SINGAPORE: Egyptian authorities revealed on Monday (March 29) that traffic through the Suez Canal had resumed after the refloating of the ship called Ever Given, which had been grounded for nearly a week.
While there was general relief about this development, the incident generally sparked a reflection on what could have been done to prevent this horrific mess.
Just as companies are hoping the episode is an exception, boards around the world are going to tear up how things can be improved.
IMPLICATIONS FOR GLOBAL SUPPLY CHAINS
On the one hand, the impact on shipments, oil and commodity prices, and commodity availability has been enormous. Europeans have learned the news that they may face a shortage of instant coffee as the ingredients cannot be shipped.
Container shipping costs have climbed four times a year, continuing a multi-year trend accelerated by COVID-19.
While the ship has been freed and the congestion will eventually be alleviated – however long it may take – what are the potential ramifications for global supply chains?
At stake is liability for missed deliveries, lost sales, downtime, expired products and insurance claims.
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This is not just for the Ever Given vessel, but for the delayed deliveries from other affected vessels. Who will absorb these costs will be a long matter of multi-party negotiation between shippers, consignees, shipping lines, freight forwarders and insurance companies.
The magnitude of these potential trade commitments will increase until the bottlenecks of ships in the waters disappear, as billions of dollars in trade pass through the Suez Canal every day.
Countries with strategic stocks can breathe easier. As Transport Minister Ong Ye Kung explained, this is precisely the kind of scenario for which Singapore has forecast a reduction in stocks.
WHY ALTERNATIVE WAYS OF TRANSPORTING GOODS ARE NOT PERFECT
In the short term, shipping routes are still being re-routed, mainly through the Cape of Good Hope in Africa.
This is a longer distance of more than 10 days, resulting in delays and higher costs. While the immediate delay is on Europe-Asia routes, the delays will also affect all other shipments as vessel capacity is limited.
The question to ask is therefore: will this mean an increase in the use of other modes of transport?
Air freight could be used, although it is more expensive and likely to be activated for urgent shipments, such as out-of-stock raw materials for production or spare parts for maintenance and repair.
It all depends on where you are shipping from, the distance, volume and weight of the goods.
According to the freight management company Freightos, a piece of furniture from Shenzhen in the United States can cost 1,200 USD by sea, but the exorbitant sum of 4,000 USD by air.
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Air freight can be used for smaller volume, low weight items, such as online shopping for consumer items like cosmetics, fashion, and electronics, where buyers can be impatient while the costs freight rates remain low.
But air freight is unlikely to be a significant substitute for large corporate shipments, when these routine, pre-planned replenishment orders are typically more efficiently transported by sea.
When businesses do not use ships, they use land transportation such as rail and trucking.
This had already seen a sharp increase during port delays induced by the pandemic last year, which fueled the growth of technological integration to ensure seamless connectivity between airports, seaports and last mile trucking so as e-commerce was booming in the world choose the most efficient routes.
In part, this infrastructure explosion was underway before the pandemic to serve the booming trade between China and the rest of the world.
An example of a rail connection that has seen strong trade is the one that runs from China to Europe, via Russia and Central Asia, was introduced in the early 2010s and has become part of the Belt and Road initiative.
Rail and road shipments from China to Europe also increased during this period – nearly double according to transport group Geodis.
But these modes of transport will not be able to replace sea freight, especially since land modes – limited by the size of the vehicles, with costs of time, fuel and labor making it less efficient by compared to sea transport – have also traditionally been more expensive than sea cargo.
The pandemic has also made long-distance, multi-country cross-border trucking less efficient, as intensified checks, controls and customs have slowed wait times at the Sino-Vietnamese border post and more.
Driver vaccination, which Malaysia and Singapore have pledged to do, could perhaps alleviate the problems.
While they are an important part of alternative shipping methods for businesses, their wider adoption in the long run will depend on the price and the fluidity of border clearance processes.
SUPPLY CHAIN RESILIENCE IS COSTLY
Longer term, the Suez Canal incident will likely be part of the larger trend in recent years that has seen companies focus more on supply chain and business continuity.
Ensuring the continuity of the supply chain is, however, more costly. This means keeping more inventory, rather than focusing on Just-in-Time (JIT) deliveries.
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This requires securing multiple sources to ensure continuity of supply, which can also increase the cost of logistics and the price of products. Countries and businesses are also exploring near-shore alternatives, particularly in critical supplies such as food, medicine and energy, where possible.
For example, Singapore’s focus on food resilience may see vegetables from local producers that could be more expensive, as they are produced in Singapore, where land is scarce, using advanced vertical farming technology.
Businesses will have to weigh the trade-offs between the costs of contingency planning and the costs of disruption.
If disruptions are rare like black swan events, it doesn’t make sense to pay the additional costs of risk mitigation. If, however, we expect to see some form of disruption on a regular basis, then it would make business sense to pay the additional costs of the backup plans.
CHANGING THE STRUCTURES OF THE GLOBAL SUPPLY CHAIN
Overall, an incident like what happened at the Suez Canal is unlikely to result in major changes in supply chains.
However, the global supply chain landscape has changed and adapted, reshaped by new emerging markets, trade tariffs, the impact of technologies such as automation and e-commerce and, more recently, COVID-19 disruptions.
We are more likely to see a portfolio approach rather than a one-size-fits-all approach, with a mix of activities spread across different clients and different countries.
Companies may find that with certain markets, products and trade routes diversification is essential, while in less risky markets or more stable companies, choosing proven and reliable options is adequate and can be more profitable.
Companies need to understand general trend lines and invest with a medium to long term perspective, while preparing for the inevitable short term operational fluctuations.
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Global supply chains will continue to diversify, with regional supply chains also interconnected globally.
The Suez Canal incident is yet another reminder of the need for supply chain resilience in Singapore’s long-term planning.
Goh Puay Guan is Associate Professor in the Analytics & Operations Department at the National University of Singapore (NUS) Business School. He is also academic director of the NUS MSc in Industry 4.0 program. The opinions expressed are those of the author and do not represent the views and opinions of NUS.