Recent attacks on cargo ships in the Red Sea have led to multiple major shipping lines suspending journeys through the crucial transit passage from Asia to Europe. The COVID-19 pandemic saw unprecedented supply chain disruption, and this was followed in early-2021 by the Ever Given blockage of the Suez Canal. The attacks in the Red Sea have once again highlighted the need for a focus on operational resilience in supply chain management and design – disruption is a feature, not a bug.
In 2020, the huge drop in demand in industries such as travel and leisure, and the surge in demand in industries such as consumer goods, electronics, and home improvement saw shipping container and freight prices soar, with the global container freight index peaking at more than four times higher than at the start of 2020. The Ever Given running aground saw the Suez Canal closed for six days, with knock-on effects lasting for many months. The decision by shipping companies to choose alternative routes will add at least two weeks to transit times, with further knock-on effects on availability and schedules expected. This will likely lead to delays, congested ports and shortages of vessels, containers and equipment – all contributing to a surge in prices again.
For decades, global supply chains have fixated on efficiency, cost reduction, and lead time optimisation. The ‘just-in-time’ approach has led to huge savings in inventory and costs, but when faced with disruption on a larger scale, this approach has seemingly reached its limit. A method centred on stable and predictable arrival times struggled to respond when transport costs skyrocketed, and businesses looked to hold more stock in response to the delays.
With operational disruption becoming a normality, businesses need to ensure they have the right balance of efficiency and resilience in their operations. To achieve this, companies need to adopt a mixture of tactical and strategic responses over both short-term and long-term horizons. Front of mind when considering the response should be that for modern operations, resilience is now just as important as efficiency.
We outline a framework to help companies assess their options and develop a range of responses to future-proofing their operations for the decades to come.
Understand your network and cost base, and know your alternatives
Recent events have highlighted that businesses do not always know the major operational cost and service drivers in their supply chain and logistics networks:
- Continually analyse your cost base – understand the fixed and variable elements of your unit costs (e.g. port charges, fuel cost) – which are susceptible to change?
- Build the cost of inventory and working capital into landed cost calculations, and run scenarios on the impact of shipping delays
- Buy the right way in the short-term – continuously benchmark for lanes where long-term agreements are not in place and identify clear alternatives
- Map out the riskiest routes to understand where the major delays occur – which lanes are most likely to incur delays or lost time? Be aware of what options there are to move to different shipping lines or ports if needed
- Track shipments and containers to provide real-time updates on location – know how long containers have been in the port or on the boat, if you are incurring unexpected demurrage charges, or whether you can move product faster through different routes
- Know which are your most profitable products – create a clear plan to secure supply of those products at the expense of less profitable lines if needed
Leverage strategic partnerships with logistics providers
For decades, companies have typically used third party logistics providers to drive down costs and generate efficiencies, without fully utilising their capabilities.
- Focus not just on cost, but on capability – leverage their global scale, flexible labour models, optimal locations, cutting edge systems and extensive logistics expertise to build resiliency in your logistics network. Ask them what they are doing for other customers, and ensure that you are benefitting from their experience and scale
- Use the full range of their global networks – find the right locations for your business’ logistics and supply chain network, and secure capacity for now and the future
- Secure preferential rates and booking slots on capacity constrained routes, and ensure costs are minimised by sharing loads with other customers
- Establish a clear issue resolution process and a framework to track performance – work collaboratively to provide and update forecasts on key routes
Review your sourcing strategy
The Asia-Pacific region has often been the default location for low-cost sourcing, but that needs to be reviewed and re-checked for more resilient options based on business priorities.
- Review market capabilities including and beyond current suppliers through a Request for Information (RFI), starting with a focus on tier-one – know their sourcing routes, which ports and shipping lines they rely on, and whether there are alternative locations available
- Focus on dual-sourcing – consider how to diversify the supply base for the most critical products or components to reduce dependency on sea freight, containers or particular routes. This could include evaluating trade-offs for heightened resilience, particularly in scenarios such as relying solely on a route through the Suez Canal to Europe.
- Check your suppliers’ resilience levels – ask them if they have business continuity and disaster recovery plans in place, how robust they are, and whether they are aligned to yours. While tier one suppliers are crucial, don’t forget tier two – the Business Continuity Institute estimated that 40% of COVID-19 disruptions happened in tier two suppliers
- Consider the business case for near-sourcing versus low-cost country sourcing and be prepared to move to those alternatives if needed – understand when one becomes more cost-effective than the other, how the service levels compare and ensure that quality factors are considered in the total cost of ownership calculation
Set up your business to dynamically plan the network
Visibility of costs and volumes can enable Advanced Planning & Scheduling systems to optimise production and shipping locations to mitigate the impact of delays or price rises, by finding the best combination of volume and routes to market.
- Review your operating model to connect teams across geographies and business units to quickly make the best collaborative decisions
- Leverage your data to predict delays based on historical patterns and latest data (pre-, during, and post-COVID 19), and re-route shipments or re-allocate production capacity to alternative sites
- Build contingency into the network – understand where you have spare capacity in the network, and have plans to use it where needed
A combination of these responses will be needed to secure your supply chain and logistics operations – not just preparing, but actively planning, for interruptions. While 2020 and 2021, may have been exceptional for disruption in sea freight and shipping containers, it is evident further disruptions are still occurring, so ensuring that you are ready for the next crisis will help you win when, not if, it next arises. Supply chain resilience by design is required.
Authors: Rob Carlisle, Charlotte Harryman
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