Israel-Iran War & the Strait of Hormuz
Israel and Iran had an escalating 12-day war with the U.S. getting involved by bombing Iran’s main nuclear facility. Although a cease fire has been negotiated, tensions remain high in the Middle East. There could be several supply chain impacts with the main focus on the Strait of Hormuz which is the strait between the Persian Gulf and the Gulf of Oman that is the only sea passage from the Persian Gulf to the open ocean and is one of the world’s most strategically important choke points.
Supply Chain Impacts from the Middle East War
The largest supply chain impact relates to oil. Iran is threatening to shut down the Strait of Hormuz which carries 20% of the global petroleum production. This equates to 20 million barrels a day and $1 billion per day. All Iranian oil goes through this choke point. 84% of the oil and 83% of the liquefied natural gas going through the Strait of Hormuz goes to Asia with over 50% to China alone. The U.S. gets less than 3% of their oil from this area and so the risk is minimal.
Oil and natural gas drive the world’s economy and are critical to national security. The U.S. has ramped up and is at peak production of oil of around 13.4 million/day and is the world’s top oil producer. In addition, the U.S. is the world’s leading natural gas producer and is generally considered cleaner than the natural gas produced elsewhere. With that said, if the Strait of Hormuz is shut off, it will have a global impact as the price of oil will rise. Since oil and natural gas are used in countless products and power the world (not only homes but also goods movement, logistics, manufacturers, etc.), the impact on supply chains could be significant.
Supply Chain Strategies for Success: Predictive Planning
As supply chains must pivot around choke points, predictive planning and advanced supply chain strategies will be key to success. For example, predictive planning processes will forecast disruptions, evaluate your products’ status and journey to its destination, evaluate options to ensure on-time delivery for the customer while mitigating risk and minimizing cost, and provide recommendations. The same type of predictive planning processes can occur on the manufacturing side where your system will reallocate production among sites, assess supplier options, etc. In essence, this type of technology powering a SIOP (Sales Inventory Operations Planning) process resiliently and looking to the future will prove essential to long-term success.
For example, a medical products manufacturer utilized SIOP and advanced planning techniques to assess its supply chain with changing business conditions. When the Panama Canal became a choke point due to a drought, they changed shipping routes. An industrial manufacturer reallocated production among its sites to mitigate the potential impacts from the tariffs and to supplement a high-growth product line. To learn more about how to roll out SIOP, refer to our complimentary eBook, SIOP: Creating Predictable Revenue & EBITDA Growth.
In addition, this situation proves that forward-thinking executives will assess risks and take appropriate actions. For example, you should have excess stock of critical materials that are likely to experience a risk event and that would have a major impact on customers and/or profits. You should have excess skilled resources for bottleneck areas during growth modes. You should deploy multiple suppliers in different geographies for critical items and approve stock increases prior to key risks such as hurricane season. For example, a medical products manufacturer located in a flood zone stored additional stock prior to hurricane season annually. Eventually, the area was hard hit, and the manufacturer started up seamlessly and far sooner than the region overall. Our most successful clients are willing to invest when the competition pulls back or panics, yet they deploy the best talent and technology to ensure success.
If you are interested in reading more on this topic:
Advanced Planning Strategies to Optimize Manufacturing Success