Archived post from legacy Decis reporting
Welcome to this week’s PRO Research report. These are long-form analyses of something that’s important to decision-makers, giving them the background and context on the issue along with some insight into how things might develop.
This week’s report focuses on maritime supply chains, what can interrupt these, and how you can make your supply chain more resilient.
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The Importance of Shipping
Amateurs talk tactics; professionals talk logistics.
Acknowledging the importance of shipping alone won’t help organizations plan for potential disruptions. Particularly as the category of ‘shipping’ covers a wide range of cargoes, routes, vessels, origins and destinations. So there’s no single shipping market, meaning there’s no single supply chain.
However, there are common factors that affect all shipping-related supply chains, and if we pay attention to these, we will get a good sense of the macro-level health of the maritime element of an organization’s supply line.
There are a lot of elements in a supply chain, but for simplicity, you can use these three factors to quickly determine your exposure to shipping disruption.
Volume
How much essential material moves by sea?
Given that 80% of international goods travel by sea then, unless something is uniquely local and highly insulated, its supply chain will be affected by what happens at sea either directly or indirectly. There are exceptions to this and the exact amount of exposure will differ, business by business, but sea freight still dominates supply chains worldwide.
Stocks
How many days of supply does a business hold?
Whether these are car parts for an assembly line, sacks of flour for a baker, or fuel for the filling station, the ability to withstand disruption is heavily dependent on the days of inventory or supply on hand. As many firms practice ‘just-in-time’ inventory to help manage efficiency and save costs, these stocks can be surprisingly small. For example, from a UN Report:
Apple keeps around 5.2 days of inventory on hand
Amazon holds inventory for an average of 36.8 days
Tesla has an inventory period of 20.2 days
McDonald's has an inventory turnover period of 11.6 days.
At the national level, supplies can also be surprisingly limited. The UK only has a few days worth of fuel readily available as shortages in 2021 illustrated.
Alternates
How many real alternatives are there to the existing supply line?
At the macro level, this usually means finding a different route altogether as disruption on one shipping route or in one location affects all cargo transiting that way. Simply changing to a different local supplier won’t solve an issue that’s being caused farther down the line.
Unfortunately, concentrations in the supply chain might mean that there are few, if any, real alternatives, as recent events in the Suez Canal or the world’s reliance on semiconductors from Taiwan have shown.
It is worth noting that air can be an alternate means of supplying essential goods, but only when these have a very high value/weight ratio. Air cargo is around 18 times more expensive than sea cargo by kg (at the time of writing in February 2024) so only the most high-value items are worth shipping by air. And even then, probably only for a short period of time, to make up essential supplies.
Cost calculations
* 25,000kg container at $3,400 - $0.136
* Air freight average - $2.33
Data and image from Frightos
With these factors in mind, you can start to identify where the vulnerabilities might lie.
We can break these down into ports through which goods pass, and the main transit routes the vessels take.
Ports
Photo by Dominik Lückmann on Unsplash
Tracking the relative stability and events in the locations essential to your supply chain will help identify potential disruption.
Image - Espace Mondial Atlas
Listed below are the largest posts serving each region by container (TEUs) based on 2022 traffic. The DCDR stability training for each country is included where available.
DCDR Stability ratings are dated as of February 12, 2024. Refer to the latest DCDR stability SITREP for up-to-date assessments.
Africa
North Africa: Port Said, Egypt - Handles approximately 3.1 million TEUs.
West Africa:
Lagos Port, Nigeria - Handles over 1.2 million TEUs.
East Africa:
Port of Mombasa, Kenya - Handles about 1.4 million TEUs.
Southern Africa:
Port of Durban, South Africa - Handles approximately 4.5 million TEUs.
DCDR Stability ratings:
Egypt. Baseline stability rating: Egypt is Stable
Kenya. Baseline stability rating: Kenya is Stable
Nigeria. Baseline stability rating: Nigeria is Unstable
South Africa. Baseline stability rating: South Africa is Stable
Asia
East Asia: Port of Shanghai, China - Handles over 43.3 million TEUs.
Port of Singapore, Singapore - Handles over 36.9 million TEUs.
South Asia:
Port of Mumbai, India - Handles over 5 million TEUs (based on existing knowledge).
Port of Karachi, Pakistan - Handles over 2.5 million TEUs (based on existing knowledge).
Southeast Asia:
Port Klang, Malaysia - Handles over 13 million TEUs (based on existing knowledge).
West Asia/Middle East:
Port of Jebel Ali, UAE - Handles over 14.1 million TEUs (based on existing knowledge).
Port of Dammam, Saudi Arabia - Handles over 1.5 million TEUs (based on existing knowledge).
DCDR Stability Ratings
China. Baseline stability rating: China is Stable
India. Baseline stability rating: India is Stable.
