The Red Sea Crisis and Supply Chain Resilience

Container shipping is now at the centre of the Crisis because of its impact on the consumer market. Traditionally, it has been mainly associated with the downstream supply chain in which a range of distributors, such as wholesalers and retailers, are involved. However, this is not the case anymore. Container shipping is also responsible for carrying materials, parts, components previously sub-assembled, tooling, and other elements used in the manufacturing processes.

By linking the different production locations spread worldwide due to the internationalisation and globalisation phenomena, the impact of the Red Sea Crisis will also affect the production of the end products that we often take for granted, which the COVID-19 pandemic has taught us not to. As ships are rerouted, the transit time of goods at sea increases, and so does the time spent on the logistics pipeline. While being good for shipping because it contributes to absorbing an existing overcapacity, it is a bad market sign as users of shipping services are subject to increasing freight rates, which is well demonstrated in the media.

Subject to this uncertainty, upstream supply chain operations will be affected since they can not comply with the expected lead times. The extent of this uncertainty depends on how long the situation remains, but even if it is solved over the following days/weeks, the damage caused to supply chains is immense. Gradually, we will see a bullwhip effect in place with supply chain players, depending on where they are located, possibly looking for new suppliers to keep their logistics system and the supply chain to which they belong functioning.

However, before these players find these new suppliers, time will be spent on procurement activities, and unnecessary additional costs will be incurred. Again, the issue boils down to supply chain resilience, something so much talked about during the COVID-19 pandemic. Therefore, it would be interesting to learn how many companies have adapted their supply chains to deal with these uncertain events. Eventually, a shift will occur from sea to air whenever possible to shorten supply chains.

However, the problem is that the number of parts, components, et cetera, involved in the production process have different lead times, meaning that if they arrive earlier, the corresponding supply chain part will have to incur additional inventory costs associated with capital-tied up and warehousing until all inputs arrive to allow the production process of the end product. With the production process of one product being affected, so are the production processes of other products affected. These will force multi-product production facilities to change their production planning and eventually implement small-batch production, which prevents economies of scale. As fewer products reach the market and if their demand levels are kept the same, a price increase is only expected, and people will tend to look for substitutes, with companies incurring a high percentage of lost sales.

The number of containerships being rerouted is already considerable. But what about the tanker and the dry bulk markets? How much will they be affected since many bulk ships use the Suez Canal? Thus, what will the impact of the Crisis be on the overall production process when bulk ships are still the horses of the sea? Again, the situation is such that as every day goes by, a range of issues will emerge.

Greetings from Lisbon!

#shipping #maritime #containershipping #drybulk #tankershipping

#linertrades #bulktrades #deepseatrades #rerouting #freightrates

#demand #logistics #suplychains #bullwhipeffect #suppliers

#procurement #air #modalshift #productionplanning

#resilience #uncertainty