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Tag: suez canal

Crisis Impact on e-commerce Inventory Management

Posted on by Keith McKinley

The Red Sea, a vital trade route connecting Asia, Africa, and Europe, has faced security concerns since the first attack on a commercial ship last year. This has sparked worries in the transportation, logistics, and supply chain sectors about disruptions, higher freight costs, longer shipping times, and the resurgence of the bullwhip effect. Consequently, some cross-border e-commerce merchants and brands have already begun increasing orders to mitigate potential supply chain challenges.

CIRRO conducted a quantitative analysis of a specific case to assess the impact of the Red Sea Crisis on inventory management for global e-commerce enterprises reliant on international supply chains and logistics. From this, we will dive into the insights about organizing the stock smartly and handling any issues that come our way, offering some essential advice for cross-border merchants who want to fine-tune their inventory game.

Case study

The graph depicted below illustrates a fundamental principle of inventory management. To maintain inventory levels above the safety stock threshold, cross-border e-commerce enterprises must initiate reorders prior to reaching the safety stock level, considering the lead time of production.

Assume that there is a cross-border e-commerce company. The average daily market demand (d) is 300 pieces. Based on historical data, the standard deviation of daily demand (σd) is 40 pieces. Lead time (LT) is 30 days. Its annual demand (D) is 100,000 pieces (assuming 333 working days per year), the fixed cost (S) of each order is $500, and the annual holding cost (H) of each commodity is $10/piece. The company has set a service level of 95%, with a corresponding Z value of 1.65 (hoping to meet 95% of order requirements).

Under the Red Sea Crisis, assume that the lead time (LT) is increased to 45 days, the annual holding cost (H) of each commodity is increased to $13, and all other parameters remain unchanged.

Key observations from the recalculated values include:

1. Increased safety stock point
Due to heightened uncertainty, the safety stock point rises by 23%.

2. Earlier replenishment initiation
The reorder point shifts, prompting earlier replenishment orders, leading to increased orders by European retailers in December-January.

3. Decrease in single order quantity
Replenishment from high inventory levels decreases single order quantity, potentially necessitating exceptional measures to meet demand.

4. Rise in overall inventory
Lengthened cycles result in a 33% increase in overall inventory peak.

5. Change in inventory distribution
Share of stocks in transit increases, while share of stocks on arrival decreases, impacting local fulfillment capacity.

The adjustments made by enterprises reflect the ‘accelerator effect’, where businesses proactively adapt to external changes, expanding or reducing inventory levels. While the accelerator effect aids in maintaining operational continuity during crises, it leads to higher inventory costs and capital pressure, necessitating a delicate balance between supply chain stability and cost management.

Key learnings

To address potential supply chain disruptions, cross-border e-commerce firms must proactively devise strategies in the long run. They can undertake supply chain modeling under various scenarios and develop adjustment plans accordingly. Here are some actions suggested to take:

Internally, cross-border e-commerce firms can work on the following five aspects:

1. Inventory optimization
Prioritize high-turnover, high-margin products to ensure inventory safety and maximize capital efficiency. Allocate limited funds away from slow-moving and low-profit items.

2. Service level adjustments
Tailor out-of-stock rate thresholds for different product categories. Consider raising thresholds for non-core products or adjusting prices to moderate sales velocity during pressure.

3. Flexible pricing strategy
Implement dynamic pricing to reflect supply costs and inventory changes, thus alleviating inventory pressure and enhancing operational stability.

4. Financing for resilience
Explore financing options to bolster inventory levels if necessary, ensuring preparedness and enhancing financial resilience against rising inventory costs.

5. Reduction in expenditure
Evaluate opportunities for efficiency improvements or cost reductions to offset increased inventory expenses.

Externally, cross-border e-commerce companies can focus on the following two strategies:

1. Seek reliable logistics partners
Prioritize stability and timeliness in logistics services and partner with reputable logistics providers or fulfillment companies, like CIRRO, to secure efficient transport routes and sufficient storage capacity.

2. Collaborate with industry partners and suppliers
Explore inventory-sharing arrangements or partnerships with related industries or suppliers to mitigate inventory-holding costs. Leverage OEM opportunities provided by factories, achieving flexible supply chain solutions and competitive advantages in lead time reduction.

