Supply chains weather the storm

Noel Lourdes FCCA, owner of Kemtron Gaskets & Seals in Ireland, says he has had to pay surcharges to suppliers, as their shippers were forced to take the Cape of Good Hope lane around South Africa. ‘Some wholesalers and distributors took the opportunity to increase prices, but ultimately the biggest pain was the freight costs,’ he says, caused by soaring fuel rates and extra costs for labour and insurance.

These elevated freight costs were also among several factors that saw UK furniture chain DFS post lower-than-expected financial results. For its financial year 2024 (to the end of June), it had in March predicted £20m-£25m in pre-tax profits, a figure that was halved in June to £10m-£12m. Final results released in September in fact showed a £1.7m pre-tax loss, attributed in part to Red Sea shipping disruption deferring sales and profits to future periods.

Alternative strategies

On 5 October 2023, the global freight index for a 40ft shipping container was US$1,390; by mid-July 2024 it had risen to nearly US$6,000. But by the end of November, it had fallen to US$3,331, partly due to an increase in shipping capacity, but also to businesses finding alternative ways to source products and materials, as well as implementing strategies such as stockpiling, contracting flexibility, dynamic shipping rerouting and multi-modal transport.

‘Strategic stockpiling can help companies counter sudden shortages or delays by establishing pre-allocated reserves of essential resources. And flexible contracts enable companies to adapt quickly to shifting conditions,’ says Dubai-based Ashray Lavsi, principal at global supply and procurement consultants Efficio.

‘Dynamic shipping rerouting – leveraging real-time data from GPS, satellite and predictive analytics – allows companies to adjust transport routes immediately in response to emergent risks,’ Lavsi contiues. ‘Multi-modal transport options, combining sea, air, and rail, are essential tools in this approach to ensure the continuous flow of goods.’

Mirza notes that ‘some businesses have turned to air freight for high-value or time-sensitive goods, absorbing the higher costs to avoid stock shortages, while others have diversified production locations by nearshoring or establishing regional supply chains closer to consumer markets.’

European discount retailer Pepco Group, another business that pointed to supply chain disruption as a contributor to lower year-on-year revenue, deployed a number of such mitigating strategies, including optimising shipping routes, using rail, shipping products earlier and optimising faster carrier options to improve availability in time for Christmas and into 2025.

Similarly, a spokesperson for IKEA says: ‘We work closely with partners to mitigate the impact of these constraints. We are maintaining higher stock levels for certain products to address the longer lead times caused by rerouting via the Cape of Good Hope.’

Sector malaise

The disruption has affected the retail, manufacturing and energy sectors the most. ‘To counter the ongoing challenges, these sectors have employed a mix of strategic sourcing, operational adjustments and innovation,’ says Mirza. ‘Retailers are advancing shipping schedules, prioritising high-demand products, and sourcing closer to consumer markets.

‘Manufacturers dealing with delays in raw material deliveries are stockpiling key inputs, shifting to regional suppliers, and investing in supply chain digitisation to improve visibility and reduce inefficiencies.

‘The energy sector, heavily reliant on maritime routes for fuel transport, is securing alternative supply sources, optimising tanker routes, and absorbing short-term costs to shield consumers from price increases.’

Absorbing costs

Managing increased costs now and in the near to medium term requires a combination of strategies, Mirza continues. ‘Some companies absorb the additional costs, especially for high-margin products, to maintain market share and avoid passing the burden on to consumers.’

At Kemtron, Lourdes absorbed as much of these extra costs as possible and only passed them on to his customers where necessary, much in the same way as he would pass on discounts. ‘It’s about transparency and fairness, he says. ‘We explained it was due to freight costs and that we’d normalise prices once these fell. If we increase our prices, it’s not because we want to increase our operating margin, it’s because we’re trying to protect our margin.’

But not all companies took this approach. ‘Many companies gradually increase prices to offset higher shipping expenses,’ says Mirza. ‘They also optimise operations by consolidating shipments, reducing less critical inventory, and increasing reliance on digital supply chain management tools to cut other logistics costs. Companies are also accelerating investments in nearshoring and regional production facilities to reduce dependency on these volatile international trade routes.’