The best consulting clients are razor focused on supply chain volatility, risk and capacity. The recent events in the Red Sea highlight these critical priorities. As Houthi drone and missile attacks create chaos in the Red Sea, shipping container lines play it day by day as to whether to brave an attack or sail around the southern tip of Africa. If they reroute, it adds approximately 10 days and 1900 nautical miles onto a typical Asia-North Europe service. Additionally, some ships go through the Suez Canal for the East Coast of the U.S. This route has increased with the recent reduced capacity of the Panama Canal. Read our recent article, Supply Chain Optimization Remains a Priority as the Panama Canal Worsens on those issues.
High Risk in the Red Sea
What started with an Iran-backed Houthi attack on container shipping lines sympathetic to Israel has blossomed into a volatile, risk-laden decision to sail through the Suez Canal. For example, there was an attack on an MSC ship sailing from Saudi Arabia to Pakistan. According to Freightos CEO, approximately 50% of ships have been diverted from the Suez Canal, reducing capacity (due to extended lead sailing time) and increasing rates by around 30%. Safety is top priority, and CEOs are evaluating risk on a daily basis.
Alternate Routes & Sources of Supply
Clients are starting to ship to the L.A. and Long Beach ports to transport across the country to the East Coast; however, this change cannot happen rapidly, and adds time and cost to shipments. For quicker needs, companies are sending product by air freight to quickly respond to changing customer needs. Certainly, air freight is more expensive, thus inflating prices further. More and more companies are realizing they must reshore, nearshore, and take control of their ability to serve customers. Some are finding backup sources of supply while others are expanding their manufacturing footprint. The bottom line is supply chains are on the move.
Mexico Border Closures Impact Intermodal Trains
According to the Journal of Commerce, a major intermodal rail connection between Mexico and the United States was halted after US authorities shut down border crossings at Eagle Pass and El Paso in Texas so customs officers could help US Border Patrol process a flood of migrants. The two major class 1 railroads, Union Pacific Railroad (UP) and BNSF Railway, were impacted. Unfortunately, this is the second time in three months the Eagle Pass Crossing was shut down due to a surge in migrant arrivals. Intermodal has opened up again; however, UP and BNSF have a logjam of laden containers built up that need to be transported to the US.
Again, customers waiting on this freight experienced delays and reduced capacity. It is clear that risk and volatility remains high throughout the world with goods movement.
Forward-Thinking Companies Thrive
Smart executives are thinking ahead, planning capacity and backup capacity with a SIOP (Sales Inventory Operations Planning) process and successfully navigating these ongoing disruptions. Forward-thinking companies are gaining an advantage as they have planned ahead to be agile, pivot quickly, and most importantly, are ahead of the curve in securing capacity. For example, a proactive client moved production from China to Vietnam ahead of the pandemic when China shut down production with Zero-COVID policies. Again, they are ahead of the curve by expanding capacity in Mexico and the U.S. to ensure sufficient capacity to supply key customers. While the competition struggles, they can provide rapid deliveries with increased prices and gain long-term customers.
The key is to proactively address these issues to mitigate the impacts to the customer and cost, and longer term, to revise your manufacturing and supply chain footprint and network to best support profitable growth and mitigate risk.
If you are interested in reading more on this topic:
Supply Chain Risk Has Risen to the Top with the White House Council