The recent incident in respect of the blockage caused to the Suez Canal by the container ship Ever Given, certainly focused the world’s attention again onto the dependency we have on global supply chains and how vulnerable they can be. If they had not been able to move the vessel, say it had broken up as they tried to free it from the sand banks then the canal could have been blocked for months. However, this would not have been such an unprecedented situation as some journalists suggested, the canal has been closed on previous occasions in history such as following the Six-Day War it was closed for 8 years.
However, it does highlight a broader risk issue, which is that of the adequacy and the interconnections of logistical and other infrastructure and the dependency that globalised supply chains have on these key pieces of infrastructure. There has been a trend for several years for container vessels to get larger in terms of their capacity, this has been largely driven by the cost and carbon footprint advantages. It does however restrict the number of ports that can take vessels of such a size. This together with the vessels themselves creates a concentration risk around one of these major ports being closed long term due to a blockage caused by one of these large vessels or damage due to a significant weather event or a failure of some other part of the key port infrastructure e.g., electrical power. It is important that organisations consider these potential single points of logistical failure in their critical supply chains. Just looking at one of these ultra large container ships which can carry up to 24,000 containers and assuming a conservative value per container of $20k(?) then the value of goods on a single ship is around $480m. Its failure to deliver on time can have an impact on many different supply chains.
This dependency on a particular part of logistics infrastructure is often overlooked in the typical risk management process carried out by many organisations. I personally have experienced this, for example, when working in the past on supply chain risk management review exercises with two large multinational companies: –
- The first company already had a well-developed supply chain risk management process. However, they were using the cheapest “ad hoc” haulage companies to service their highest value adding factory facility in Europe.
- In the other case, although the company was sourcing from a variety of suppliers in Thailand and neighbouring countries, around 80% of the profitability of that division was dependent upon the continued operation of Thailand’s major port Laem Chabang.
This realisation led both companies to risk mitigation actions through logistical and sourcing changes to reduce the likelihood and impact of any potential disruptions. The importance of understanding the estimated financial impact of the failure of a particular aspect of your logistics network should be embedded in your supply chain risk management processes. The need for this is only likely to increase driven by several factors including: –
- Concentration of logistical infrastructure and hence exposures.
- The threat of climate risks to a number of these logistical structures such as ports
- Failures by governments to invest in a timely manner in infrastructure.
- Lack of understanding of infrastructure interdependencies. For example, the ability of many logistical facility to operate without electrical power can be severely restricted.
Based on your own internal data and that available in the public domain it is possible, to map out at a high level the value flows associated with your most profitable products. This is something I would urge you to do, so you are not taken by surprise by a single point of failure in your logistics infrastructure.
Author: Nick Wildgoose, Advisory Board Member