Red Sea Attacks: Another Disruption Calling for Inbound Supply Chain Diversification

Attacks from Houthi rebels on cargo ships have made one of the major global trade passages a risky place to be. The Red Sea sees 10% of global trade pass through it every year, acting as the primary route for trade between Asian and European markets. As a result of the attacks, companies are faced with three options:

• Send shipments via air freight, taking on the higher costs.
• Divert ships around Africa, adding 4,000 miles and 10 extra days to lead times.
• Risk passing through the Red Sea while bearing the cost of higher insurance premiums.

Several major companies that have seen impacts on their operations so far include Abercrombie, IKEA, Macy’s, Target, BP, Shell, and Crocs, as major shipping lines like Maersk and Hapag-Lloyd have stopped sending ships through the Red Sea. Both Tesla and Volvo have been forced to halt their European production due to delays in shipments. Volvo, for example, has had to put a pause on its production lines for 3 days while it awaits a shipment of gearboxes that had to be diverted.

In the short period of time the attacks have occurred, impacts on transport have been substantial:

• Demand for air freight is currently 25% to 30% higher than a normal January.
• The average cost to fly 1 Kilogram (kg) of cargo from the Middle East to Europe is 35% higher than last month, according to online freight marketplace Freightos.
• Container ship traffic through the Red Sea is down 90% compared to the same time last year.
• Insurance risk premiums for ships traveling in the area have increased by over 40%.

The disruption is bringing back memories of the Suez Canal blockage in 2021 and as is always the case with supply chain disruption, the effects don’t remain isolated. Both the additional time and cost associated with rerouting freight will be trickling down the supply chain, with growing mentions of shortages, price increases, and “shrinkflation” effects.

In response to a transport route becoming unusable, companies scramble to reroute their stock via freight sourcing platforms or contacting alternative transport providers. When that route is one of the busiest in the world, finding cost-effective, alternative options becomes incredibly difficult. It takes teams of people a lot of time to run various scenarios and identify the best way around.

The recent move of supply chain software vendors toward end-to-end visibility and turning visibility into control, is starting to offer viable methods for dealing with such global disruptions from both a reactive and proactive standpoint.

• Reactive: Through a combination of platforms consolidating more data feeds and leveraging Artificial Intelligence (AI) for deeper analytics, companies can run more scenarios that consider more variables to identify the best resolution. Supply Chain Control Towers (SCCTs) and Multi-enterprise Collaboration Networks (MCNs) are delivering extensive scenario analysis capabilities and connections with more transport providers to pinpoint the right resolution before disruption escalates.
• Proactive: Companies will have their routes and transport arrangements, but very rarely be able to identify if the risk of bottlenecks or disruptions to certain points is growing. By using tools that can run network assessment and optimizations, such as Siemens Digital Logistics or One Network’s Intelligent Control Tower (see ABI Research’s Supply Chain Control Towers competitive assessment (CA-1442) for more vendors), companies can be alerted to potential issues and adjust their inbound network accordingly.

A notable trend to be aware of here is the rise in partnerships between SCCT providers and supply chain risk monitoring providers. For example, SAP has partnered with Everstream Analytics and both Blue Yonder and Blume Global have partnered with Resilinc, integrating their risk data within the platforms. Such partnerships will be instrumental in setting platforms apart as adoption grows.

While most global organizations are now using structural visibility tools, many have yet to extend this into actionable control. In a recent study by Accenture surveying supply chain executives from global organizations, almost all reported to be using solutions for monitoring and predicting, but only 40% are using data prescriptively. The solutions available today are not going to solve disruptions like the Red Sea attacks, but the more companies that leverage advanced analytics to identify where risks are present and take action to reallocate their network could start to move global trade toward a more resilient, flexible future. Diversifying inbound supply chains is a necessary strategy to reduce the impact of future disruption and companies should focus on adopting the right platforms to help them identify the best way forward.