Malaysia. Baseline stability rating: Malaysia is Stable
Pakistan - not yet rated by DCDR
Singapore. Baseline stability rating: Singapore is Highly Stable
Saudi Arabia. Baseline stability rating: Saudi Arabia is Stable
United Arab Emirates. Baseline stability rating: United Arab Emirates is Stable
Europe
Western Europe: Port of Rotterdam, Netherlands - Handles over 14.3 million TEUs.
Port of Antwerp, Belgium - Handles over 12 million TEUs.
Southern Europe:
Port of Piraeus, Greece - Handles over 5.65 million TEUs (based on existing knowledge).
Port of Valencia, Spain - Handles over 5.42 million TEUs (based on existing knowledge).
Northern Europe:
Port of Hamburg, Germany - Handles over 8.5 million TEUs (based on existing knowledge).
Port of Gothenburg, Sweden - Handles over 800,000 TEUs (based on existing knowledge).
Eastern Europe:
Port of Gdańsk, Poland - Handles over 2 million TEUs (based on existing knowledge).
Port of Constanta, Romania - Handles over 1.3 million TEUs (based on existing knowledge).
Stability Ratings
Belgium - not yet rated by DCDR
Germany - not yet rated by DCDR
Greece - not yet rated by DCDR
Netherlands - not yet rated by DCDR
Poland. Baseline stability rating: Poland is Stable
Spain - not yet rated by DCDR
Sweden - not yet rated by DCDR
North America
United States: Port of Los Angeles - Handles over 9.3 million TEUs. Port of Long Beach - Handles over 8.1 million TEUs.
Port of New York/New Jersey - Handles over 7.5 million TEUs (based on existing knowledge).
Canada: Port of Vancouver - Handles over 3.4 million TEUs (based on existing knowledge).
Mexico: Port of Manzanillo - Handles over 3 million TEUs (based on existing knowledge).
Stability Ratings
Canada - not yet rated by DCDR
Mexico. Baseline stability rating: Mexico is Unstable
United States. Baseline stability rating: The United States is Stable
South America
Brazil: Port of Santos - Handles over 4.2 million TEUs (based on existing knowledge).
Argentina: Port of Buenos Aires - Handles over 1.5 million TEUs (based on existing knowledge).
Colombia: Port of Cartagena - Handles over 3 million TEUs (based on existing knowledge).
Chile: Port of Valparaíso - Handles over 1 million TEUs (based on existing knowledge).
Stability Ratings
Argentina. Baseline stability rating: Argentina is Stable
Brazil. Baseline stability rating: Brazil is Unstable
Chile. Baseline stability rating: Chile is Stable
Colombia - not yet rated by DCDR
Oceania
Australia: Port of Sydney (Port Botany) - Handles over 2.65 million TEUs (based on existing knowledge).
Port of Melbourne - Handles over 3 million TEUs (based on existing knowledge).
New Zealand: Port of Auckland - Handles over 1.6 million TEUs (based on existing knowledge).
Stability Ratings
Australia - Baseline stability rating: Australia is Highly Stable
New Zealand - not yet rated by DCDR
Port data: UNCTAD & World Shipping
Shipping Bottlenecks
Despite the size of the ocean, there are only a handful of channels used by vessels due to the sea conditions, most efficient route, and limited option to ass by or around the major land masses.
These routes allow some flexibility where storms, military action, or piracy might interfere with free passage but there are several critical bottlenecks that are difficult -- if not impossible -- to avoid. These bottlenecks below are essential to the free flow of maritime goods.
Source Port Economics Management
TEU numbers for each bottleneck are included for comparison, but note that in the case of some passages, the container traffic is less important than the other cargoes. For example, the oil and gas shipments passing through the Strait of Hormuz are more important than the container traffic.
The Panama Canal is a critical route for 40% of all U.S. container traffic, with 14.6 million TEUs transiting in 2020.
The Suez Canal is a crucial link between Europe and Asia, with 15.6 million TEUs transiting in 2020.
The Strait of Malacca. An estimated one-third of global shipping passes through the South China Sea, with a significant portion traversing the Strait of Malacca. This strait is especially critical for China, Taiwan, Japan, and South Korea with 70.9 TEUs transited in 2020.
Strait of Hormuz. This strait grants access to the Persian Gulf and is a critical passage for a large proportion of the world’s oil shipments alongside goods to and from Dubai. 26.7 million TEUs transited in 2020.
Oresund connects the Baltic Sea with the North Sea and is vital for the economic activity in the Baltic region. 16.7 million TEUs transited in 2020.
The Strait of Gibraltar is the bottleneck between the Mediterranean Sea and the North Atlantic, linking Europe/Asia routes and intersecting with West Africa/Europe routes. 18.9 million TEUs transited in 2020.
