Future-Proofing Supply Chains: Lessons from the Suez Canal Blockage

The Suez Canal, a vital artificial waterway linking the Mediterranean Sea with the Red Sea, has long been a cornerstone of global commerce. Spanning 120 miles across Egypt’s Isthmus of Suez, it provides the shortest maritime route between Europe and Asia.

Handling about 12-15% of global trade and 20% of container shipments, the canal generated approximately $9.4 billion in revenue in 2023, underscoring its critical role in international trade.

However, since November 2023, the Suez Canal has faced significant disruptions due to geopolitical tensions and attacks in the Red Sea region, severely impacting maritime traffic.

As a result, the canal’s revenues, a vital source of foreign exchange for Egypt, fell by 50% year-over-year in January 2024, amounting to a loss of approximately USD 375 million compared to January 2023. Trade volume through the canal also dropped by 50% year-over-year in the first two months of 2024.

The canal’s importance in facilitating international commerce remains undeniable. However, recent events have underscored the challenges and risks impacting this crucial maritime corridor, highlighting its pivotal role in global trade while revealing vulnerabilities within the global supply chain.

Impact on Global Supply Chain

Shipping Delays

Ships rerouting around the Cape of Good Hope faced significantly longer journeys, often adding 10 days or more to their transit times. The global supply chains may take more than two months to absorb the two-week delay caused by these detours. This had a particularly severe impact on industries reliant on just-in-time delivery systems, such as manufacturing and retail, leading to production delays and supply shortages.

Unlike the supply chain challenges posed by the COVID-19 pandemic, the current supply shortage can lead to significant stockouts. The primary impact is on cargo traveling from Asia to Europe, but the resulting delays have created an imbalance in container availability, affecting routes from Asia to the west coast of North America as well.

Increased Costs

The shipping industry faces a critical dilemma: maintaining the Suez Canal route entails high insurance premiums and security risks, while rerouting incurs increased fuel costs and other operational expenses. Either option will significantly elevate global maritime transportation costs.

Aggregate measures of container shipping costs have risen to two-and-a-half to three times their levels from early December 2023. Notably, prices along routes through the Suez Canal, particularly from Asia to Europe, surged five-fold in April this year, creating challenges for China and East Asia in exporting to Europe and importing key components from Europe. Costs from China to the U.S. have also more than doubled. A few months ago, when the situation was at its height, Managing Partner Daniel Karlsson discussed the increased costs and their implications. Read more about his insights and forecasts on the Supply Chain Disruptions Amid the Red Sea Crisis.

While the largest impact has been felt along Asia–Europe shipping lanes, costs on other routes could rise as capacity is redirected. This situation could worsen if shipping orders are rolled forward in anticipation of lengthening delays.

Exposed Vulnerabilities in Global Supply Chain

Dependency on Key Chokepoints

Cargo ships are estimated to move 80% of all international trade by volume and over 70% by value. Much of this trade relies heavily on key maritime chokepoints such as the Suez Canal, the Panama Canal, and the Strait of Malacca. These narrow passages are critical transit routes for a significant portion of the world’s trade, making them particularly vulnerable to blockades or deliberate disruptions during times of political unrest due to their narrow, heavily trafficked nature and location in geopolitically sensitive regions. Ensuring the security and efficiency of these passages is vital for maintaining global supply chain stability.

More than 50% of global maritime trade may be at risk of disruption in four key areas of the world. While the conflict in the Red Sea has captured significant attention, there are three other maritime passageways that risk becoming chokepoints due to either geopolitical or environmental factors.

1. The Strait of Hormuz.

The Strait of Hormuz, situated between Iran to the north and the UAE and Oman to the south, is crucial for both energy and goods shipping. Approximately 20% to 30% of the world’s oil trade passes through this strait, along with a significant portion of global shipping volumes. However, the ongoing conflict in the Middle East poses a substantial risk to the free passage of vessels through this vital corridor.

2. The Straits of Malacca and Taiwan

The Strait of Malacca, between Singapore, Malaysia, and Indonesia, is the shortest shipping route between East Asia and the Middle East and Europe and accounts for 30% of global trade. Two-thirds of China’s trade passes through the Strait of Malacca each year, including 80% of its energy imports. There is an ongoing dispute between China and several members of the ASEAN trade area over a large area in the South China Sea.

Also in the region, the Strait of Taiwan is another important shipping lane—40% of the world’s container fleet passes through it. Both trade routes are subject to heightened geopolitical uncertainty.

3. The Panama Canal

The canal, which links the Atlantic Ocean and the Pacific Ocean, accounts for 5% of total global container trade, and some 46% of the trade from the US East Coast to East Asia. It is facing a severe drought due to the El Niño weather phenomenon.

Lack of Flexibility

From delivering raw materials to manufacturers to carrying finished products to their ultimate destinations, the maritime supply chain is essential for smooth and efficient global operations. Recent events have underscored the critical importance of building a resilient supply chain that can quickly adapt and recover from unprecedented disruptions. The ongoing variation of the coronavirus and the differing anti-epidemic policies across countries with various political systems and civil structures have prolonged and normalized the global epidemic situation.