The impact of the Red Sea Crisis on the supply chain depends significantly on how severe it becomes over time. In a prolonged crisis, having a clear, responsive plan becomes essential. Given the ongoing and evolving nature of the Red Sea Crisis, cross-border e-commerce merchants and brands must closely monitor its developments.

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Cross-border data competency “can ease supply chain pressures”

 

More Turmoil for Shipping?

Posted on by David Priestman

Geopolitical upheaval and legislative change: More turmoil for shipping ahead.

There’s no such thing as a typical week for shipping. Global routes form a delicate web, and disruption is to be expected. From inclement weather to economic headwinds, disruption rarely makes global headlines, as contingency planning by shippers and carriers usually shields consumers from its effects. Notable exceptions include the period following COVID-19 lockdowns, when the whole globe felt the impact of port congestion and skyrocketing shipping costs. Recent events appear similarly momentous, putting global shipping in a precarious position and highlighting endemic issues.

When lightning doesn’t just strike once

Rather than a single lightning strike, current shipping disruption can be attributed to a barrage of unforeseen geopolitical and climatic developments. Currently, attacks by Houthi rebels are disrupting shipping in the Suez Canal, which usually accommodates roughly 12% of annual world trade and 30% of all global container traffic. Meanwhile, across the globe, an ongoing drought in the Panama Canal continues to restrict shipping capacity.

The result? Shippers are experiencing significant delays, and freight costs are skyrocketing again. For example, Transporeon data shows that container shipping prices from Asia to Europe have recently spiked by 300%. And with no end to disruption in sight, this may just be the start! But geopolitical upheaval is just one of many sources of disruption facing the European maritime transportation sector, with two important legislative changes coming into force.

Introducing the EU Emissions Trading Scheme

Designed to reduce shipping emissions by encouraging carriers to invest in sustainably-fuelled vessels, the EU Emission Trading Scheme (ETS) came into force at the start of 2024. Shipping companies are now obliged to buy permits for a portion of their emissions (gradually increasing to 100% by 2027) for all inbound, outbound and transhipment vessel movements. LNG and other ‘sustainable’ fuels are exempt from EU ETS. However, these are currently used in less than 1% of maritime transportation, and it’s likely to take decades to build capacity. So, in the short term, most carriers will view EU ETS as a ‘cost of doing business’. An extra ‘ETS/fuel surcharge’ will most likely be passed onto shippers.

The end of CBER

In April, the EU will make another significant legislative change by discontinuing the 2009 Consortia Block Exemption Regulation (CBER), which allowed shipping companies to cooperate in consortia. CBER was introduced to improve service availability and market options for shippers, intended to drive down the price of maritime transportation. However, the pandemic exposed its flaws (limited oversight and information-sharing), which allowed larger carriers to consolidate and potentially exploit loopholes. This led to higher prices and reduced service options for shippers – and ultimately to the exemption’s demise.

The full implications of ending CBER aren’t clear yet. Shipping consortia will need to carefully assess whether their current cooperation agreements are compatible with general EU antitrust rules when offering joint services or sharing slots, capacity and data. However, some speculate that we could see reduced competition (and therefore capacity). Container shipping is very capital-intensive, and there’s a high barrier for carriers to add new services to a line, particularly when collaboration is limited. However, there’s also a clear expansion opportunity for carriers who already have a strong market position.

If disruption is a given, how can shippers prepare?

Ask any shipper, and they’ll tell you that delays aren’t always inherently problematic. However, a mismatch between their expectations (i.e. the timely arrival of cargo) and reality (i.e. delays) can have serious repercussions in the form of resource misallocation and unnecessary costs. These are ultimately passed onto consumers when problems stack up – so everyone loses.

Unfortunately, ‘unexpected’ delays are far too common in maritime transportation. The problem isn’t that delays happen ‘too suddenly’ for shippers to act, but that there’s a lack of information-sharing within the industry. Shippers routinely lack regular updates on the status of their freight, and if freight has been booked via a third party, tracking information is often completely unavailable.
Maritime transportation suffers from endemic data fragmentation. For instance, to track freight, shippers currently have to ‘call’ different carriers’ APIs individually for each vessel. The technology to fix this problem already exists. In recent years, it has been widely implemented across other transportation modes – to the point where real-time visibility is now becoming standard practice for road freight.

