Retailers worldwide are navigating a complex web of logistical challenges triggered by recent militant attacks on vessels in the Red Sea. The attacks have prompted major container ship operators, including industry giants Maersk and Hapag-Lloyd, to reroute vessels away from the Suez Canal – the shortest route from Asia to Europe. This unexpected twist comes as retailers gear up for the approaching China Lunar New Year holiday, compelling them to stock up on goods and explore altern
alternative transportation methods to avert potential delays that could leave their shelves bare in the coming months. Fears of a prolonged disruption to global trade are palpable, particularly as supply chains are still recovering from the impacts of the pandemic. The Suez Canal diversions, while circumventing potential threats, come at a high cost – adding an extra $1 million in fuel expenses and approximately 10 days to the journey when circumnavigating southern Africa. Speaking to the Reuters Global Market Forum in Davos, Maersk’s CEO Vincent Clerc said that the disruption to global shipping caused by the attacks on vessels in the Red Sea would probably last at least for a few months, though it could be longer due to the unpredictability of the situation. Meanwhile, war-risk insurance premiums for shipments through the Red Sea are also rising. Industry sources told Reuters that premiums have risen to around 1 per cent of the value of the ship, up from 0.7 per cent previously. This translates into hundreds of thousands of dollars of additional costs for a one-week voyage. Banking executives have also speculated that this crisis might create inflationary pressures that could ultimately delay or reverse interest rate cuts. A nuanced perspective According to Chris Weaver, the chief commercial officer of Shippit, a software company that connects retailers with different carriers, around 15 per cent of global trade passes through the Red Sea and any disruption there will impact capacity. As a result, container prices and lead times are likely to increase as ocean liners are forced to take alternative routes and merchants compete for the capacity. “It is hard to flex capacity in the short term so the immediate impact will be high prices and longer lead times for delivery. Going through the Red Sea typically saves 10 days and therefore millions of dollars in fuel costs,” he told Inside Retail. In response to this current bottleneck in the supply chain, some companies have been adjusting their logistics strategy by front-loading orders and exploring alternative routes due to the Red Sea incidents. Weaver said that in the post-pandemic era, there has been a lot more talk about ‘nearshoring’ or even ‘onshoring’ manufacturing. He feels incidents like this will add further weight to those considerations, but this comes with higher capital expenditure and operational costs. “In all likelihood, the short-term fix will be to hold higher inventory levels which is already challenging in a higher interest rate environment and one where consumer spending is unpredictable,” he added. Exploring alternatives Some retailers are even considering air and rail alternatives to transport goods. While air freight is a viable alternative, it comes at a higher cost and Weaver believes that it is not a fix for all types of freight. “Air freight capacity is nearing pre-pandemic levels but there are also impacts here with the recent Boeing 737 Max-9 grounding meaning there is less capacity in commercial flights,” he said. “Rail infrastructure is lacking in APAC at the levels you see in Europe and North America and this impacts connectivity and is obviously unusable for water crossings.” With the Lunar New Year holiday approaching and factories in China closing in anticipation of the celebrations, companies are rushing to secure shipments. Nonetheless, Weaver believes there are plenty of tools available to logistics providers in the APAC region to help their clients navigate these time-sensitive challenges. “There are plenty of demand planning tools that can help merchandisers and buyers predict lead times and required order quantities. Lunar New Year is a known event and should be well planned into retailers’ buying cycles,” he elaborated. Diversification on the rise Recent years have seen a growing number of companies beginning to reduce their dependence on China by diversifying their supply chain sourcing from markets like Vietnam and Turkey. How feasible is this strategy for companies in the APAC and what challenges might they face? Weaver pointed to Apple, which is moving significant manufacturing plants away from China, as evidence of this trend, which he believes is likely to continue, with positive knock-on effects for the APAC region. “I think there is likely to be manufacturing moved to other Asian countries that are deemed more politically stable, but I think onshoring to high-wage countries is very unlikely to happen,” he added. He also stressed that competition is global now and the likes of Temu and Shein will continue to provide low-cost goods to Western countries. “It is hard to onshore supply and be competitive unless countries introduce high tariffs which seems unlikely when there is a cost of living crisis,” he explained. Weaver believes there are a few key points that need to be taken into consideration for companies in the APAC region to build resilience in their supply chains, amidst the current geopolitical and logistical challenges. “As much as possible don’t be single-point dependent and have a few options. Hold a certain level of inventory buffer so you can ride a shorter-term crisis. It is very hard to be prepared for a black swan event like the pandemic and the costs of being prepared for this likely outweigh the benefit,” he pointed out. At the end of the day, Weaver said that ‘just-in-time ordering’ or ‘just-in-time manufacture’ in the current climate carries the risk of stockouts and lost sales but businesses need to remain flexible to the challenges.