Sink or Swim: Emerging from Supply Chain Disruption
The global nature of trade means that the supply chains that are essential for it to keep running smoothly are becoming increasingly complex. In the name of efficiency, suppliers, producers, and sellers engage in a complex dance to maintain a lean supply chain that has sufficient transparency for goods to be tracked at every point.
But as economic and geopolitical tensions have made clear, these multilayered dependencies make for a volatile risk profile. Disruptions at any point could cascade, resulting in knock-on effects throughout the supply chain.
“The pandemic and resulting global lockdowns at different times over 2020 exposed ‘build-to-order’ supply chain models and ‘just-in-time’ inventory systems as a weak link in the overall supply chain structure as some suppliers could not deliver stock on time while others could not make the delivery at all,” says Jan Steven Kelder, Head of Marine, Asia, Aon.
The March 2021 Suez Canal blockage is another case in point. On 23rd March 2021 at approximately 0540 GMT, the m/v EVER GIVEN ran aground 151km north in the Suez Canal, effectively blocking passage through the canal and immediately causing a backup of more than 100 other vessels either already in or entering the canal from either end. She was finally refloated about six days later with the help of an array of salvage companies.
Traffic through the Suez Canal accounts for around 12% of global trade, and every day it was blocked, an additional 50 vessels added to the backlog of traffic entering the 120-mile long waterway from either end, resulting in potentially US$10-15m of additional losses per day.
The knock-on effects from the Suez Canal shutdown will reverberate through supply chains, with businesses facing issues such as congestion at ports and vessels not being in the right place at the right time, per their schedules.
A supply chain moves a product or service from supplier to consumer. While a focus on efficiency may have paid off in the past, increasingly complex geopolitics and the effects of the pandemic have shown that supply chain survival requires a new focus on resilience.
“Supply chains face a complex set of risks that must be addressed holistically,” says Jan Steven Kelder, Head of Marine, Asia, Aon. “While it has been an issue historically, it has been amplified by factors such as the Sino-US trade war, COVID-19 pandemic and the March 2021 Suez Canal blockage.”
What are the key vulnerabilities of modern multilayered supply chains?
Efficiency: Leaner operations at the risk of disruption
To achieve costs savings, businesses are opting to have a leaner supply chain and ensuring just enough production to meet demand. They are limiting storage and scaling production up or down depending on the movement of cargo within the supply chain.
“Many companies have decreased their inventory levels and subscribing to “build-to-order” supply chain models and “just-in-time” inventory systems instead,” says Madeleine Griffiths, Associate Director – Marine, Asia, Aon.
“To minimize stock levels, the time between sourcing materials, producing goods and distributing final products has shrunk to the extent that many parts of the chain are becoming critical,” Griffiths explains. “However, this creates a high degree of dependency across all parts of the supply chain. If any part of the supply chain is disrupted, inventory may pile up.”
Shipping lines saw increased demand for the clearance of a large backlog of cargo in the second half of 2020 as countries started opening up post-pandemic-lockdowns. However, equipment shortages at key export hubs and choked factory-port connectivity has meant further supply chain disruption, as inventory, now trapped further up the supply chain, will need to be cleared.
This is clearly showing in year-on-year global transshipment cargo rollovers, which have increased by nine percent year-on-year in Jan 2021. Cargo rollovers happen when cargo cannot be loaded onto scheduled vessels due to capacity issues resulting from factors such as overbooking. The cargo is then loaded onto other vessels instead.
Transparency: Technological advancement opens new vulnerabilities
An efficient supply chain relies heavily on the ability to track goods accurately. As supply chains matured, the use of containers and the sizes of container vessels grew – by more than 60 percent over the past 15 years, Griffiths says. This limits the number of accessible ports and makes the logistics of distributing the goods inland far more complex.
Aging infrastructure at many ports worldwide has meant that they were not ready to effectively manage the growing sizes of container vessels.
“This has resulted in longer loading and discharging times of ultra-large crude carriers (ULCCs), challenging the economics of scale of the vessels,” Griffiths says. “Goods therefore accumulate exponentially in containers and ports. Producers lose track of their product, placing them at risk of logistics default.”
The introduction of blockchain and similar technologies is addressing this gap, enabling real-time updates. Shipping giant AP Moeller-Maersk has trialed the use of blockchain technology to track cargo and similar initiatives are launched across the industry. Blockchains provide Maersk a digital shipping ledger, where each line is recorded based on the previous one using cryptographic techniques, rendering any future modifications almost impossible. The ledger has no central administrator and is fully accessible for instant proof and verification by multiple parties.
While the introduction of technology has transformed the supply chain risk profile, it has also introduced new risks in cybersecurity and IT dependency.
NotPetya, a cyber security breach dubbed the most devastating cyberattack in history, compromised all of Maersk’s systems and applications in June 2017, wiping out almost all of the company’s data, causing vessels to be delayed and upsetting global shipping schedules. The immediate cost of Maersk’s disruption was upwards of $250 million to $300 million, but the wider cost to the global supply chain as a whole – which depends on just-in-time delivery of products and manufacturing components – was far harder to quantify.
Dependency: Global volatility translating to supply chain risk
In a globalized world, critical dependencies exist at every point of supply chains from production to delivery. “This complexity presents inherent risks, such as supplier defaults, natural catastrophes and defaults in the logistics sector,” Kelder warns.
“But the nature of supply chain disruption is changing,” he adds. “With countries tightening their borders over the past year, supply chains are now grappling with a whole new issue of customer dependency.”
Recent economic and geopolitical tensions have introduced massive disruption. Brexit, the China-United States trade war, and new trade directives from the Philippines have resulted in goods being refused entry into countries, leaving them piling up in limited warehouse space. The temporary lockdowns during the COVID-19 crisis further highlighted the vulnerability of lean multilayered supply chains.
Opportunities amidst challenges
While technological advancements and dependency across modern supply chains have led to increased risks such as cyber and business interruption, they have also prompted innovation that could be revolutionary.
For instance, many components can now be 3D-printed where they are needed, freeing manufacturers from reliance on third-party manufacturers and shortening the supply chain. This could mean a decrease in marine trade of certain components but an increase in demand for raw materials for 3D printing, such as plastic.
To capture new opportunities, suppliers will need to adapt to emerging technology, potentially shifting their business models from storing and moving inventory to 3D-printing inventory on demand, closer to the consumer.
Recent disruptions have also prompted businesses to re-think safety margins. “Companies used to be comfortable with lower inventory in hand, but we’re seeing an increasing tendency to stockpile in order to weather longer-term disruptions,” Griffiths explains. “This strategy will also give companies room to scale up production as soon as the lockdown is lifted.”
Supply chain disruption may push suppliers to forge new partnerships to achieve resilience. “It could benefit businesses to place greater weight on the quality of a new supplier or customer in terms of credit and even currency risk as geopolitical tensions continue,” Griffiths adds.
Holistic risk management
Different vulnerabilities at every point of the supply chain mean there is no single catch-all risk management solution. “Finance departments, logistics and operational risk management will all be focused on different risks,” says Griffiths. “Bring these stakeholders together. Businesses can build more resilient supply chains by considering overall risks and concerns holistically.”
Siloed solutions create inefficiencies and there is a risk that a specific concern could be overlooked. “Risk management partners can take a holistic overall approach and examine how insurance solutions could work together to cover gaps along the length of the supply chain,” Kelder adds.