In one of our previous articles, we discussed the Middle East tensions threatening international trade, shining light on the impacts on supply chain viability in the Red Sea area. Two critical chokepoints in maritime trade—the Suez Canal and the Panama Canal—have been at the forefront of these disruptions. Natural disasters are not the only concern, as developing geopolitical conflict pressures prove that there is more beyond supply chain destabilization. Considering rising political conflicts, such as the ongoing trade war between the US and China, where both countries impose tariffs and trade barriers limiting the availability of resources, or political wars such as the Ukrainian war of which sanctions on Russia stopped the flow of certain goods, have had a vast impact on critical resources across various industries.  

This article was written by Kristi Rutgers ([email protected]) and Cem Adiyaman ([email protected]). Both Kristi and Cem are consultants with RSM Netherlands Business Consulting with a focus on International Trade & Strategy.    

Supply chain disruptions often have a global impact that can lead to high costs ranging from $150 billion in 2019 to $350 billion in 2017. Incidents such as the Panama Canal, a connecting route between the South and North America, experienced extreme droughts which resulted in the closure of the channel. This pushed companies to follow the Suez Canal route, which makes for the most important communication line between Asia, Middle East and Europe, have recently faced large disruptions. Due to the conflicts in this route, the Suez Canal has become too high of a risk for suppliers to travel through and increased shipment costs in this route by 120%, and instead, suppliers have rerouted to the Cape of Good Hope. The Cape of Good Hope, a port located in South Africa, is not a viable long-term solution as it increases the travel time by 10 days and increases the logistic costs up to $1 million, which poses a concern whether it is time to redraw trade route maps. 

These disruptions have shone light on the vulnerabilities of supply chains, particularly due to their heavy reliance on globalization and outsourcing. This dependency allows disruptions to propagate quickly throughout the supply chain, causing a ripple effect. The severe impact of these disruptions arises from the tightly interconnected nature of supply chains, where suppliers heavily rely on one another. As a result, a single disruption can trigger a domino effect, leading the supply chain to have a complete shutdown. This has increased the pressure to restructure supply chain networks to enhance their flexibility. However, achieving this flexibility is challenging, and this was experienced during the Covid-19 pandemic, where it appeared to be difficult to implement rapid recovery strategies due to a lack of resources.    

During the Covid-19 pandemic, internationally active companies proved how important it is to strengthen supplier relations and having transparent communication with other suppliers is. This concern has been shared by the Institute of Export and International Trade, which proposes officials and businesses to question their current resilience strategy of their supply chain and whether these strategies are effective enough to endure future, unprecedented disruptions.     

Regulatory landscape 

Additionally, the evolving regulatory landscape, particularly in major supply chain hubs like China and the US, exerts significant pressure on global supply chains. Trade policies and sanctions are increasingly targeting specific countries and industries. For instance, Article 3g of the European Russian Sanction Regulation (EU Council Regulation No 833/2014) focuses on the iron and steel industry, requiring EU importers to provide evidence of the origin of iron and steel inputs used in third countries for processing products imported into the EU. These stringent regulations complicate the movement of goods and materials, prompting businesses to diversify their supply sources, prioritize regional trade partnerships, and invest in more resilient and adaptable supply chain infrastructures. The emphasis on compliance with international trade laws, coupled with the need to mitigate risks associated with political and economic instability, highlights the necessity for a strategic overhaul of traditional supply chain models.

Resilient Supply Chain: Technology and Strategy

To effectively address these regulatory changes, disruptive forces and lack of visibility on the supply chain, companies should focus on minimizing reliance on suppliers and redrawing their supply chains. When adopting any strategy, the importance lies in maximizing control and visibility over your supply chain to minimize disruption effect, which can be achieved through adoption of information processing technologies such as the ERP – Enterprise Resource Planning – to have a real-time comprehensive view of your resources and supply chain.
Moreover, a strategy that can minimize reliance on suppliers is onshoring, where you insource part of their supply chain by bringing production sites closer to its business operations, which allows you to respond quickly to market changes. However, this approach can be expensive and inefficient, particularly in a time with limited resource availability. Yet, excessive onshoring can be counterproductive as it demands capabilities or resources that are not always domestically available, whereas overreliance on offshoring can leave a company vulnerable to disruptions. Therefore, you should seek to maintain a balance between their domestic and international networks to reduce vulnerabilities to global disruptions and remain competitive. 

Forward Thinking

To ensure resilient supply chains, companies must enhance visibility and control through advanced technologies such as ERP systems, diversify supply sources to avoid reliance on single regions, and strengthen supplier relationships for better coordination. Investing in flexible infrastructure and regularly updating resilience strategies will help manage disruptions effectively. These steps are essential for maintaining stability and competitiveness in the global market.

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