Risk-Management Considerations Amid Continuing Supply-Chain Pressures

Supply-chain vulnerabilities existed before the trade disruptions and inventory shortages attributed to the pandemic outbreak early in this decade, but the concerns are no longer just about shipping and logistics.

Subsequent, largely geopolitical developments have since only magnified how supply chains impact macroeconomic factors such as inflation and how they must be broadly factored in to business plans and risk assessments.

As a March shipping-industry analysis by Fitch Ratings noted, “We do not believe that the Red Sea disruptions [following military attacks] or those in the Panama Canal due to drought point to a structural shift in the sector, although they could keep freight rates higher for longer.” Fitch viewed “the nature and implications of these disruptions [as] significantly different from those in 2021–2022, which were related to broader supply-chain issues, including port congestions, a pandemic-related decline in port efficiencies and container dislocations.”

Meanwhile, trade balances are in flux, in part from what Laura Alfaro of Harvard Business School and Davin Chor of Dartmouth’s Tuck School of Business describe in a working paper as a “looming great reallocation” of U.S.-China flows. This is reflected in “nearshoring” and “reshoring,” and more imports coming from markets such as Mexico and Vietnam.

It does not yet amount to full-scale deglobalization, Alfaro asserted in a presentation to the Federal Reserve Bank of Atlanta’s recent Financial Markets Conference. Nor is it likely that tariffs or other policies can eliminate all China dependencies.

According to the paper, an “optimistic view of GVCs [global value chains] has soured considerably. In its place, concerns are being voiced over the wisdom of sprawling supply chains that can expose firms and countries to the risk of disruptions.”

While U.S. imports from China were growing by 1.2%, China lost 5 percentage points of market share. (Data from presentation by Prof. Laura Alfaro.)

Alfaro also presented indications from another paper, Bank Financing of Global Supply Chains, on which she has three co-authors, of the role relationship banking is playing in meeting shifting demands for credit on favorable terms amid tariff-induced or unit-cost supply changes.

Getting Around Suez

With the Suez Canal accounting for 10% to 15% of world trade and being critical to oil and container shipping, the cost of routing around it was reflected in a 115% spot-container market-price spike in one early January week, Wes Loeffler, Fusion Risk Management’s director of third-party risk management, said in an interview. ‘ 

Rico Luman, an Amsterdam-based ING economist, observed that ship owners, charterers and cargo owners were “wary of resuming operations after months of incidents and casualties,” with two-thirds of Red Sea traffic diverted, and considering the level of Middle East hostilities, it could take months to fully adjust.

For purposes of risk management, “these attacks aren’t isolated incidents; they pose a formidable threat to supply-chain management and could result in soaring prices and delivery delays,” Loeffler said. Organizations confronting supply-chain and procurement issues must be prepared for disruptions “at least in the short term and for heightened oil prices as long as logistical routes remain compromised.”

In a February report, ING’s Logistics and Automotive team said a full resumption of Red Sea transits was not imminent. “The initial shock of re-routing was disruptive, but as things settle, the available overcapacity will be able to absorb the extra required vessels. And the still limited congestion indicates that it won’t get much worse than this.”

Proactive Mitigation

Fusion RM’s Loeffler stresses the need for affected parties to do upfront “due diligence to uncover potential concentration risks and exposure vulnerabilities, particularly in response to multifaceted challenges like extreme weather incidents and geopolitical conflicts.”

Wes Loeffler, Fusion Risk Management

For those reliant on Red Sea routes, redirecting around Southern Africa “is an essential move to maintain business continuity,” despite the longer delivery times and increased costs. Collaborative actions should be pursued by affected companies; these might entail supplier risk-sharing, contract adjustments and “flexible pricing mechanisms to account for volatile freight rates and surging insurance premiums.”

Richie Daigle, enterprise account executive at Tive, recommends that “in the short term, companies likely need to do whatever they can to ensure that freight arrives at its destination as quickly as possible” to expedite “project completion.” Longer term, decisions can be made about alternative ports and transportation modes.

“Guidelines and Protocols”

In the interest of proactive contingency planning, Loeffler said, “establishing clear guidelines and protocols for activating these alternatives can ensure the uninterrupted flow of goods during disruptions and help effectively navigate these challenges.”

Proactive monitoring allows “for swift responses to any deviations or emergencies,” Tive’s Daigle explained. “Real-time shipment tracking is one of the most important measures for safeguarding both cargo and personnel from potential threats ranging from piracy to geopolitical tensions.”

Daigle also suggested that “advanced technology such as AI-driven predictive analytics and blockchain for transparent documentation can fortify supply-chain resilience and responsiveness to emerging challenges.”

A comprehensive strategy that combines short-term actions with longer-term strategic positioning is key. “Risk managers can be better prepared for uncertainties, such as those presented by the Red Sea crisis as well as future issues, ensuring business continuity and minimizing potential losses, regardless of the disruption we see on the ground,” Daigle said.