‘Resilience’ to container shipping shocks fades in post-COVID era

It was one of the key questions to come out of COVID-19: How would the behavior of shippers change, or would it change, following the worst-ever disruption to containerized supply chains?

The answer, a year after the World Health Organization (WHO) declared an end to the "Public Health Emergency of International Concern" on May 11, 2023, is beginning to emerge. And it's not what some were hoping it would be.

The answer is not, as many believed, that shippers stunned by the severity and costs of unprecedented disruption would not be fooled again.

Still, many a consulting report points to the tantalizing possibility, from the perspective of logistics providers hoping to cash in on an extended COVID-19 windfall, that the environment had permanently changed. Going forward, shippers would ensure they are prepared for the next shock to the system, even if that preparation comes with a higher cost. "Resilience" would be transformed from a term bandied about at industry conferences to one with tangible meaning.

As one third-party logistics leader wrote recently, "Resilience in the supply chain can come in many forms — adding redundancy, planning contingency routings and capacity, redesigning networks to be closer to customers or production sites, shifting between modes of transport, maintaining higher stock levels, diversifying supply sources, or simply increasing real-time visibility."

As reasonable as that sounds given the many reasons to believe that supply chain risk is elevated coming out of the pandemic — the Red Sea attacks, the Baltimore bridge collapse and the South China Sea tensions, to name a few — there are indications it is not influencing shippers' behavior nearly to the degree some may have anticipated or hoped. The so-called lesson learned may have been limited to the pandemic.

Abstract vs. identifiable threats

Bloated pandemic-era inventories are finally being worked down, and with interest rates having been ratcheted up by central bankers to combat inflation, fashionable "just in case" buffer stocks become hard to justify if the risks are abstract. Risk may be elevated in the aggregate, but justifying higher inventory costs without a specific threat is a tough sell. In the same vein, consumer products and other companies are reducing their number of suppliers, having expanded them during COVID-19 to ensure a steady flow of supply, research from S&P Global Market Intelligence shows.

Identifiable threats are ready-made opportunities to mitigate risk, and here companies aren't hesitating. It's responsible risk mitigation to divert freight away from the US East Coast given that shippers can see port disruption a mile away as traditionally disruptive contract negotiations got under way between dockworkers and employers. Similarly, it's prudent supply chain management to avoid unnecessary Canadian routings in the face of the possibility of a rail strike later in May. It's not unreasonable over a longer-term horizon to diversify sourcing due to geopolitical risk.

A reversion to pre-Covid supply chain thinking naturally alters shippers' priorities. For those reverting to lean inventories, reliability takes on growing importance, irrespective of their willingness to pay for it. It was no accident that schedule reliability figured prominently in this year's trans-Pacific annual service contract negotiations, as did shippers' desire to concentrate their volumes among fewer carriers to be more important to those carriers if space gets tight during the upcoming contract year.

Shippers seek answers for reliability woes

With global container ship schedule reliability still near just 55% in March, according to Sea-Intelligence Maritime Analysis, shippers are still struggling with a high degree of arrival variability, much more so than in pre-COVID years. That directly undermines lean supply chains.

Thus, it's easy to see why some shippers, such as the Global Shippers' Alliance, would respond positively, if cautiously, to the potentially game-changing commitment by Hapag-Lloyd and Maersk to deliver greater than 90% schedule reliability once their Gemini Cooperation alliance network is fully phased in. This didn't come out of nowhere; it is their answer to shippers jaded by the COVID-19 experience and whose patience regarding carriers' use of blank sailings to manage capacity is wearing thin.

With hardly any port congestion being experienced currently and ample capacity available to plug holes in elongated services being routed around the Cape of Good Hope in southern Africa, it is reasonable that the stated aspiration of Hapag-Lloyd to phase out blank sailings would be well received by shippers, especially if it came true.

COVID-19 is being left behind in more ways than one.

*This article was published on May 9, 2024 by the Journal Of Commerce

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.