Navigating Troubled Waters: Red Sea Crisis Sparks Concerns Over Trade Routes and Supply Chain Costs

This article was written by Paul Hopton, Managing Director and CTO, Scoutbee. To find out more about how Scoutbee’s partnership with SAP can help you drive resilience, cost reduction, operational efficiency, and responsible business practices, you can watch their joint LinkedIn Live event here.

Houthi rebel attacks on commercial vessels in the Red Sea in recent months have severely disrupted global shipping, causing international concern. These assaults, which have been going on since mid-November 2023, not only pose safety risks but also wider economic consequences. 

Major shipping firms, like A.P. Moller-Maersk, are considering avoiding the Red Sea and Suez Canal altogether, leading to severe delays and significantly increased transport costs, particularly on goods being shipped from Asia to Europe. 

Detours, especially around the Cape of Good Hope, have extended cargo transit times by up to twenty days. Over 500 vessels have been rerouted, which is having a massive impact on global supply chains, with companies like Michelin and Tesla facing production halts due to delays. 

Shipping rates, especially on Shanghai to North America routes, have surged, as have insurance costs for vessels traversing high-risk zones. The inflated premiums are reshaping shipping routes, favoring the Cape of Good Hope over the Suez Canal. A return to usual routes in the near future seems unlikely until security improves.

Some Facts and Figures

• More than 500 vessels have been rerouted to avoid the Suez Canal.

• Cargo transit times have increased by up to 20 days.

• Shipping rates from Shanghai to the U.S. West Coast have increased by 43%.

• The Shanghai to East Coast route has seen a 48% hike.

• Insuring a vessel can now cost anywhere from $1 million to $2.5 million.

The Scoutbee View

This crisis underscores the interconnectedness of global shipping logistics, where geopolitical events profoundly affect trade routes, costs, and the broader supply chain, raising several considerations for procurement professionals.

What’s different about this crisis?

Obviously, supply chain disruption is nothing new. We had the Ever Given disaster a couple of years ago, pirates off the Horn of Africa affecting shipping routes and, of course, the COVID-19 pandemic. 

The Francis Scott Key Bridge collapse in Baltimore, which has severed vital oceanic links to the city’s port, is the latest event to add to the challenges faced by global supply chains already strained by the impacts of war, climate change, and rising interest rates. 

The Red Sea shipping disruption is just the latest crisis. But what’s different this time is that we’re seeing a hardening of borders to trade, which I think is a reversal in trend from what we’ve been seeing in recent years. Ten years ago, everyone was all about globalization and opening up trade. Now, we’re seeing more sanctions, companies disinvesting in China… 

Organisations are looking at how to build more resilience, increasing the size of their inventories, near shoring their suppliers, and diversifying their supply chains so that they can avoid getting stuck in a particular geopolitical bottleneck.

Here, Scoutbee’s partnership with SAP Ariba Sourcing can bring a lot to the table by allowing procurement teams to quickly re-source their goods. I’m especially proud of this expanding partnership and what it can do for sourcing events. 

This crisis won’t be the straw that breaks the camel’s back

I don’t believe that this crisis will be the tipping point. I think there’s enough elasticity in supply chains at the moment to cope with this. Insurance rates might go up, oil prices may be affected, it could add a percentage point to inflation rates here and there, but I don’t think it will have a meaningful long-term impact.

There has been an uptick in interest in AI-powered supplier discovery solutions

I get a lot of questions from organisations about how they can diversify their supply chains, how they can take their supply chains into different geographies, and how they can build more elasticity into their supply chains. If you’re looking, for example, to find a supplier of some remote area in Latin America instead of Southeast Asia, it’s quite a difficult thing to do using traditional methods and procurement professionals might not have expertise in this area. AI-driven solutions like Scoutbee Discovery can be invaluable.

Looking to the future…

A lot of people are talking about the end of just-in-time supply chain delivery, but nobody’s talking about what’s going to replace it. Massive amounts of inventory in warehouses is not the answer. The stock market and investors aren’t going to be happy to see companies with loads of assets stuck on shelves in a warehouse somewhere and they will still want to see organisations minimising their assets. 

But it’s going to be a fine balance to get this resilience in place as nobody’s really talking about this kind of challenge yet – about where do we sit on this scale between 100% inventory and just-in-time delivery? Now is the time to start talking about it.

Organisations need to be able to find solutions much more quickly

At Scoutbee, we speak to a lot of organisations where a very small team of purchasers has been working with the same very small group of suppliers for a long time and this obviously creates brittleness in the supply chain. 

Companies need to gear up the practice of looking at alternatives from different places and maybe running small experiments to bring in a percentage of supplies from a different supplier, building out resilience by looking at alternatives, maybe not completely replacing everything, but at least starting to look at how they can reduce the impact of an event like the Red Sea crisis.

Don’t write off Christmas just yet

Some people are saying that long-term effects on rates could impact the 2024 holiday season but I don’t think the nano network of deliveries will be affected; the goods will just find another route around the world. If the situation goes on for much longer, there could be an impact, but I still think people will have presents under the Christmas tree this year.

If you would like to find out more about how Scoutbee’s partnership with SAP can help you drive resilience, cost reduction, operational efficiency, and responsible business practices, you can watch their joint LinkedIn Live here.