that must be considered but environmental ones too. Dr Heletjé van Staden, assistant professor of management in the supply chain management area at UCD College of Business, says that a potential solution that pairs environmental responsibility with tracking, inventory and manufacturing decisions is synchro modality [16].

Synchro modality is an emerging transportation policy that uses smart algorithms and the physical internet to dynamically make transport mode decisions to ship inventory between source and destination.

“Mathematical models and data analyses have shown that such policies can reduce emissions, costs and improve reliability,” van Staden says. Though difficulties emerge when one considers the implementation. “They require collaboration between shippers and transport providers to work, also meaning changing working culture and obtaining buy-in from end users.”

In other words, another oil tanker needs to pull a one-eighty.

The fragility of global supply chains

Recent attacks by Houthi militants on commercial vessels in the Red Sea expose the fragility of existing global supply chains. On the back of the pandemic, Russia’s invasion of Ukraine, and the bizarre circumstances of the Ever Given incident, all in the space of a few years, it’s clear that long-established routes and processes can no longer be relied on. Complacency set in through years of relative smooth sailing, and now it’s coming back to bite.

As well as the obvious setbacks of delays and potential price spikes from any businesses not willing to swallow the rising costs themselves, the impact will likely be felt in inflation. Given the serious damage inflation is already reaping, no one wants the problem inflamed any further.

Between nearshoring, inventory regionalisation strategies, a broadening of suppliers, and more technological advances like smart tracking with AI and synchro modality, businesses are changing the way they approach their supply chains. Lessons have been learnt, but implementing change takes a long time.

The oil tanker is turning. Here’s hoping it can do so fully before another bus arrives.

Sources

About the author

Shay Dalton

Partner

Shay has placed over 200 successful C-level candidates and is one of the best known and respected executive recruiters in the market.