The Red Sea route accounts approximately for 15% of global sea trade with commercial ships transporting goods through the strait of Bab al-Mandab – a 20-mile-wide channel that splits Eritrea and Djibouti on the African side and Yemen on the Arabian Peninsula. Continuing attacks on merchant vessels along this strait, however, have led several of the world’s largest shipping firms, including Hapag-Lloyd, Mediterranean Shipping Company and Maersk, to divert vessels along a much longer route around Africa’s Cape of Good Hope. Other more expensive modes of transportation, such as air freight, however, are not a suitable option. In addition to being costly, they are not sustainable, writes Simon Thompson, Vice President of Sales UK and Nordics at Jaggaer.
The impact of this necessary rerouting is broad and poses a wide-spread threat to international wholesale commerce due to their impact on the supply chain.
Longer shipping times mean orders may not be fulfilled on time and that clients need to place orders much earlier than usual, especially for periodical goods such as summer products or Christmas items. When it comes to raw or semi-finished goods, the knock-on effect can be disastrous, holding up production chains or putting entire processes at risk. In addition to this, longer shipping times drive up Co2 emissions, compromising environmental claims and promises to customers, as well as costs which in turn will drive up inflation.
J.P. Morgan Research estimates the disruptions could add 0.7 percentage points to global core goods inflation, and 0.3 percentage points to overall core inflation, during the first half of 2024 with consumers feeling the pinch by the start of Q2.1
Wholesale managers that have not started to do so, will need to keep a keen eye on these trends as the impact spreads across a wide range of goods. Rabobank reports that British retailers relying on maritime Asian imports, seeing the impact on food and agricultural commodities, as well as apparel, while a potential black tea shortage has been raised by Sainsbury’s.2
Indian exports are likely to experience delays and price increases as the Institute of Export & International Trade highlights that there are potential shortages concerning rice coming from India. The country is the world’s largest rice exporter, shipping more than 4.5 million tonnes annually, 35% of which passes through the Red Sea. Estimates suggest that some $30bn in rice exports could be lost if the crisis continues.3 Other goods whose supply chain is coming under scrutiny are garments from Bangladesh, machinery from Japan, and wine, lamb and beef from Australia and New Zealand. Fertiliser, chemicals and grains used by the European farming industry are also typically shipped through Red Sea.4
As attacks continue to occur, the financial and operational pressure on organisations and their supply chains increases, making identifying low-cost and efficient alternative transport options urgent. Wholesale managers that can identify and quickly secure alternative sources and transportation capacity are better positioned to address this particular situation and any future disruptions. This in turn relies on having an alternative plan on how to conduct trade to drive resilience, mitigate risks, optimise costs and efficiencies to help their companies react flexibly to unexpected changes in their business environment.
Fortunately, technology and automation can now provide key support in helping make dynamic and flexible plans that effectively manage and minimise the impact of unexpected events. Automation can help manage processing huge volumes of data from supplier sources, analysing and even predicting changes in performance or potential bottlenecks before they happen. This analysis can be supported by establishing closer real-time collaboration with suppliers through digital tools, enhancing transparency and gaining intelligence in a timely manner. AI powered technology, can support businesses on both these fronts, also helping manage a diverse portfolio of suppliers, a complex and time consuming task if performed manually.
To date, use of AI has mainly been limited to specific tasks based on predefined algorithms, such as predictive analytics. When applied to supply chain management, AI could help make informed and timely buying decisions based on pricing, market trends, the risk of disruptions to supply chains and other factors. Now, generative artificial intelligence (such as the popular ChatGPT) has expanded the potential for AI to also create new content and analysis. Generative AI can in fact conduct dynamic analysis of supplier proposals, identifying key parameters including cost-effectiveness, quality, delivery performance, alignment with organisational goals such as sustainability or social value, together with critical geo-political risk factors.
Thanks to the speedy processing of huge volumes of data and proposals, AI can automatically generate dynamic supplier rankings and make timely recommendations based on a full range of analysis including market supply and demand, historical pricing trends, cost structures, risk alerts, news items etc.
The Red Sea crisis is just the latest bottleneck in a series of recent and cyclical disruptions to the world economy that range from the Covid-19 pandemic, to issues sourcing Russian gas. The current situation highlights the need for companies to embrace intelligent, predictive, data-led scenarios with technology to protect the supply chain.
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