In maritime transportation, the key to minimising disruption lies in increasing cross-industry collaboration and boosting the data maturity of shippers and carriers. Ideally, early impact identification and analysis require shippers to have access to a single source of truth with data from all carriers. Though data fragmentation can’t be fixed overnight, shippers can already implement technologies that offer improved visibility into the location of freight and enable them to predict where future disruption might occur. The bottom line? Shippers can’t control the climate. Or geopolitics. Or legislative changes. But they can control how they respond to disruption.

by Lena von Fritschen, Director Market Intelligence at Transporeon, a Trimble Company.

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Industry View: Secure Your Supply Chain Now to Beat Disruption

 

Suez Canal Blocked by Grounded Container Ship

Posted on by Keith McKinley

An Ultra Large Container Ship, MS Ever Given, grounded in the Suez Canal and brought traffic on the central shipping route between Europe and Asia more or less to a standstill. A second incident – a bulker and Russian military tanker collide in Suez Canal – was reported in the Egyptian waterway on Tuesday, following Ever Given boxship grounding.

As one of the leading shipping insurers, Allianz Global Corporate & Specialty constantly monitors and analyses risk scenarios in the shipping industry and annually publishes the Safety & Shipping Study. The company provides research support as well as facts and figures on the current grounding incident:

Shipping risk situation in the Suez Canal
• About 10% of global trade passes through the Suez Canal, which connects the Mediterranean to the Red Sea and provides the shortest sea link between Asia and Europe. Ships face costly and lengthy deviations if canal is not opened soon. Ships save 9,000km or 10 days by using the Suez Canal.
• Ship trackers and brokers said there were more than 100 ships waiting to transit the canal. The traffic jam comes at a particularly bad time for global supply lines. Car and computer makers are straining from a global chip shortage, exacerbated by a fire in a big chip making factory in Japan last week. Car makers have closed plants after a Texas cold snap earlier last months hits plastics production, and Califorinia ports have been hit by backlogs and delays.
• Nearly 19,000 ships passed through the canal in 2020, according to the Suez Canal Authority – an average of 51.5 ships per day. The Suez Canal has an excellent safety record overall with shipping incidents extremely rare – There have been 75 reported shipping incidents in total in the canal over the past decade according to the Allianz Global Corporate & Specialty Safety & Shipping Review 2020. More than a third involved container ships (28).
• Between 2013 and 2016 there was an average of 12 shipping incidents a year but the numbers have declined since then. The 10 year average is 8 incidents a year.
• However, groundings (such as the Ever Green incident) are the most common cause of shipping incidents in the canal – 25 in the past 10 years or 1 in 3 of all shipping incidents in the canal. Together, grounding, collision and contact incidents account for half of all shipping incidents in the Suez Canal over the past 10 years (38 in total).
• Machinery breakdown is the other major cause of shipping incidents in the Suez Canal accounting for 21 incidents over 10 years
• There has been only one total loss of a vessel reported in the Suez Canal over the past decade – back in 2010. The total loss in the Suez Canal was a cargo ship called Maryam which sank after loading some bitumen.
General shipping statistics on mega-ships and grounding:
• Container ship graphic attached above. Another important stat – container-carrying capacity of ships has increased by around 1,500% since over the past 50 years and has almost doubled over the past decade
• The other graphic attached looks at a potential loss scenario and the costs involved in event of a major casualty involving a container ship (although the Suez situation is not comparable)
• There have been over 200 reported grounding incidents involving container ships around the world over the past decade, accounting for around 1 in 10 of all incidents involving container ships.
• The insured values of these vessels (hull only) depends on many factors like age but ranks between 70 mn USD for an older vessel (say 2012) to 150 mn USD for a new one.
• Other main risks associated with megaships include major risks are fire-fighting capability, safe storage of cargo and cargo misdeclaration; salvage challenges given their size.

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