Red Sea Disruptions: Building supply chain resilience through process excellence

Geopolitical tensions in the Red Sea are having a massive impact on global supply chains. Disruption to one of the world’s most important shipping routes means longer transit times, increased costs and rising sustainability concerns.

The biggest diversion of international trade in decades.

The latest analysis suggests eight in ten of the world’s largest container lines, controlling over 60% of global shipping capacity, are currently avoiding passage via the Bab al-Mandab Strait and the Suez Canal.

Instead they’re rerouting via the Cape of Good Hope on the tip of southern Africa, in what Bloomberg describes as “the biggest diversion of international trade in decades”.

This alternative transit route increases journey times by around two weeks and has more than doubled spot rates for containers traveling from Asia to Europe.

The disruption has contributed to a significant drop in the Dun & Bradstreet Global Supply Chain Continuity Index. It fell sharply by 6.3% for Q1 2024 compared with Q4 2023, and shows a deterioration in both suppliers’ delivery time and delivery cost indices.

What’s more, Sea-Intelligence, a maritime advisory organization, suggests the Red Sea situation is already having a bigger impact on vessel capacity than the early stages of the COVID-19 pandemic.

The disruption is affecting businesses across a variety of sectors:

• Automotive shutdowns: Electric car manufacturer Tesla halted production at its factory near Berlin for two weeks, with CEO Elon Musk saying the pause could mean up to seven thousand vehicles aren’t built. Volvo also paused manufacturing at its plant in Belgium for a period of three days.

• Retail delays: Menswear brand Neem London, says the crisis has delayed stock deliveries by 3-4 weeks and increased delivery costs by 20%. At the same time, a statement from furniture retailer Ikea says "the situation in the Suez Canal will result in delays and may cause availability constraints for certain Ikea products."
• CPG concerns: Dairy group Danone is reporting increased transit times due to diverted shipments, and is seeking alternative routes. Dutch dairy cooperative FrieslandCampina is also concerned longer transit times will significantly increase prices, suggesting the price per container could increase by 30-70% depending on the destination.

These examples are just the tip of the iceberg.?

Virtually every sector and industry is impacted in some way by the ongoing disruption.?

Building resilience to deal with supply chain shocks

The frequency and severity of these types of supply chain shocks is increasing, and disruption is becoming the norm.

There is a perfect storm, which is brewing.

As Julian Fischer, Partner at McKinsey & Company observes, “If I look at supply chain at the moment, and the clients that I serve in their supply chains, there is a perfect storm, which is brewing. The amount of disruption that we see at the moment is just unparalleled.”

As a result, businesses around the world are looking to build more resilient supply chains that will help them to achieve operational continuity. The COVID-19 pandemic and the Red Sea situation are examples of large-scale global occurrences. But the butterfly effect means even smaller, more localized incidents – such as industrial action or material shortages – have a significant knock-on impact on supply chains.

German manufacturer Freudenberg understands the importance of end-to-end supply chain visibility and process excellence in maintaining operations during a crisis. It was hit hard by material shortages during the pandemic and – with 18,000 raw materials used to produce over 20 million sealing products every day – transforming supply chain performance became a top priority.

Freudenberg launched a co-innovation project with Celonis to track material flows worldwide. Now it can see how bills of materials depend on each other, analyze inventory levels, understand what can be produced, and identify which customers can be served.

As well as seeing the real-time impact of material shortages on downstream processes like production, it can also understand the indirect dependencies on procurement and sales. This puts the manufacturer in a strong position to proactively implement the best possible solutions and effectively handle supply chain disruptions.

Freudenberg is far from the only business to transform its supply chain following the challenges of the pandemic (as well as other recent disruptions like the Ever Given container ship blocking the Suez Canal for six days). Many others have begun to increase visibility and optimize key processes, and they’ve been better placed to cope with the Red Sea situation as a result.

Whether it’s moving from a just-in-time to a just-in-case model, prioritizing critical orders, or seeking alternative routes, modes of transport, and suppliers, many businesses are already relying on improved processes to help them deal more effectively with the current disruption.

Supply chain leaders recognize the role of processes

Every organization’s supply chain is effectively a mega-process made up of lots of connected micro-processes. So supply chain professionals largely understand the central role that processes play in increasing resilience to cope with a precarious and rapidly changing environment.

In fact, the latest supply chain edition of The Process Optimization Report reveals a convincing 85% of supply chain leaders recognize processes as their greatest lever for value and their fastest lever for change.

When these supply chain leaders were asked what they felt was driving the need to optimize processes in the year ahead, almost two-thirds (64%) cited coping with supply chain disruptions as a top-five factor.

And, when asked about the specific results that can be achieved through process optimization, 40% gave the flexibility to respond quickly to change as a top-three outcome.

But just because most supply chain leaders recognize the value of optimizing processes in responding to change and handling disruption, that doesn’t mean they’re all doing it as effectively as they should.

The report reveals over half (54%) of supply chain leaders haven’t optimized a process in the last twelve months. So what should supply chain teams be doing to improve processes and build resilience?

The process intelligence journey begins

Most supply chain teams will start their process optimization journey with process mining. This technology extracts data from business systems to model processes as they actually run, allowing real-time visualization of every variation to enable process improvement.

Only 35% of supply chain leaders say they are currently using process mining, but a further 35% say they are exploring its use, which is a positive sign.

By using the latest iteration of process mining, which is object-centric process mining, or OCPM, supply chain teams can gain a three-dimensional view of the entire business.

They can see how processes in other business functions connect to supply chain workflows, and can uncover value opportunities at the intersection of these processes.

To build truly resilient supply chains, the data from process mining can be layered with standardized process knowledge, AI and advanced modeling, to deliver Process Intelligence – an end-to-end understanding of how a business flows. Process Intelligence is the real force multiplier that allows digital process twins to be created for entire organizations, and helps enterprises envision their ideal future state, as well as orchestrate continuous actions to realize it.

For supply chain teams, Process Intelligence can be combined with additional data sets, like real-time supply chain visibility data from Celonis partner, project44. This data enables smarter routing decisions worldwide to accelerate supply chain velocity.

In an environment where enterprises are looking to maximize supply chain resilience, the combination of project44 and Celonis empowers them to proactively mitigate risks, prevent delays, ensure compliance and efficiently handle exceptions.

Get ahead of the next supply chain disruption

Disruption to shipping in the Red Sea currently shows no signs of easing, and is expected to continue throughout 2024. But even if the situation is resolved, the next supply chain shock will already be in motion, or waiting just around the corner.

By understanding and optimizing their core processes, enterprises can build more resilient supply chains that will help them continue operations and satisfy their customers through any type of disruption.

Read The Process Era is Here: Supply Chain Edition, to find out more about how today’s supply chain leaders are using processes as a driver for value and a lever for change.

This article was written by Bill Detwiler and originally published on Celonis.com.