Red Sea disruption starts to bite

Resilience has a cost—but so too does a lack of resilience

The British like their cups of tea. So when in mid-February it emerged that one of the country’s largest tea blenders and packers—Tetley Tea—was monitoring its tea supplies on a daily basis as stocks ran low, the story made headlines. It was a “critical period”, said the company.

Nor was Tetley an isolated instance. Supermarket chain Sainsbury’s reported nationwide tea supply issues, with some shelves empty. And Yorkshire Tea, another blender and packer, also confessed to monitoring the situation closely.

The cause of all this consternation? Attacks by Houthi rebels on shipping in the Red Sea, prompting shipping lines to divert via southern Africa’s Cape of Good Hope, adding ten days and 3,500 miles to Asia-Europe shipping routes. Estimates vary slightly, but something like 12–15% of global trade travels through the Red Sea.

Inflationary impact

It should not be a surprise that tea has emerged as an early warning sign of disruption severe enough to cause shortages. Tea would normally find its way to Europe with a short hop across the Indian Ocean, up the Red Sea to the Suez Canal, and then through the Mediterranean. Now, it’s a long haul around southern Africa.

And it’s not just tea. Everything is affected.

The macro effects of all these extended supply chains aren’t difficult to discern. At a stroke, we’re almost back to where we were in the pandemic—admittedly not the frightening days of early Spring 2020 when little freight was moving, but certainly back to the disruptions of the remainder of 2020 and most of 2021.

With ships spending 30% longer at sea, a lot of shipping capacity has been taken out of circulation. Freight costs are rising, fuelling inflation. Back in mid-November, it cost around $1,200 to ship a standard 40-foot container from Shanghai to Rotterdam—by the end of January, that had risen to almost $5,000. And in respect of crude oil tankers diverted via the Cape of Good Hope, there’s a double inflationary whammy: yes, the cost of fuel rises, but so too does the cost of everything else transported in vehicles, vessels, and aircraft powered by that fuel.

Don’t look to diplomacy—or the military

What can be done? What is already clear, just a few weeks into the Red Sea attacks, is that there are few attractive options.

The West can send naval escorts to the region, but shooting down incoming drones costing a few tens of thousands of dollars with missiles costing in the high hundreds of thousands of dollars is an expensive business. Diplomacy? Both the Houthis and Iranians seem implacable. Can Israel be persuaded to withdraw from Gaza? It doesn’t seem open to the idea.

And so on, and so on.

The world’s supply chains, therefore, are voting with their feet—or rather, their ships. In the short to medium term, routing via the Cape of Good Hope seems to be the safest option.

Strategies for resilience

But what does that mean for those supply chains, and the businesses relying on the freight coming through them?

Tetley Tea, Yorkshire Tea, and Sainsbury’s—and by extension, the rest of the tea industry—already have one answer: more intense monitoring, which will call for better supply chain visibility of goods in transit. The least welcome form of supply chain disruption is unexpected, unplanned-for disruption. With some advance warning, businesses can at least attempt mitigation. Neither the mitigation, however, or the supply chain monitoring, will be cost-free.

Larger inventories are another answer—and they, of course, also come at a cost. A possibly quite unpalatable one, given the present interest rate environment. For 35 years, though, businesses have increasingly been building Just in Time supply chains: going back to traditional inventory management won’t just be a culture shock, it will also call for businesses to invest in a sizeable increase in warehouse space.

Shorter supply chains, avoiding the Red Sea altogether, also become more attractive: once again, we see the simple logic of near-shoring, re-shoring, and dual sourcing. The resulting products might be more costly, sure, but at least they’re on the shelves. But if near-shoring and re-shoring were easily attainable options, more businesses would presumably doing more of it: the present supply chain disruption is just a latest in a series of supply chain shocks going back 15 years or so.

Yet another option is remanufacturing, or the circular economy: making more use of recycling, refurbishing, and repurposing. Again, this isn’t a ‘silver bullet’. And nor is it free from cost. But, undeniably, it will result in fewer things being transported long distances over vulnerable supply chains. And, equally undeniably, there is considerable scope for such a strategy: most industries have so far barely scratched the surface of what is possible.

Action, not words

In short, there are no easy answers.

But there are answers. And it’s time to start embracing them more energetically.

And recognising the harsh reality that supply chain resilience in practice isn’t the result of one single silver bullet, but several strategies working in concert. Resilience has a cost, to be sure—but so too does a lack of resilience.