Professor John Manners-Bell, Chief Executive of Ti Insight and Founder of the Foundation for Future Supply Chains, recently addressed an expert meeting at the United Nations in Geneva on the subject of ‘Future proofing maritime transport and logistics’. The event, organised by United Nations Trade and Development, focused on how risk in maritime networks and supply chains could be mitigated and the steps that needed to be taken by global shippers, shipping lines and governments.
In his opening remarks, Manners-Bell told delegates that risk in maritime supply chains had become highly consolidated due to the nature of the networks which had developed in the past few decades. ‘Hub and spoke’ models had been created by shipping lines to maximise economies of scale. This has resulted in larger, but fewer vessels; better utilisation; larger and more automated ports and fewer carbon emissions per container shipped. Volumes have been concentrated on a few main trade lanes serving a limited number of ports big enough to receive the latest generation of vessels.
When these networks work well, there have been many benefits to consumers (lower prices) and shipping lines (higher profits). However, Manners-Bell went on to assert such networks are highly fragile in nature and many risks have been ignored or are invisible to those who developed such logistics systems. If disruption occurs to any of the ‘hubs’ or ‘spokes’, there is a risk of dysfunction at a network level. Such failure is not just conceptual and the weakness of the model has been demonstrated by events many of which he went on to discuss in more detail.
As he commented, ‘The ‘assortative’ model which existed before the focus on mega-ships and mega-ports may have been more costly but it provided many more options for shippers to avoid disruption’.
However, shipping networks should not be viewed solely as the organisation and movement of goods from origin to destination. They exist in parallel but interconnected with multiple other networks including ICT, human, manufacturing, financial and energy. The complexity of the holistic, three dimensional eco-system means that the failure of one network has a profound but little understood or anticipated impact on all the other networks.
The movement of goods is facilitated by flows of data up and down the supply chain, informing decisions which can mitigate risk by, for example, avoiding chokepoints or creating efficiencies through the automation of processes. The industry has now become so dependent on information and communications technology that any failure, such as through a cyber attack, can be devastating, bringing supply chains to a halt. No company is immune, from Maersk to Expeditors including Port Community Systems as I’ll go on to describe.
Less obvious is the impact of human networks on global supply chains. During the Covid-19 pandemic we saw the effects of the disease on dock workers first in China and then throughout the rest of the world, slowing throughput and adding to levels of congestion. The human element is obvious too in the strikes seen recently at ports on the East Coast of the USA, showing how vulnerable the industry is at these critical maritime nodes.
As was clearly demonstrated during the Covid-19 pandemic, transport infrastructure only has a certain capacity and this became very clear when the West Coast ports of the USA were overwhelmed by demand for Chinese-made consumer goods. The demand for shipping forced up rates to astronomical heights and even if shippers could book space, vessels could be waiting outside ports for days or even weeks. Once finally offloaded, containers often spent weeks in yards due to a lack of port equipment, congestion in intermodal yards or a lack of trucks and truck drivers.
Supply chains are also vulnerable to shifting patterns of manufacturing. This can take many forms. More production is being undertaken now in ‘China Plus’ markets such as Vietnam and this is adding to the pressures on undeveloped transport infrastructure. Trade tariffs and the imperative to diversify sourcing and production strategies are behind this transformation in demand which has also led to far more near-sourcing at the fringes of Europe and in Mexico for the US market.
Financial networks are also of huge importance with flows of funds moving upstream from the consumer to the original supplier. There have been times when this model has also broken, during the Great Recession of 2008 and during Covid-19, for instance. When there is a squeeze on finance, suppliers, especially SMEs, find it very difficult to access finance and this can have a significant impact on both supply chains as well as local economies.
And then there is the supply of energy. The invasion of Ukraine by Russia led to a surge in energy prices which fed through into logistics costs. In the future, establishing an alternative fuel bunker network to replace fossil fuels will be a major challenge and cost the shipping industry billions of dollars.
What is clear is that to fully assess the risks involved in global supply chains, the entire eco-system has to be understood. Future proofing maritime transport and logistics can only be achieved by creating resilience in each of these interconnected networks.
The map above shows some of the most recent, and in some cases on-going, issues to impact on maritime supply chains. Geo-political and security issues are at the forefront of network disruption. Attacks by the Yemen Houthis have prevented a large proportion of container traffic transiting the Red Sea and Suez Canal. The route via the Cape of Good Hope is much longer, has financial implications for European importers in terms of inventory holding costs and will result in much higher carbon emissions. It has also been found that containers ships using this route are vulnerable to winter storms and this has resulted in the loss of many hundreds of containers overboard with financial and environmental consequences.
In recent months, there have also been cyber attacks – such as those on the ports of Nagoya, Lisbon and Seattle. Environmental risks have included the drought which reduced the numbers of vessels able to use the Panama Canal and floods and droughts impacting on barge traffic on the Mississippi and Rhine rivers. Human risks include the strikes on the East Coast of the USA whilst security risks include on-going piracy in the Gulf of Guinea off Nigeria.
