The global supply chain is facing growing disruptions from attacks by geopolitically driven rebel groups on cargo ships and tankers in the Red Sea, which began in late 2023 and have continued into 2024. According to an article by the World Economic Forum on this issue, the Suez Canal and the Red Sea channel approximately 30 percent of the world’s container traffic and facilitate the annual movement of merchandise valued at over $1 trillion. These continued Red Sea area threats have been forcing many shipping vessels to alter their courses from the highly utilized Suez Canal to be rerouted around Southern Africa and the Cape of Good Hope.
These lengthy detours, which add approximately 4,000 miles to ocean shipping routes, are contributing to a significant impact on the world’s supply chain and logistics, including limited shipping lanes, port congestion, container shortages, extended lead times and overall transportation and shipping price increases.
Addressing these unforeseen challenges from what has become widely known as the “Red Sea Crisis” requires supply chain and logistics leaders from the nutrition and other global industries to quickly develop timely near-term strategies, as well as revised longer-term planning, to help mitigate supply, production and budgetary risks for their own businesses and for their customers.
From our perspective as contract manufacturers in the dietary supplement space, following are key supply chain areas we are seeing impacted throughout the industry and some proposed risk mitigation practices and strategies to better navigate these new challenges.
Rising Freight Costs
In the nutrition industry, we are currently seeing an increase of overall freight costs in a range of 20 to 30 percent, particularly for importers overseas. Recent increases in ocean shipping costs, for example, are now up to $7,000 per container to ship from Asia to the U.S. East Coast.
As these rising freight costs are causing a significant impact to companies’ logistics budgets, organizations need to revisit their pricing strategies and determine potential ways to gain cost savings measures in other areas which may help to offset additional freight costs.
These alternative options can include trying to renegotiate contracts with suppliers and other logistics-related vendors to see if there may be ways to secure reduced rates and more reliable service to better manage costs.
Looking at alternate shipping routes and suppliers that might be closer geographically to help reduce dependency on higher cost routes is also a channel to explore to lessen expenses.
Port Congestion
Increased port congestion is being experienced in major hubs such as Singapore.
This congestion leads to delays in receiving critical raw materials, which in turn disrupts planned production schedules.
In order to offset these issues and prevent further delays, strategies to consider include increasing inventory buffers and working more closely with logistics providers to re-evaluate data and analysis, prioritize shipments, and better manage evolving logistics needs.
For inventory buffers, this can include system configuration to add additional safety lead time to your product data for materials. Ensuring your procurement lead times are as up to date and as accurate as possible in the system is also very important. Further review can include using analytics resources to examine your historical consumption and apply that data to try to find the right balance of safety stock inventory to better manage needed supplies, while reducing implications on your cash flow.
Having the right logistics partners who can provide valuable analytics resources, such as high-level tracking technologies, that can be leveraged for supply chain management is crucial, especially at times like these. Improved tracking technologies can help you gain real time access and insights into your shipments to help improve planning and to better strategize and align production schedules based on timely updates that can be obtained through well-equipped logistics partners.
Supply Chain Operations and Inventory Management
Resulting delays from the diversion and rerouting of vessels around the Cape of Good Hope are also severely influencing current supply chain operations. We’re seeing industry shipment delays from this diversion causing extended transit times by an average of about 10 to 15 days.
Suggested practices to manage these diversion challenges include adjusting production timelines and increasing communication with customers to have very open, honest and transparent conversations about extended timelines and what to expect, including the reality that there will be some potential disruptions.
When manufacturing products for customers, for example, these discussions may also include proposing strategies to keep floor stock of finished goods as safety stock and extending customer commitments. Then, as that floor stock is consumed, systems can be configured to automatically trigger a replenishment of that safety stock. Building these types of contingency factors into your system can provide greater ability to better support and service customers and meet their expectations with limited disruptions.
In some cases, for particularly high priority shipments, considering air freight options as an alternative to ocean freight is another potential approach when dealing with supply diversion challenges. Though air freight is typically more expensive, if the volume of raw materials being shipped is significant enough, the additional dollar amount per kilo added to the front-end via air may be worth the investment.
Utilizing air freight could potentially mitigate additionally incurred back-end costs and disruption which would result from ocean shipping delays. In some scenarios, cost benefits for using air freight could possibly result in breaking even. Depending on the business case, deliverable urgency and financial resources, any added air freight costs could potentially be assumed by the vendor or handled as a shared investment with the customer.
In terms of overall inventory management, optimizing inventory levels, increasing safety stocks and using analytics to better forecast ongoing demand are all important factors. Other strategies to consider include front loading inventory by doing blanket purchases on behalf of a customer. Blanket purchases could be done for an entire demand supply of materials required for manufacturing for a particular business period, such as a quarter, instead of just-in-time purchasing for those materials. In terms of costs for such an investment, it would be a vendor’s business decision to assume the blanket purchase, carrying costs and storage requirements, or to possibly work out arrangements with supplier partners for extended terms to help off-set associated added costs.
Risk Management Practices and Longer-term Strategic Adjustments
Organizations in the nutrition and other global industries need to consider implementing supply chain risk management practices that can not only address current issues, such as the Red Sea attacks, but also help to navigate similar future unexpected logistics challenges that may arise. For companies that have the resources, the formal approach of establishing a dedicated risk management team to focus on monitoring for potential supply chain risks can provide the ability to more readily plan possible solutions and act more quickly when those risk factors may become a reality.
Having contingency plans and diversified logistics strategies to ensure flexibility and resilience are also critical for risk management. Risk management planning solutions should include looking at diversified shipping routes, and securing alternative and multiple transport options, if needed. To better support this process, it’s important to build strong relationships with a range of different high-quality logistics partners to help maintain an increased level of flexibility and resiliency throughout the supply chain.
As it is currently unclear how long the supply chain impact from the Red Sea crisis will continue, making long-term strategic adjustments to a company’s supply chain operations is also vital for managing ongoing supply chain disruptions and elevated freight costs. This long-term planning can also provide added support for other potential unexpected logistics challenges in the future.
Best practices to consider as part of long-term planning, included developing a diversified supplier base and investing in digital supply chain technologies, as well as exploring nearshoring options. The goal of all of these risk management and long-term planning strategies is to help to reduce risk exposure and improve response to disruptions down the road. NIE
Jeohvan Montoya, with more than 17 years of seasoned experience within the nutraceutical industry, has cultivated an impressive career trajectory across various pivotal roles including, purchasing manager, senior R&D/product development manager and director of supply chain management. Presently, Montoya assumes the position of head of procurement and planning at Lief Labs, headquartered in Valencia, CA. In this esteemed capacity, he spearheads the strategic alignment of supply chain objectives, leveraging astute assessment, meticulous planning, and seamless execution to drive organizational success. For inquiries or collaborations, Montoya can be reached at [email protected].
