“While 2023 seemed to mark a degree of post-Covid normality, 2024 has started with a sharp reminder about how important supply chain resilience is.
The wish is understandable. While 2023 seemed to mark a degree of post-COVID-19 normality, 2024 has started with a sharp reminder about the importance of supply chain resilience. Reduced cost and inventory levels alone don’t make the Panama Canal any fuller or the Red Sea any more navigable.
Long-term questions haven’t gone away either. A recent report by the McKinsey Global Institute (MGI) looks at shifting global trade flows, considering potential reconfigurations based on developing economies and geopolitical distance. It flags that businesses will need to plan for disruptions, and two ongoing examples in shipping show just how great the need is.
Our colleagues in McKinsey’s Travel, Logistics, and Infrastructure practice have commented on the cost and delay implications of low water levels in the Panama Canal, which normally carries around 8 percent of global container volume.1 Extreme drought has reduced maximum ship crossings, resulting in prolonged waiting times. Consequently, several carriers have already announced new fees for Panama transits.2 In addition to costs incurred by shipping companies and their clients, costs for the Panama Canal itself are estimated to rise to between $500 million and $700 million in 2024,3 compared with previous estimates of $200 million.
At the same time, conflict in the Red Sea and reduced access to the Suez Canal are leading companies to reroute shipping around the Cape of Good Hope, adding about two weeks to shipping time while raising costs for resources such as fuel for the vessel and food for the crew. While this delay is relatively short if a supply chain is prepared accordingly, there have been reports of automotive companies implementing line stoppages in response to material shortages. The direct impact on business revenue illustrates the need to invest in resilient supply chains.4
These disruptions are different from the challenges posed by the COVID-19 pandemic. At that time, the demand for goods significantly increased, whereas now a supply shortage has the potential to lead to stockouts. Still, both cases call for measures to increase supply chain resilience. In the current situation, the main impact is on cargo traveling from Asia to Europe, but because of delays causing an imbalance of container availability, the impact is also being felt in routes from Asia to the west coast of North America. As with most challenges, the situation will normalize; we expect it to take around two months for global supply chains to absorb the two weeks (the time added by shipping detours) of inventory.
Waiting for that normalization to happen is not an attractive option. Instead, company leaders can take actions to build further resilience and ready themselves for additional disruptions, should they occur. Most likely, they will; previous research has predicted disruptions of one month or more every 3.7 years.
The expectation of more frequent disruptions suggests a need to prepare for the future. Supply chain leaders can prepare by developing an understanding of their operations and the world in which they are operating. They should establish an insights edge for competitive advantage, with a granular view of their company, peers and other elements of the value chain, and the broader global context.
Second, it is important that supply chain leaders understand their tier-n connections in detail. Indeed, MGI research shows that only 2 percent of companies have visibility below tier two. And finally, it is becoming increasingly important for leaders to monitor the world for tremors that may signal challenges to their operations; looking solely at their own value chains will no longer be sufficient.
With this in-depth understanding of their supply chains in place, companies can pursue a set of strategic actions to mitigate future risks. Establishing options to shift supply chains, production locations, or operating markets can provide alternatives when disruption hits, as can explorations of new technologies, partnerships, and alternative materials.
A final thought: there is no room for complacency in supply chain management and the pursuit of resilience, and the case for supply chain leaders having the ear of—and indeed being part of—the executive board remains as strong as ever.”
*This article is excerpted from mckinsey.com website, published February 6, 2024