Lessons in risk from the Suez crisis

“Know your supply chain” is a mantra for risk managers. But when a warm March wind caught the side of the giant 400-metre container ship Ever Given and knocked it sidewise to block the Suez canal, many were left with the realisation that there was an awful lot that they didn’t know after all.

“A lot of companies thought at first that they weren’t affected,” says Suki Basi, founder and managing director at Russell Group.

“And then as time went on, the exposures in their supply chains became more and more apparent and they became more and more worried.”

This is hardly surprising. The Suez canal carries about 12% of global trade. Plus, around one million barrels of oil and roughly 8% of the world’s supply of liquefied natural gas pass through the canal each day.

It represents the shortest maritime option for trade from Europe to Asia and as a result it was a rare European firm that didn’t take a hit to their operations this spring.

From Just-in-Time to Just-in-Case

Suez is only one incident to hit global supply chains in recent months. We have seen the Covid-19 pandemic and the Brexit transition cause disruption, while other events cascade and compounded each other to impact businesses across the world.

In March a fire at a Renesas factory in the city of Naka, Japan, knocked out one of the car industry’s biggest computer chip suppliers impacting the firm’s ability to fulfil orders.

The fire came shortly after freezing February weather in Texas closed chip-making plants there, US trade restrictions on the Chinese telecoms firm Huawei and chip-maker SMIC had caused stockpiling and a drought in Taiwan impacted chip production there.

The result was consumer frustration and longer waits for new cars made by firms only just emerging from the hardships of the Covid-19 recession.

“The last decade has witnessed many in the supply chain drive towards streamlining and operational efficiencies,” says Mike Yarwood, Managing Director, Loss Prevention at the TT Club, who provide insurance and related risk management services to the international transport and logistics industry.

“Such measures have included reducing the number of suppliers and introducing ‘just in time’ principles to lessen the burden of unnecessary inventory costs.

“Experiences over the last twelve months bring into question this bias towards efficiency and cost reduction. If such are achieved at the expense of resilience, is this policy the correct one?

“The new normal might see many stakeholders increase their focus on contingencies and adopt more a ‘just in case’ philosophy than a ‘just in time’ one.”

Building in contingencies

In the FERMA Covid-19 Survey Report, published in December 2020, risk managers said supply chain was one of the top four aspects of business operations affected by the pandemic.

Just under half these respondents said they were considering changes to their supply chains as a result.

Of these, 70% said they would consider reducing dependency in their supply chains by adding additional or alternative suppliers. While 59% said they would look at their contract terms and 51% said they would look at increasing supply chain transparency with for example, scenario modelling.

Fundamentally, when it comes to risk, prevention is better than a cure. And as such we should perhaps take a lesson from the more proactive trends towards wellness in healthcare.

Suki Basi says: “If the world economy is the patient, then the countries are the organs, the transportation system is the arterial network and trade is the blood.

“And if Russell were the doctor, the diagnosis would be that the pandemic reduced trade by 15% and showed us all the vulnerability of our supply chains.

“COVID-19 brought together all our worst fears in one year. What we used to call complex risk and now call connected risk, that’s all playing out around us.”

And the only choice is to keep moving forward.