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Canal delays are making waves

Re:think

Coping with ocean cargo delays ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌   ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ 
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Re:think
Re:think

FRESH TAKES ON BIG IDEAS
A drawing of John Murnane



ON CANAL CARGO
Canal slowdowns could create rough seas for global trade

John Murnane

When delays recently afflicted two major canals—the Panama Canal, due to a drought that created low water levels, and the Suez Canal, due to conflict in the Red Sea region—it was the latest in a long line of supply chain complications that have occurred since the beginning of the COVID-19 pandemic. Nowadays, supply chain executives are aware that they need to be ready for anything. There was even a previous canal shutdown in 2021 when a ship ran aground in the Suez. As a result, these canal slowdowns haven’t been quite the shock that they might have been in the past.

That said, trade route disruptions have consequences. Different trade lanes and types of cargo face different challenges. Companies dealing in items with tightly time-constrained supply chains and high value per volume—such as electronics—could start using air carriers to keep operating smoothly. Some sectors—such as automotive, pharmaceuticals, and high-end retail—could see inventory shortages, which could frustrate consumers. Higher transport costs could also be passed on to those consumers. Companies might investigate sourcing items from new locations that are less affected by canal delays; maybe some manufacturing gets shifted from Asia to, say, Angola. However, it can take 18 months or more to negotiate new sourcing, and the newly sourced item might not be identical to the previous version. 

Lower-value goods could be profoundly affected because their transportation costs are high compared with their total value. Some bulk-commodity trade lanes that rely on the canals might not even be viable if cargo transit cost and duration both increase dramatically. For instance, flows of grain from Europe into Eastern Africa that move straight through the Suez on barges might make less sense if they need to make a longer journey around the southern tip of Africa using a different type of ship that can handle that trickier passage. The refrigerated-fruit trade from the west coast of South America could also face serious challenges if markets on the far side of the Panama Canal are no longer accessible. Ultimately, the chunk of trade involved is big enough to affect macroeconomics. Canal delays could show up in GDP numbers or inflation rates. The delays could also affect carbon emissions. More items might be sent by air, which creates higher emissions rates than ocean shipping. And even when items are sent by sea, rerouted ships will, in many cases, have to make longer passages and try to sail at faster speeds to make up time, which burns more fuel.

“For some companies, these canal slowdowns could present growth opportunities.”

I’ve laid out a bunch of downsides. But for some companies, these canal slowdowns could present growth opportunities. Maybe a company can gain more share in a market because a dominant competitor’s easy routing through the Suez has been disrupted. Maybe a manufacturer on the west coast of Africa, not reliant on the Suez for transport, is suddenly more attractive to European customers. There could be new success stories as companies realize that logistics can be a strategic advantage.

For decades before the pandemic, moving goods by ship anywhere in the world was generally very easy and inexpensive. Even at large companies, there were sometimes only one or two people left handling logistics because it was mostly just a procurement function. Companies are now starting to see that they need the capacity to handle disruptions and that logistics can be a competitive strength when done right.

This is a critical moment for companies to modernize their logistics capabilities, particularly by taking advantage of digital advancements that enable sharper insights and smarter execution. Elevating the role of logistics within a company and integrating logistics leaders into global strategy teams can lead to faster decision making and broader impact. Companies can view logistics as a means of differentiation and value creation, not just as a cost to minimize.

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ABOUT THIS AUTHOR

John Murnane is a senior partner in McKinsey’s Atlanta office.

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by "McKinsey Quarterly" <publishing@email.mckinsey.com> - 02:39 - 15 May 2024