In this context, companies unprepared for such significant disruptions and not fully recovered from previous ones may lack alternative suppliers or contingency plans to mitigate the impact of rerouting and delays. Consequently, they must continually adjust their operations to adapt to the new normal.

Resilience Strategies

To bolster supply chain resilience, businesses must adopt a multifaceted approach. Diversifying transportation routes and modes can mitigate the impact of disruptions while embracing technology enables real-time tracking and proactive risk management.

Dual Sourcing

Dual sourcing can provide a more reliable supply of materials for products. Ideally, key suppliers should be in different geographic locations to prevent weather issues or local disruptions from affecting the entire supply chain. If alternative suppliers are available, a company must compare its costs against the potential impact of delivery delays and increased freight costs during global supply chain disruptions.

Onshoring and Nearshoring

Onshoring refers to relocating production from overseas back to the company’s domestic location while nearshoring refers to moving production to a nearby country, typically within the same continent. Bringing production closer to consumer markets often reduces transportation costs and the risk of delays. However, these benefits must be balanced against the costs of relocating production, including labor and material expenses.

Insurance Coverage

Companies should consider insurance to mitigate risks associated with goods lost or delayed in transit. Various insurance products offer protection against such disruptions, including cargo insurance, contingent business interruption (CBI) insurance, and supply chain risk insurance.

• Cargo Insurance: This insurance generally covers shipments of goods against losses, damages, or theft during transit. It ensures that the financial value of the goods is protected throughout their journey.
• CBI Insurance: CBI insurance typically covers lost profits and extra expenses incurred due to a business interruption experienced by a customer or supplier. This type of insurance helps businesses recover financially from disruptions that impact their operations indirectly.
• Supply Chain Risk Insurance: This insurance offers broader protection against financial losses arising from supply chain disruptions. It covers a wide range of events, including government-related disruptions, pandemics, labor issues, and financial problems. This comprehensive coverage helps companies safeguard their operations from various unforeseen events that could impact their supply chain.

Advanced Planning

Companies need to plan for extreme supply and demand disruptions by implementing several proactive strategies to ensure smooth operations. This involves ordering components earlier than usual and allowing extra time for delivery to mitigate potential transportation delays. Firms must also account for higher costs of energy, materials, and transportation, adjusting their budgeting and pricing strategies to maintain profitability. Regularly checking inventories of critical materials allows companies to reprioritize production if shortages appear, ensuring that essential products are manufactured first. In anticipation of logistics disruptions, securing capacity on alternative routes can help maintain the flow of goods and minimize the impact of any single-route dependencies.

ARC Consulting Case Study

A renowned Nordic fashion brand, founded in 2014, has ambitious growth plans for the APAC region but faces significant challenges in logistics. The company approached ARC Consulting for assistance in establishing a more efficient and flexible supply chain.

In this project, we began by analyzing the business model’s pain points, sales performance across various regions, and financial status. This allowed us to map the client’s original supply chain flow and identify its bottlenecks. Subsequently, we conducted horizontal benchmarking against global competitors, focusing on warehousing, goods flow, and logistics. This comprehensive analysis enabled us to propose various supply chain models and evaluate their respective advantages and disadvantages.

Delivered Impact

Final Comprehensive Report: Supply Chain Issues and Improvement Potentials

Optimized Goods Flow Mapping:

• Imported goods and domestically produced goods.
• B2B sales and B2C sales, both domestically and internationally.
• Return management and add-on services.

Supply Chain Restructuring:

• Enhanced the client’s market presence in China.
• Improved warehousing and logistics efficiency.
• PSA: Always review the content thoroughly, as GPT can make mistakes.

Future Outlook

In recent years, global trade has faced a “poly-crisis” of adverse factors. The World Trade Organization (WTO) anticipates some improvement in the trade environment this year and next, potentially boosting goods trade in 2024 and 2025. However, geopolitical tensions and policy uncertainty may limit the extent of any rebound, making resilience and flexibility in supply chain management paramount.

The maritime supply chain is essential for global operations, and recent events have highlighted the need for resilience. The ongoing variation of the coronavirus and differing anti-epidemic policies have prolonged and normalized the global epidemic situation. Companies unprepared for significant disruptions may lack alternative suppliers or contingency plans to mitigate the impact of rerouting and delays, necessitating continuous operational adjustments.

Companies must enhance the resilience and agility of their supply chains while controlling costs to meet customer demands and maintain margins. Supply chain executives acknowledge that their systems were designed for cost efficiency. The current challenge is to balance cost, speed, and service in an evolving landscape with higher uncertainty and customer expectations.

As the supply chain landscape transforms, ARC Consulting remains committed to guiding businesses through strategic decisions. These insights provide valuable perspectives on the evolving dynamics of global trade and the imperative for companies to adapt to emerging challenges.

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References:

• Supply chain resilience in the face of change | McKinsey
• Canal disruptions and shipping delays impact supply chains (mckinsey.com)
• The Impacts of the Red Sea Shipping Crisis | J.P. Morgan (jpmorgan.com)
• The week in charts: Suez Canal vessel transits plunge by a third | Risk appetite divides Red Sea Shipping | Chinese tonnage increases in Red Sea despite Houthi attacks :: Lloyd’s List (lloydslist.com)