The sea freight industry is in danger of sliding back to pandemic levels of disruption, with Europe facing the worst of the disruption, warns a leading supply chain expert.
Dave Petrucci is Supply Chain Global Practice Leader at Protiviti, the global consulting firm that provides clients with consulting and managed solutions across finance, technology, operations and data. It serves 80% of Fortune 100 companies. It also works with government agencies and smaller, growing companies, including those looking to go public.
Speaking to Supply Chain Digital, Petrucci -- referring to the Red Sea shipping crisis -- says the greatest impact from prolonged rerouting to avoid the Red Sea region is not transit delays “but rather the impact on the availability of containers”.
He adds: “This is similar to the out-of-position assets we saw during Covid.”
Petrucci predicts this is likely to see inventories “build slightly as a precaution for a wider disruption”, adding: “That’s the bottleneck I’d be looking at if I'm on the client side, and one way to mitigate that is to build inventories early, which obviously creates its own problems.”
Despite noting how vessel displacement is approaching pandemic levels, Petrucci doubts that we’ll see the same levels of sea shipping cost inflation.
Protiviti: Sea freight 'seeing pandemic-type displacement'
At the height of the pandemic in 2021, the world’s largest shipping lines made a shade under US$80bn in operating profits. The cost of a shipping container increased by 80% from November 2020 to mid 2021, and by the end of 2021 had almost tripled.
“Events such as the Red Sea provide an opportunity to raise rates but the transportation market is in a much more challenging position than it has been at any other time in the past five years,” says Petrucci. So, I am not sure the industry will be able to maintain increased rates for a sustained period of time.”
He also feels that the biggest impact of Red Sea disruption will be in Europe, rather than North America.
“The Red Sea route isn’t a major route for US imports, which mostly come across the Pacific and in through the West Coast.”
Mid-term to longer-term, Petrucci feels that Red Sea disruption will prompt more companies tp seek local suppliers and alternate sourcing.
“Supply chain risk will continue to be elevated as a very important KPI,” he says. “It will play a much bigger role in decision-making and scenario evaluation.”
Supply chain uncertainty behind 'right shoring' trend
This has already started, he says, pointing to examples of ‘right shoring’ for a number of critical items. Right-shoring is when a business locates its manufacturing operations in locales and countries that provide the best combination of cost and efficiency.
“The advantages of offshoring are eroding,” says Petrucci, “which is leading to more companies bringing manufacturing operations closer to home.
He adds: “We will also see more activity related to network design and rethinking the distribution network.
“This is typically done early in the investment cycle and rarely in strategic planning. This will emerge as an important activity as companies rethink their networks and assess their risk exposure.”
He also cautions that the Red Sea situation “is a clear inflationary force if it expands into a wider Middle East conflict”, because of the impact this will have on oil prices”.