Supply chain woes alter risk profiles, add exposuresPosted On: May. 17, 2022 6:55 AM CST
Companies working to rectify supply chain issues that began during the COVID-19 pandemic face continuing challenges as problems have been amplified by recent events, including slowdowns at West Coast ports related to labor negotiations, the Shanghai pandemic shutdown, and the Russia-Ukraine war.
Last week, Boeing Co. said production and deliveries of its 737 MAX aircraft were hit by shortages of a wiring connector; baby formula is in short supply across the United States due to pandemic-related supply chain issues and a recent recall; and the auto industry continues to be hampered by a semiconductor shortage.
Strategies to mitigate supply chain disruptions can help but may change the risk profile of a company’s operations, creating additional exposures, experts say.
Some shipping companies are looking to address delays by expanding their capabilities so they can offer trucks, warehouses and rail cars in addition to ocean shipping, said John Frazee, a managing director in the U.S. marine practice at Marsh LLC, who is based in Los Angeles.
This approach may help them better control their supply chain by not relying on a third party, Mr. Frazee said. “The downside is that’s a big expense, and only bigger companies can afford to do that,” he said.
Shipping companies are also exploring alternative routes or ports. “On paper that sounds like problem solved, but if you don’t own the vessel, you don’t tell the vessel where to go,” and finding ports that can discharge and transport cargo without delay remains challenging, Mr. Frazee said.
Using different routes to move products may also raise insurance concerns. “Are they covered by the risk transfer programs that companies have?” Mr. Frazee said. Accumulation risks and over-limit shipments are added concerns, he said.
Strategies such as holding extra inventory or sourcing alternate suppliers create resilience in a company’s operations and are good risk management, said David Shillingford, Salisbury, Connecticut-based chief strategy officer at Everstream Analytics, a supply chain risk analytics company.
They may have unintended consequences and increase risks, however. “The counterargument is that you increase your surface area and there are more things to go wrong,” Mr. Shillingford said.
Companies should look to find the right balance, he said. “It’s all about assembling the data and doing the analytics to work out where you need to be redundant and where it’s not so important,” he said.
The Russia-Ukraine war has exacerbated ongoing supply chain issues and risks, said Rahul Khanna, London-based global head of marine risk consulting at Allianz Global Corporate & Specialty SE, a unit of Allianz.
“Russia and Ukraine are both key suppliers of grain, so there are a lot of grain exports coming from these countries that are now disrupted,” Mr. Khanna said. Vessels operating in the Black Sea, a major trading region, have been severely disrupted, he said.
Crews may also be stuck on ships, creating logistics problems if they can’t return home or others can’t rejoin vessels, Mr. Khanna said. Over 10% of the world’s 1.9 million seafarers come from Russia and 4% from Ukraine, AGCS said in a report released last week.
Inflation is compounding supply chain risks. “The cost of shipping one container from China to the U.S. a few years ago used to be $2,000 to $4,000 and is now $10,000 to $15,000 per container, which pushes up costs for everything,” Mr. Khanna said.
Higher freight rates and a shortage of container ship capacity are tempting some operators to use non-container vessels to transport containers, which raises questions around stability, firefighting capabilities and securing cargo, AGCS said in its Safety and Shipping Review 2022 report.
Local events, such as the Russia-Ukraine war and the latest port slowdown in Shanghai, are causing a global impact that is effectively “rewiring the way trade flows,” said Suki Basi, managing director of London-based Russell Group, a data and analytics company.
For example, efforts are being made by some countries to secure alternative gas supplies from Africa and South America in response to the Russia-Ukraine conflict. “New relationships are evolving all the time,” as countries look to trade with partners in “more secure parts of the world,” Mr. Basi said.
The latest Shanghai COVID-19 lockdown has created severe delays at the port, delivering a $28 billion hit to global trade, with clothing and textile industries having the most exposure, according to an analysis by Russell Group.
Any further supply chain shocks will continue to push up prices and slow down economic recovery in Western economies, but real-time data can help insurers, reinsurers, companies and policymakers understand and manage their risks, Russell Group said in its analysis.