The map says it all. The shortest route from Asia to Europe and the Mediterranean is through the Suez Canal. Detouring around Africa adds a week of sailing time to those routes and to all-water services to the U.S. East Coast.
So when Egypt was roiled by mass protests that toppled President Hosni Mubarak, supply chain managers were relieved when the Suez stayed open, even as some terminals shut down for a time and ships reportedly moved through the canal without undertaking crew changes and other services. For the shipping industry, the anxious two weeks watching the state of the canal were a reminder that for all the industry’s growth, shipping’s vulnerability to disruptions at trade crossroads has hardly diminished.
|Philip Damas, director of liner shipping and supply chains at Drewry Supply Chain Consultants in London, ranks the Suez Canal atop “major potential chokepoints of global shipping,” ahead of the Hormuz and Malacca straits, the Panama Canal and the Strait of Gibraltar. “All five are strategic arteries of international trade in oil, containerized products and other products,” Damas said.
“In the past, it was no surprise that the U.S. military sought to control the Panama Canal and the British military sought to control the Suez Canal,” he said. “Today it is no surprise, either, that pirates are targeting ships in the Strait of Hormuz and in the Strait of Malacca, because they know that the ships have to get through these narrow, vulnerable points.”
Transportation chokepoints present “potential high-impact, low-frequency risks” and shippers and carriers should prepare contingency plans to address them, Damas said. “It’s still below the radar for many companies,” he said.
But today’s world of global sourcing and the extended supply chains that serve manufacturing and retailing operations put those chokepoints directly in the path of just about any business touched by international distribution. The automobile manufacturing industry got a hint of that in 1995 when the Kobe earthquake hit Japan, shutting some port operations and halting parts production at Toyota factories, triggering shortages and factory slowdowns in the U.S.
Risk management has grown as a discipline in the logistics world over the past decade, triggered by the impact of the September 11 terror attacks and raised in importance since then by natural disasters and by events such as the management lockout of dockworkers that shut down U.S. West Coast ports in 2002.
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“The key to resiliency is flexibility,” which requires risk assessment and planning, said Yossi Sheffi, director of the Center for Transportation and Logistics at Massachusetts Institute of Technology. “When a disruption hits, it’s too late to make preparations.”
A Suez Canal shutdown was considered unlikely — the canal generates an estimated 3.4 percent of Egypt’s GDP — but a sustained interruption of the waterway’s traffic would have had severe impact on the global economy.
The anti-Mubarak demonstrations caused oil prices to jump, as traders were influenced by memories of the 1967-1975 Suez shutdown that forced tankers to detour around the Cape of Good Hope. But the world’s economic geography has shifted in the last 40 years. Now, traffic through the Suez is dominated by large container ships plying high-volume Asia-Europe routes.
The same is true for the Panama Canal. When canal officials began planning larger locks scheduled to open in 2014, the project’s main justification was tankers and bulk carriers. Now it’s container ships with capacities of up to about 13,000 20-foot equivalents.
Container ship transits during the canal authority’s fiscal year ending last Sept. 30 totaled 3,031, or 24 percent of the total for seagoing vessels, approximately the same as bulk ships. The numbers for container ships were down 9.9 percent for vessel transits and 10.9 percent for TEU volume, which fell to 10.6 million TEUs.
Container ships account for 38 percent of all vessels and 55 percent of the net tonnage transiting the Suez, according to the Suez Canal Authority. Paris-based research analyst Alphaliner reports at least 56 strings of container ships transit the Suez, mostly on weekly service. Of that total, 46 sail between the Far East and Europe. An average of seven to eight container ships transit the canal each day in each direction.
Closure of the Suez or Panama canals would be a supply chain disaster. Shippers’ costs would rise and retailers and manufacturers would face interruptions in deliveries of products and components over the short term and longer lead times over the long term. West Coast ports offer U.S. importers and exporters a landbridge alternative to the Panama Canal, but there’s no similar backup in case of a Suez shutdown.