Recent Houthi attacks in the Red Sea, the 2021 Even Given accident in the Suez Canal, and the effects of drought in Panama on canal capacity illustrate the range of factors that can affect these bottlenecks and just how quickly trade can be disrupted.
However, given that several of these bottlenecks only affect cargoes moving in a particular direction, there will only be a couple of places to track with respect to your own supply chain.
Hot Spots
Image - Splash247.com
It’s worth noting that there are other maritime hot spots that can affect shipping. Sometimes, these overlap with shipping bottlenecks, such as the Malacca Straits, where the proximity to land makes piracy or attacks much easier.
However, there are other hot spots where piracy or storms can affect shipping. These events usually have a more limited, local impact on vessels in the immediate area and are less likely to affect global trade as a whole.
That’s not to downplay the effect on the crew and vessel that a pirate raid off Somalia or in the South Chian Sea will have, but these are not normally macro-economic events in the same way that a blockade of the Suez Canal is.
Preparing for Disruption
Given the complexities of global supply chains and the concentrations of some routes or supplies, it will not be possible to avoid disruption entirely. Therefore, organizations should build contingency plans for a range of potential disruption scenarios. A series of planning considerations generated by the DCDR agents are included below. Use these to begin planning or assessing contingency plans for your organization.
Couple these with tracking and monitoring of the key locations, routes, and bottlenecks associated with your supply chain to ensure that you can identify and react to potential disruptions as quickly as possible,
Contingency Planning Considerations for Supply Chain Disruption due to Shipping Interruptions
Introduction:
Supply chain disruptions caused by shipping interruptions can have a significant impact on organizations. This contingency plan aims to provide a clear and structured approach to help organizations prepare for such disruptions. The plan takes into consideration the paradigm of volume, stocks, and alternates, and provides actionable steps to minimize the impact of shipping interruptions on the supply chain.
I. Assessment Phase:
1. Determine the volume of essential materials moved by sea:
Identify the extent to which your organization relies on sea freight for its supply chain.
Evaluate the vulnerability of your supply chain based on the percentage of essential materials moved by sea.
2. Assess the stocks of essential materials on hand:
Calculate the number of days of supply your organization holds for critical materials.
Identify any potential bottlenecks or inefficiencies in the inventory management process.
3. Evaluate the availability of alternates:
Identify potential alternative shipping routes or methods.
Assess the feasibility and cost-effectiveness of using alternative routes or methods for essential goods.
II. Planning Phase:
1. Diversify supply chain sources:
Identify and evaluate potential suppliers from different geographical regions.
Establish relationships with multiple suppliers to mitigate the risk of disruption in one location.
2. Establish safety stocks:
Increase the days of supply for critical materials to ensure a buffer during shipping disruptions.
Consider implementing a safety stock management system to optimize inventory levels.
3. Develop a robust communication plan:
Establish communication channels with suppliers, logistics partners, and customers.
Create a communication plan to quickly disseminate information and updates during shipping disruptions.
4. Implement risk mitigation strategies:
Identify potential risks and develop strategies to mitigate their impact on the supply chain.
Consider insurance options to cover losses or damages during shipping disruptions.
III. Execution Phase:
1. Monitor and track shipping conditions:
Stay updated on global shipping news and be proactive in monitoring potential disruptions.
Utilize technology and tracking tools to monitor the movement of goods in real time.
2. Activate alternate supply chain routes:
If a shipping interruption occurs, quickly activate pre-established alternate supply chain routes.
Prioritize high-value/weight ratio goods for air cargo, considering the cost implications.
3. Maintain constant communication:
Communicate with suppliers, logistics partners, and customers to provide timely updates on shipping disruptions and alternative arrangements.
Collaborate with stakeholders to find solutions and minimize the impact on the supply chain.
IV. Evaluation Phase:
1. Assess the effectiveness of the contingency plan:
Conduct post-disruption evaluations to identify areas of improvement in the contingency plan.
Gather feedback from key stakeholders to gain insights for future disruptions.
2. Adapt and refine the plan:
Incorporate lessons learned from previous disruptions to refine and enhance the contingency plan.
Continuously review and update the plan based on changes in the shipping landscape and the organization's requirements.
Conclusion:
By following this strategic contingency plan, organizations can proactively prepare for supply chain disruption caused by shipping interruptions. Assessing the volume, stocks, and alternates, and implementing the appropriate strategies will help ensure the organization's resilience and minimize the impact of shipping disruptions on the supply chain.
Although this is a deep-dive report, we’ve only really scratched the surface with respect to the complexities of modern supply chains. Nevertheless, by keeping track of the potential flashpoints at the post and bottlenecks your supply chains depend upon and having some basic but robust measures in place, you’ll be able to identify potential disruptions as they arise and act accordingly.
And if there’s a location that’s particularly important to you that DCDR isn't covering currently, please just hit reply and let me know.
All the best
~Andrew