Supply Chain Briefing

Panama Canal Drought Accelerating Supply Chain Optimization

The Panama Canal has a 40% market share for containers moving goods from Northeast Asia to the U.S. East Coast, and drought conditions are creating a new round of supply chain disruptions. There have been between 130 – 160 ships waiting, leading to supply chain delays. Supply chain risk is extreme in the global supply chain. This is simply the latest issue impacting supply chains.

Due to a lack of rainfall, the Panama Canal has reduced the number of container ships to pass through on a daily basis by 20% (from 40 to 32). Additionally, it has put restrictions on the maximum ship draft to 44 feet (vs. around 50 feet previously). The trip through the Panama Canal takes 8-10 hours. If you have to find an alternate route, it adds 8000 miles.

Luckily, many companies started to diversify their supply chain with the pandemic, and they moved from just-in-time (JIT) to just-in-case inventory, and so disruptions have been muted thus far. However, as time goes on, the supply chain impacts are increasing. Costs are escalating with surcharges of up to $300-500/ container as not uncommon.

Smart Executives Responding with Supply Chain Optimization

Smart, forward-thinking executives are responding with supply chain network optimization and risk mitigation strategies. For example:

  • Alternate routes: Forward-thinking executives are finding and using alternate routes. You never know when an issue will arise, and you cannot afford to wait for the crisis to occur to use your backup plan. Thus, smart executives are using alternate routes for at least a minimum percentage of shipments so that they establish their presence. Depending on your beginning and ending point, there might be several alternatives with varying levels of benefit/ cost.
  • Alternate modes of transportation: This strategy will certainly cause hefty price increases, and so it is used as a last resort. However, it makes sense to establish these options.
  • Reshoring & expanding manufacturing capabilities: Several clients are planning for a resurgence of manufacturing closer to customers and ramping up in the U.S. By virtue of this strategy, shipping lanes will change and diminish.
  • Nearshoring/ Friendshoring: Many clients are also searching for manufacturing capabilities closer to customers, not in the U.S. or Europe. For example, MedTech is nearshoring to Mexico, Costa Rica, and the Dominican Republic. it is critical to ensure you find a friendly country to mitigate supply chain risks.
  • Forward positioning of WIP inventory: Depending on your products and customer requirements, you could change your manufacturing process to produce and ship work-in-process (WIP) so that it can be turned into multiple products based on customer need and/or it can be stored at a lower cost while mitigating risk. This concept can be called mass customization, configure to order (CTO), assemble to order, and other names. The product can be redesigned to apply this strategy in some situations.
  • Distribution network design: Your distribution network can be redesigned to mitigate risk while accounting for customer requirements and cost concerns.
  • Right-size inventory levels: Although moving from just-in-time (JIT) to just-in-case isn’t necessarily the best plan for profitable growth and happy customers, reevaluating your replenishment planning strategies can make good sense. By resetting your planning processes, ERP / MRP settings, and kanban strategies, you can store more of the high risk inventory while storing less of unnecessary inventory to achieve a win-win outcome. To learn more about how to right-size inventory, read our recent article.

These are a few options. The key is to reevaluate your supply chain and optimize your supply chain design and network strategy.

Deep Dive into Supply Chain Risk

The Panama Canal might seem like an ideal solution, and there is significant investment going into upgrades over the next few years. However, have you performed a deep dive risk analysis? It turns out that China can control the Panama Canal even though the U.S. built the Panama Canal and gave control to Panama.

According to the Hay-Bunau-Varilla Treaty of 1903, the United States gained a 10-mile wide strip of land for the canal and provided a one-time $10 million payment to Panama in addition to an annual annuity of $250,000. However, in 1978, the President Jimmy Carter and Panamanian dictator Omar Torrijos signed a treaty agreeing to transfer control of the Panama Canal from the United States to Panama at the end of the 20th century. Panama earns around $3 billion in revenue annually.

China in essence ‘owns’ the Panama Canal since Hutchison Ports controls both ends of the Panama Canal with a terminal at each end. If China gets into a war or conflict with the U.S. or Japan (as the top 3 users of the Panama Canal are U.S., Japan, and China), they could cut off access to both ends of the Panama Canal. Which other ports does Hutchison own? If you are concerned about supply chain risk, you better find out.

The Bottom Line

A key part of a SIOP (Sales Inventory Operations Planning) process, also known as S&OP relates to proactively evaluating supply chain risk as part of your supply chain optimization strategies. Learn more about why a SIOP process should be a key part of ensuring the successful execution of your company’s strategy and the best practices for designing and implementing in our book, SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth.

These types of disruptions and inflationary pressures will not stop in the current volatile and uncertain global environment. Thus, be proactive and forward-thinking in your supply chain optimization and risk mitigation strategies. At a minimum, perform an assessment of your current state supply chain and begin with the top priorities for improvement. Learn more about LMA’s complimentary supply chain assessment.

Please contact us with your stories, issues, and ideas on how issues like the Panama Canal impact your company and end-to-end supply chain. And, please keep us in the loop of your situation and how we can help your organization with supply chain optimization, risk mitigation and supporting SIOP programs.

P.S. To get ahead of the curve on where to focus for the best results to build on your foundation to get ahead of the competition, download our complimentary report, and The Road Ahead: Business, Supply Chain & the World Order.