This piece is by Pascal Matthey, Marine Risk Control Specialist, Sompo;
Over the past several decades, industrial production has been characterized by a large delocalization of manufacturing processes to save costs. Based on reliable, extensive and cheap transportation costs, this evolution has developed certain regions to become the factories of the planet and reduced the size of our world.
Just-in-time production and immediate deliveries became the norm as businesses cut costs by avoiding lengthy storage fees.
This in turn has meant a greater reliance on efficient distribution channels. With many goods needing to move faster and over longer distances, supply chains have become not only more complex but also less transparent.
According to the latest risk report from the World Economic Forum, supply chain disruption figures continuously among the top 20 major perils for industry. Nevertheless, McKinsey studies reveal that most companies still follow a more reactive approach in responding to supply chain issues, thus losing a critical amount of time due to the lack of preparedness, should anything hit them.
Worse still, if immediately post-COVID the security of supply chains was high on top management agendas, three years later, cost reduction seems to have taken center stage once more, making supply chains less resilient, as revealed by a Swiss Re study in 2024.
Few companies realize that the sourcing of some components often relies on a single supplier or various suppliers clustered in the same region. Any disruption of this fragile construction can lead to the severe interruption of production and consecutive market loss. In case of supply chain failure, the company which is able to be back on the market faster than its peers will make the difference. A robust supply chain is a key factor for success.
WAKE UP CALLS
Recent larger natural hazards such as the COVID crisis demonstrated the fragility of modern supply chains. These events have acted as a wake-up call for many companies to better analyze the resilience of their sourcing processes and distribution channels,
Supply chain resilience often appears as one of the top risks keeping risk managers awake. While direct transit damages are typically covered under cargo insurance policies, consequential losses do require additional cover which is usually not taken up. But even in such cases, most of the financial impact suffered cannot be insured. It is usually accepted that for any euro paid by insurers in case of claims, there are four euros more to be spent in terms of business interruption or market loss which cannot be recovered.
However, marine insurers offering dedicated risk control capabilities can be solid partners to enhance and support the risk management process every company should endeavor to conduct all along their unique supply chain structure. Longer term, considerations need to be made to reduce offshoring and relocate production sites closer to customers. A major increase of transportation charges as well as the total cost of risk will offset higher production costs. For instance, freight rates for shipping containers at sea hit the highest value on record in July 2024, being more than twice as high as before COVID with an increase of over 20% since May 2024 due to geopolitical instability around the Persian Gulf and the Horn of Africa.
The topic is not new. Back in 2011, the earthquake and tsunami which triggered a nuclear accident at Fukushima in Japan had significant consequences on global supply chains. The shortage of energy forced many manufacturing plants to shut down. Infrastructure damage also caused transportation disruption and port congestion. As Japan is a major supplier of automotive and other electronic parts, batteries and semi-conductors, this interruption caused disruption for manufacturers both nationally and internationally with sectors impacted worldwide due to a lack of components to be integrated in a timely manner in production lines.
The COVID crisis forced many businesses to revamp their operations and strengthen their risk management capabilities. The pandemic had many consequences – including factory shutdowns, port congestions, reduced air freight capacity and dramatically increased freight costs. These served to provide further evidence of the vulnerability of just-in-time models and the overall fragility of some supply chains.
When cargo ship the “Ever Given” rammed its bow into the bank of the Suez Canal in March 2021, the waterway was blocked for more than six days. Considering that the daily average of ships passing the Canal is more than 63 vessels, this accident affected the entire global economy by delaying 30% of the world’s container traffic. According to the International Chamber of Commerce, goods valued at US $3bn pass through this waterway every day. Although it is hard to calculate the direct and indirect losses caused by this event, some estimates cite a global impact of around 2.5bn euros.
We have also seen the impact in the Red Sea and off the Horn of Africa of political instability and how it can cause an ongoing peril to the supply chain. More than 60 ships have been attacked since October 2023, obliging many shipowners to consider rerouting around the Cape Of Good Hope or customers opting for land transportation instead, while the choice for using the Silk Road from China through Russia has also been impacted since Russia’s invasion of Ukraine,
Elsewhere in March this year we saw the impact of the Francis Scott Key Bridge collapse in Baltimore, US, after it was hit by a large container ship. A multitude of parties were affected, and vessels were trapped on both side of the bridge impairing the operation of the ninth largest US port, causing multi-million-dollar financial losses.
All these challenges require us to reassess supply chain risks and to monitor continuously the efficiency of new trends and developments. The key is internal communication. The risk manager needs to discuss with other important stakeholders such as procurement, warehousing and logistics as well as distribution departments. Audit and finance being other important partners to better understand all the dependencies across the company and with respect to key suppliers and major clients. Securing top management buy-in is essential to ensure resources and enforcement of the risk mitigation strategy. The work does not end at the doorstep of the company. Since the highest probability of an issue lies with either second-tier suppliers or along the transportation chain, an in-depth analysis to understand where the products are coming from, how they are shipped and what are the alternatives to be triggered in case of single failure will be crucial.
For getting a global view over many trade sectors and geographical areas, cargo insurers and their risk control specialists are useful and effective partners to help companies navigating these risks. They support customers in building up resilient strategies, identifying threats and opportunities to mitigate the probability of disruption and help businesses to run smoothly.
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