One of the biggest threats to maritime supply chains is the potential invasion of Taiwan by the Chinese military. This would of course have a huge impact on the global economy. The Chinese navy has very recently undertaken exercises off the Taiwanese coast in a practice run of a potential blockade.
So, what will be the response of global shippers and carriers to the changing set of political, economic, technological and environmental factors in terms of supply chain and logistics? Shippers are implementing China Plus sourcing strategies as a way of mitigating geo-political risk and avoiding the tariffs which are now applicable to many goods imported into the US from China. To the same end, Chinese manufacturers are also expanding their production footprint into south east Asian market taking advantage of lower labour costs at the same time as reducing their exposure to US trade measures. Other companies in Europe and North America are undertaking re-shoring and near-shoring and this is leading to alternative routes, for example cross-border to the USA from Mexico; sea-air through the Gulf; or intermodal options, all designed to reduce the dependence on inter-continental shipping.
Carriers meanwhile are looking at developing more agile fleets and I expect the average ship size to fall in the future as smaller, more versatile ships are acquired. And this leads on to another important point. The trend to ever larger ships which can only be served by huge ports has left many emerging markets with few, if any direct calls. Transhipment results in extra costs and in some cases limited services, a point which is raised continuously by many emerging market governments. A reversion to smaller ships will reverse this trend and allow for the development of more ‘disassortative’ networks, mitigating overall risk.
Such a trend will also allow for the use of secondary, regional ports in Europe, bypassing the major gateways and at the same time reducing distances between port and end-user. This brings with it the potential to reduce carbon emissions at the same time.
Of course, there has been huge consolidation in the industry over the past two decades as carriers have fought to achieve market and network domination. Although share at the top of the market is likely to remain in the hands of a small number of carriers, there will be opportunities for smaller, regional or national carriers to enter the market providing more point to point services. The ill will which was generated at the height of the Covid crisis when the largest carriers re-deployed capacity from regional markets to the main trade lanes, led to calls for the creation of more national carriers. Whilst this is a long way off, it provided many in emerging markets with more evidence that ‘globalisation was broken’.
Finally, the trend for manufacturers and retailers to adopt near-sourcing strategies is already leading to a big upturn in short sea shipping services in the Mediterranean. Ports in Italy and Spain are benefitting from increased throughput as more goods are imported on Ro-Ro services from North Africa, South East Europe and Turkey. The benefits for the importer include rapid delivery, lower inventory levels and cheaper goods than if produced within Europe itself.
The consequence of these changes is mixed. Certainly, there will be higher levels of supply chain complexity, shipping costs are likely to increase as there will be less benefits of economies of scale and in some cases there will be higher levels of carbon emissions per TEU. However, set against that, supply chains will become more flexible and agile to react to disruptive events – from geopolitical conflict to pandemics.
There will also be a wider spread of transport infrastructure and ICT investment to take advantage of the changing patterns of volume flows. This will lead to greater levels of automation and better supply chain visibility.
What is the role of government in the changing market environment? There are some key steps which must be taken to ensure that positive change is facilitated.
Firstly, governments must take steps to reduce trade barriers and implement trade facilitation measures. This is increasingly difficult in a world in which protectionism is becoming commonplace and accepted. Reducing barriers will enhance economic growth, cut transit times, increase efficiency, reduce carbon emissions by reducing dwell times and mitigate the risk of corruption through the introduction of ‘single window’ measures, for example. Secondly, they should also Increase investment in supply chain digitisation which will Increase supply chain visibility and improve integration with global economy, especially for small and medium-sized exporters. Thirdly, investment in transport infrastructure should be a policy priority. Investment provides very well-documented benefits in terms of economic value creation, reducing time to market and allowing for integration with the global markets. It also allows businesses to undertake higher value logistics activities such as cold chain – particularly important for pharmaceuticals and the export of fresh fruit and vegetables and floriculture. Connecting ports with their hinterland remains a high priority.
Fourthly, to take advantage of ‘China plus’ diversification strategies being deployed by many global manufacturers and retailers, emerging markets must focus on developing manufacturing eco-systems to attract suppliers. This will include the encouragement of FDI, the improvement of governance and, importantly, trade finance initiatives. The final priority for governments must be the development of supply chain skills. This will involve a focus on achieving gender diversity and an investment in education.
Undoubtedly the frequency of high impact events resulting in the disruption of maritime supply chains has increased over the past decade. However, shipping networks have not evolved at the same pace, still based on a ‘hub and spoke’ model which consolidates risk on trade lanes, choke points and ports. In the coming years, a new system must be developed which reflects changing demand patterns, meets the needs of emerging as well as developed nations and becomes more robust and resilient in the face of increasing risks.
Source: Ti Insight
Author: John Manners-Bell
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