Red Sea disruption stalls automotive aftermarket

Article sponsored by: Slimstock UK

Disruptions in the supply chain follow in rapid succession. The aftermath of the errant cargo ship, Ever Given, which blocked the Suez Canal in Egypt for weeks in the spring of 2021, has barely subsided, and the next logistical nightmare at sea is already presenting itself. And for businesses across the automotive aftermarket, the latest disruptive event is a big one. 

As Drones piloted by Houthi forces from Yemen target cargo ships in the Red Sea, the fallout can be felt throughout the global automotive supply chain. 

Asia is a significant automotive manufacturing hub. And with some 70% of all aftermarket parts passing through the Red Sea, the looming situation puts logistics carriers in a huge dilemma, forcing them to choose between the safety of their ships and delays in delivery time, with the added consequence of considerable extra costs.

Meanwhile, Automotive Aftermarket suppliers, both in the UK and further afield, face lengthy delays, soaring freight costs and customer service challenges as inventory levels rapidly deplete. The big question now is whether the situation will be a short-lived event or a long-term problem.

What is clear is that shipping companies are bracing themselves for the worst. And so, too, should businesses throughout the automotive aftermarket. 

5,000 extra kilometres 

The shipping route along western Yemen is part of the busy shipping route between Europe and Asia. It is the link between the Mediterranean Sea and the Red Sea and is visited by dozens of cargo ships every day. To illustrate this, one in every three containers transported by sea passes through this shipping route, of which the Suez Canal is perhaps the most famous stretch. Although the route is vulnerable – after all, we saw it in 2021 – shipping companies will always have a preference to use it. The alternative is to circumnavigate around Africa’s southernmost point, which easily adds up to some 5,000 extra kilometres.

Several international shipping companies (including MSC, Maersk and Evergreen) have already indicated that they will immediately avoid the route via Yemen, and thus the Suez Canal, to guarantee the safety of their ships.

The shipping companies that have already declared this measure are collectively responsible for about 60% of world trade. They are now opting for the alternative shipping route or even choosing to set up hybrid models that combine sea and air cargo, or sea and road transport. This has sizeable implications for automotive players.

The knock-on effect on the automotive supply chain

Extended sea voyages around Africa add three to four weeks to the round trip from Asia to Europe. This is not only annoying in the short term, but will inevitably cause long-term reverberations globally.

Containers will not be at the right destination at the right time, so it will not be possible for newly scheduled cargoes to be transported in the planned containers.

This capacity crunch, in turn, will lead to further delays in the delivery of containers and goods. Orders placed without considering the extended delivery time will not be sufficient to cover expected demand.

This immediately raises the danger of stockouts, and customers will likely have to wait longer for their orders because upstream suppliers will be out-of-stock.

While customers may be able to understand the current situation, multiple delays, and/or no deliveries at all, will not be accepted. If supply chain leaders do not take timely action, they are likely to face the same problem more often.

The problem now emerging in the Red Sea may reverberate for a longer period of time, and the logistics sector will start noticing a domino effect in the supply chain process. So, responding to current events now is the key to success that every business needs to pick up on.

Disruption in the Red Sea leads to price hike

Buying the right amount of stock at the right time is becoming crucial for buyers. For pending orders, it is important to factor in a temporarily longer delivery time provisionally. After all, the containers that suppliers had planned to ship their freight in could arrive days, weeks, or in the worst case scenario, months later.

But it’s not just containers that are suddenly scarce; ships are also not in the right place at the right time either. Delays in deliveries of containers and raw materials are inevitable. And with that, the next problem presents itself. I’m talking about price increases. In fact, they are already visible now.

The current uncertainty in the Red Sea has already directly driven up sea freight costs. Since the start of the war between Israel and Hamas, prices for the Asia-East US transport route have already risen by 5% to $2,497 per sea container, freight booking platform, Freightos, has reported.

The ING banking group has also reported price increases. For instance, the price for transporting a standard 40ft sea container between Shanghai and Rotterdam was an average €1,063 at the end of November 2023; now it is €1,513 – over 40% higher.

With the recently announced course changes by the aforementioned shipping lines, there is a good chance that those costs will keep rising. A longer shipping route entails higher fuel costs, and because ships take longer to reach their destination, the diversions result in a perceived ‘ship capacity crunch’. With that, the possibility of further price increases lurks in the background. 

A resilient supply chain is essential

Watching the developments in the Red Sea from a distance is not enough for supply chain leaders if they want to continue offering their customers the service they are used to.

Automated and standard processes can come under pressure, so appropriate action is required to maintain service levels at the desired standard.

Organisations that can change plans quickly are as much as 198% more likely to realise the full potential of opportunities in the face of external events. This is according to Gartner’s recently released Strategy Adaptive Planning Survey.

What actions do you need to take now?

Supply chain teams need to be able to respond competently to the current situation to be successful. However, Gartner’s research shows that only 38% of all business leaders say their business plans can change quickly enough to respond to changes in the market.

Understand the battlefield

Disruptions at sea (both the Red Sea and the Panama Canal) create uncertainty in the supply chain. From a planning perspective, actions must be taken to reduce supply chain risks, such as inventory shortages.

Monitor which open purchase orders do not arrive on time

Chances are your placed orders will not arrive at your desired time. Rerouting or waiting for available containers will result in them arriving weeks later than planned.

Identify which items need to be ordered in larger quantities

To make sure you can meet your customer demand, your stock must be adequate. Therefore, it makes sense to check whether you need to temporarily buy more, given the longer delivery times. Adjusting delivery times (as in Slim4) results in a higher order recommendation, for example.

Seek alternative solutions

There may be alternative suppliers who can supply you with your desired items. During the corona virus pandemic, many supply chain leaders were already looking for alternative suppliers and got creative by moving stock within their own network. The knowledge gained during this period can now be reapplied.

Categorise the risk

Gather input from your procurement department to hear which suppliers are affected in terms of their location and the carriers they use. After all, not all carriers have yet decided to avoid the Red Sea. Others offer alternative routes by combining sea, air and road freight.

It is advisable to then convert this information into logical actions so that you know what suppliers do, do not, or no longer have a grip on your orders. Your orders can be divided into three categories:

  • Orders already ordered but not yet on their way.
  • Orders already ordered, in transit, but not yet arrived at port.
  • Orders for which you want to place an order soon.

Keep delivery times up-to-date and update scheduling parameters

Keeping a finger on the pulse is hugely important. Stay in touch with your suppliers so that you know the current delivery times of your ordered products.

Where normally it might have taken a week to get your order to its destination, it could now take five weeks. Shipping times might have increased fivefold, containers and ships may suddenly become unavailable. It’s important to set up your inventory to respond to longer delivery times, either by:

  • Adding supplier reliability. This affects the lead time, safety stock and order level.
  • Adding extra time to the total lead time. This affects the lead time and order level.

Track exceptions and take corrective action where possible

Special situations require special measures. Look within your organisation to see what you have in hand that can be implemented immediately. For instance, move stock within your network where possible to solve problems. And/or place orders where possible with alternative suppliers closer to, or within, Europe.

Keep monitoring

It is vital to keep a close eye on the situation. Should you stick to your alternative plans, or is your critical inventory problem now over? If the latter, it is advisable to return to familiar ordering patterns as soon as possible. After all, that is what business operations are built on.

In this time of uncertainty, a resilient supply chain is indispensable. With the above steps, companies can guard against supply chain disruptions and possibly even emerge stronger from them.

Stay agile, stay informed and steer your supply chain to success. 

Find out why the world’s leading automotive brands count on Slimstock to navigate disruption: 

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