What The Suez Canal Blockage Means For Supply Chains

Look at a map of ship traffic going through the Suez Canal and you’ll see the direction is clear: the lines of cargo to and from Asia are where it’s at. If we didn’t have a global economic model designed around making this region of the world (and maybe three countries) the hub of global manufacturing, supply chain disruptions caused by pandemics and ships blown off course would be less pronounced.

The pandemic has shown us that supply chain resiliency is a must. What has the days-long Suez Canal blockage shown us?

For Søren Skou, CEO of shipping firm Moller-Maersk, the shutdown of Suez Canal shipping traffic has added extra pressure on firms to move from a just-in-time delivery model, to what he calls a just-in-case model. This view goes well with the overall view in Washington these days that the U.S. needs to shore up its supply chains in key items in order to be less reliant on Asian-sourced goods, whether its semiconductors from Taiwan and South Korea, or pharmaceutical inputs and N95 masks from China.

“We are moving towards a just-in-case supply chain, not just-in-time. This incident [in the Suez Canal] will make people think more about their supply chains,” Skou told the Financial Times on Monday.

The Ever Given container ship got lodged in between the Canal’s walls last week. It was reported that the ship would be stuck there potentially for weeks, but it was dislodged on Monday. Crisis averted.

But companies have had enough of this supply chain disruption and will take measures to avoid these problems, Skou thinks.

Maersk has dozens of ships among the hundreds delayed by the blockage and has already rerouted 15 of its ships around South Africa, adding about 10 days to journeys. It is also considering using air freight to get crucial components to customers, based on FT’s reporting.

Maersk carries around a fifth of the world’s seaborne freight. FT noted that the cargo giant transports goods for many of the world’s largest retailers like H&M and American brands made in China, namely Nike.

Many companies have been rethinking their supply systems after Covid-19 lockdowns led to significant disruptions in just-in-time supply chains when they suddenly could not get their hands on a certain component, the article stated. Most recently, our semiconductor shortage serves as a classic crisis-level example. Some automakers have temporarily closed assembly lines because of it.

“How much just-in-time do you want to be? It’s great when it works but when it doesn’t, you lose sales. There’s no just-in-time cost savings that can outweigh the negative of losing sales,” Skou said, adding that companies were also moving away from being dependent on single suppliers, a decision that might have saved them “the last 5 cents on a component.”

“We clearly see our customers saying we need to have multiple suppliers to make sure that one small sub-supplier can’t close us down,” Skou said.

CPA believes the more we can produce at home the better. If price is always going to be an issue, then supply chain remapping will never occur at any meaningful level as it is impossible for labor priced in dollars to match labor priced in renminbi and the Vietnamese dong.

“In the past twelve months, we’ve had shortages of PPE and pharmaceuticals, shortages of microchips, and now we’ve had week-long delays in long-distance cargo shipping caused by one container ship stuck in the Suez Canal,” said Jeff Ferry, CPA chief economist. “The time has come to admit that global supply chains need to be replaced with a more resilient, local solution,” he said. “We need to ‘build back better’ within our own borders.”