Covid-19 and Logistics: Reacting to New Possibilities in the World of International Shipping
- Joseph James
- Jun 1, 2024
- 4 min read
Updated: Oct 30, 2024
There is a plethora of articles pertaining to Covid-19’s effect on international supply chains. Panic-buying and stock-piling of goods has produced huge spikes in demand for certain products, resulting in a depletion of supply and massive reorder quantities that I’m sure will be used as textbook examples of the bullwhip effect for years to come. However, in this article I will present a rather unknown and unexpected effect that the pandemic has had on shipping routes and speculate on how firms should react by strategically reassessing the amount of inventory they keep on hand.
The first important piece of knowledge in the story of how the pandemic is affecting shipping routes pertains to the Suez Canal: an artificial waterway connecting the Mediterranean sea to the Indian Ocean. The canal allows a convenient route for shipping vessels from eastern ports across Asia seeking to access Europe and the west, offering a reduced transit distance compared to alternative routes, shortening voyage times and lowering operating cost.
In recent years, the longer alternative shipping routes are very rarely chosen, and so the Suez Canal effectively monopolises shipping from Southern and Eastern Asia to Western Europe and America’s east coast. However, this has changed thanks to the pandemic’s effect on western consumer demand and on oil prices. According to Alphaliner (a shipping database with detailed information on the international movement of goods, see article linked below), a historic number of vessels have opted to use the alternative route around South Africa’s Cape of Good Hope in place of the Suez Canal, including at least 20 sailings on the Asia-Europe, Europe-Asia and North America east coast-Asia trade routes.
The reasons behind this change in shipping behaviour are two-fold. Firstly, rock-bottom fuel prices are allowing a longer route to be more economically viable. Since the cost of a standard container ship seeking a single transit through the Suez Canal can be just shy of 1M USD, the reduced fuel price incentivises shipping companies to seek longer alternative routes that avoid the hefty charge associated with using the Canal.
Secondly, the pandemic has produced an economic depression and a resultant reduction in Europe’s buying power, thereby reducing overall demand for many products. This reduces the time-sensitivity of East-to-West shipping, allowing more flexibility in lead-times across the supply chain. In turn, this further incentivises shipping companies away from the costly Suez route, and towards a longer, more cost-effective route.
So what does this mean for companies and how can they realign inventory levels in a reactionary way? The Operations Management gurus will recommend that any operations strategy should be aligned with the core values of the company, and so if a firm centres itself around the mantra of being low-cost, the feasibility of the alternative shipping routes may be a blessing, lowering shipping costs and potentially reducing overall operational expenditure. Furthermore, if a firm can accurately predict the decrease in consumer demand, longer lead times between deliveries may allow lower average levels of inventory, naturally matching the new demand, and lowering holding costs in tandem.
For a firm that prides itself on delivering a high level of customer service, and seeks to minimise stock-outs, increasing order quantity and the amount of buffer inventory kept on hand would be the natural reaction to shippers moving to the alternative Cape Hope route. If the demand is predictable over a given time frame, the firm would be able set inventory levels in a way that would mitigate the effect of the longer lead-time between deliveries. Furthermore, most firms (with the exception of the newspaper vendors) would be able to profit on over-stocked items through promotional activities, so airing on the side of caution by increasing inventory levels would be a wise move for firms who prioritise customer service level and minimising stock-outs.
An additional consideration pertains to the increased risk that the Cape of Good Hope shipping route brings. Harsh weather conditions that can be encountered along the lengthy route result in higher stresses and structural damage on ship hulls. The wikipedia article for the route lists a plethora of vessels which have sank while driving around the cape, especially during the southern hemisphere’s harsh winter months of June, July and August. This increase in maritime risk may encourage some firms to avoid shipping companies that are opting to use the Cape of Good Hope route, or may increase insurance premiums on goods brought from the far east.
Overall, my recommendations for companies are twofold: firstly, visibility along supply chains is as important now as it has ever been, including visibility of granular details including proposed shipping routes of suppliers upstream. Asking questions pertaining to exact route specifications should be as important now as the standard shipping questions of cost and lead-time. Secondly, inventory should be managed with a strategy that aligns with the core values of a firm and in a way that takes into account factors relating to the global geo-political environment. If these lessons can be learned now, they will stand firms in good stead in an uncertain future.
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