Suez Canal services have annual capacity of 9.2 million TEUs from Asia to Europe, 5 million from Asia to Mediterranean ports and 1 million to the U.S. East Coast, Drewry estimates.
“There’s no Plan B in terms of ability to handle the volume, other than to go around the Cape of Good Hope. Even that would be a stretch, because of the number of vessels you would need,” Damas said.
Rerouting around Africa would require about two additional vessels per service, or some 100 additional ships. Fuel and other operating costs also would rise sharply.
Risks of disruption at transportation chokepoints, including ports and inland intermodal hubs such as Chicago, are magnified by the increasing scale and globalization of supply chains, and by emphasis on lean inventories and just-in-time delivery.
To reduce per-unit costs and accommodate global container traffic that Drewry Maritime Research estimates rose to 155 million TEUs last year, ocean carriers are investing in larger ships. Today’s 14,000-TEU ships are roughly twice the size of the largest a decade ago.
The resulting economies of scale have come at the cost of reduced operating flexibility. A 14,000-TEU ship has few options for deployment except for high-volume routes linking deep-water Asian and European ports via the Suez.
Of the 289 ships with capacities of 8,000 TEUs or more in operation last November, 197 were deployed on Asia-Europe services, Europe’s DVB Bank said in a recent report. An additional 31 were in Europe-Far East-West Coast pendulum services. Most of the rest, all with capacities under 10,000 TEUs, were in trans-Pacific services.
Closure of a major transportation chokepoint ranks among a supply chain manager’s worst nightmares.
When West Coast ports were closed for 10 days by a lockout of longshoremen in 2002, shippers felt the impact quickly. Retailers’ tight supply chains were disrupted and manufacturers ran short of components. The Toyota-General Motors plant at Fremont, Calif., halted auto assembly after its six-day inventory of a key part was exhausted.
A few ships were diverted to ports in Mexico, but most sat tight and anchored off Los Angeles and Long Beach, waiting for the ports to reopen. Even if other gateways could have handled the volume, diverting a large ship on short notice would have forced carriers and shippers to make last-minute changes to intermodal rail and truck routings and service providers.
The experience had a tangible impact on North American supply chains, convincing many shippers to diversify their import gateways. Wal-Mart once moved the vast majority of its imports through West Coast ports. Now the retailer divides its imports about equally among Los Angeles-Long Beach, the Pacific Northwest, Norfolk, Houston and intermodal rail hubs in Chicago.
Despite such defensive moves by importers, the West Coast’s share of U.S. import traffic remains close to its 57 percent level of 2000, because Pacific ports provide a more direct route and quicker transits than using the Panama Canal.
The West Coast port shutdown, however, was a reminder of the risks of long supply chains and tight inventories, and the need to have alternatives.
A 2009 Drewry report on supply chain risk said international sourcing “has introduced in global business more and higher risks related to transport and logistics, and that these risks are often more complex and significant than in the past but are still misunderstood.”
The report found companies spent more time on transportation risks related to business processes and infrastructure than on risks involving organizational structures and relationships with customers or contractors or on “macro-economic risks” such as natural disasters, political or economic crises or terrorist attacks.
This is probably because companies are more concerned with preventable risks, or somewhat predictable risks such as a hurricane hitting Florida every few years, than with an event that may be devastating but is unlikely in our lifetimes, Damas said.
“Many shippers have a policy of not putting more than X number of containers on a single ship, particularly during the holiday season,” he said. “If something happens to that ship, they want to have limited exposure.”
Some companies have hedged risks on Asian suppliers by allocating a small share of their production to countries closer to markets. Apparel retailers are signing supplementary sourcing contracts with manufacturers in Central America or Mexico to serve the U.S. market, or in eastern Europe to ensure European store shelves remain stocked.
But Sheffi said companies should anticipate the possibility of disruptions and seek ways to add flexibility so they can recover more quickly. “Something like closing the Suez Canal would affect all companies,” he said, “but the companies that find alternatives first are the ones that will win.”
Contact Joseph Bonney at email@example.com.