The shipping recovery may take longer than you think |
The closure of one of the world’s major shipping routes, the Strait of Hormuz, has disrupted the global supply chain operations of many critical goods, such as oil, liquefied natural gas, and fertilisers.
The hopes of a ceasefire for two weeks raises questions about how to keep the Strait of Hormuz open and whether supply chain recovery operations will continue.
The full closure and long-lasting disruption make it harder to predict when supply chain operations involving this route will be normal and fully recover.
Here’s why supply chain recovery could take longer than the disruption duration in the context of the closure of the Strait of Hormuz.
The shipping disruption in the Strait of Hormuz has been continuing for more than a month.
During this long disruption, shipping routes and their original states could be impacted.
Even after the disruption ends, authorities and shipping companies need time to confirm that the Strait of Hormuz is safe and stable for commercial ships and their crews.
The evaluation involves safety inspections, coordination with maritime and port authorities, and validating that all operational hazards have been fully removed.
The Strait of Hormuz has been closed due to geopolitical wars, and it poses major risks and threats to commercial ships.
Shipping firms need to carefully assess any remaining risks, such as unexploded artillery, piracy threats or political instability before resuming shipping operations.
This risk assessment and its management processes can be very time-consuming, specifically when new protocols or security measures are required.
Route and insurance clearance may need a review once the routes are open again for commercial shipments.
Insurers and regulatory bodies could take extra time to reinstate coverage for ships and vessels travelling through the Strait.
Shipping lines through the Strait need to obtain clearances to use them again. It can involve paperwork and negotiation.
Backlogs and inventories
During the disruption in the Strait of Hormuz, goods, such as oils and fertilisers accumulated at the ports of origin and suppliers’ end due to a decline in shipments.
Once operations get clearance to resume, it takes significant time to process the backlog of goods, move delayed shipments and rebalance inventories throughout the supply chain network.
The disruption in the Strait of Hormuz is a major and long-term one. It impacts all stakeholders involved in shipping and logistics operations.
It is common that not all ships, crews and logistics providers can return to normal immediately.
Some resources and ships may have been redeployed and/or require further maintenance. As a consequence, the entire supply chain system ramps up slowly and gradually, which leads to increasing recovery time.
Reallocation of resources
Any disruptions change the allocation and reallocation of resources and equipment as part of the response to the changed environment.
Over 34000 shipping routes have been diverted since the disruption in the Strait of Hormuz. Shipping companies will need to transfer vessels, crews and equipment from other routes or operations back to the Strait shipping route.
These reallocation and new scheduling processes are far more complex and can delay the restoration of operations to full capacity.
New normal operations
The aftermath of a disruption is to deal with new normal situations.
In the case of disruption in the Strait of Hormuz, it is more relevant as it has been disrupted due to a war and major geopolitical conflict.
Businesses and shippers need to review the financial impact of the disruption, which includes assessment of increased costs, lost revenue and changes in insurance premiums. ‘
All of these critical assessments can affect decisions on pricing, investment and operational strategies for future shipments.
Supply chain is a complex network and deals with multiple parties such as suppliers, logistics providers, wholesalers and retailers.
Recovery efforts and their impacts take time to flow through the entire supply chain, from upstream suppliers to logistics providers and finally to retailers and end consumers.
Each party in the supply chain needs time to adjust to new operational plans and synchronise with them. It causes a domino effect that extends the overall recovery period for the entire supply chain.
Sanjoy Paul is Associate Professor, Operations and Supply Chain Management at University of Technology Sydney.
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