Ensuring continuity of supply in light of recent global and national events has been an unprecedented challenge for logistic service providers. So says Maria du Preez, Business Development Director for Bidvest International Logistics (BIL).
“The upheavals caused by the coronavirus pandemic have forced entire countries to reimagine how they deliver resources and services while simultaneously overhauling business practice for economic sustainability.”
Efforts to supply goods have been massively impacted because of Covid-19 quarantine restrictions at ports of entry, for example. Coronavirus outbreaks among airport ground and cargo-loading crews have necessitated that affected members are placed in quarantine for up to two weeks at a time, leaving fewer staff to handle cargo.
“Cargo is also backed up as flights are unable to depart with full loads. In one recent example, cargo had to be routed from China to Hong Kong for departure, putting tremendous strain on Hong Kong Airport and causing further delays. “As a consequence, the uncertainty around schedule availability, workforce on the ground and increased demand can lead to an increase on rates in the market,” says Du Preez.
The world is also having to contend with the growing threat of climate change, increasingly manifesting as catastrophic disasters like hurricanes such as the ones in New Orleans and Texas, wildfires and flooding events that have destroyed billions of dollars’ worth of infrastructure. Typhoons and extreme weather in China have also become a challenge to global supply chains, as goods stuck at some of the world’s busiest container ports are further delayed.
An example of this happened in August when Shanghai’s Yangshan mega-terminal facility and nearby ports had to evacuate ships as Typhoon In-Fa slammed into the coast, bringing widespread flooding and toppling containers stowed in the hold of a bulk carrier traveling to the US. Such delays can wreak untold havoc on global supply chains.
Furthermore, the tensions brought on by Covid-19, destructive natural phenomena and political instability are spilling over into violent acts of civil unrest.
“We saw this in July in South Africa when an estimated R50-billion worth of damage was caused by looters marauding through the provinces of KwaZulu-Natal and Gauteng, obliterating what little gains had been made in the country’s economic recovery effort,” says Du Preez, adding that a cyber-attack on South African parastatal Transnet in July paralysed several of the country’s ports for several weeks as well, forcing the state-owned company to declare force majeure.
“Over this past year, there have also been shutdowns to vital shipping lanes and ports, notably the blocking of the Suez Canal by the container ship Ever Given in March and the closure of the Chinese ports of Yantian in May and Ningbo-Zhoushan, the world’s third busiest, in August due to coronavirus outbreaks. Taken together, these events have stretched logistic service providers (LSPs) to the limit.”
Supply chain imbalance
The congestion, shortage of empty containers, delays, rollovers of shipments and ships bypassing ports are an unintended consequence of these disruptive events which have created a supply-demand imbalance with demand outstripping supply.
In some instances, an ocean line service operator deciding to cancel a call or skip a particular port – a process known as blank sailing – can have dire consequences. On any given week, there are a number of carriers which blank sail, reducing tonnage and increasing demand. To put it into context, 4 000 container slots can get lost in one sailing.
“But this is only one part of the problem,” says Du Preez. “Trucks still need to transport the cargo arriving at ports and when drivers who contract Covid-19 can no longer access harbour terminals, the supply chain is further disrupted.”
It is no secret that the US is one of the world’s biggest consumer markets, so a boom in shipping volumes is inexorably tied into America’s consumer spend. However, the country is short of thousands of truck drivers and this – along with rail and ramp delays – means that turnaround of containers has often exceeded 60 days.
Costs are astronomical
Du Preez points out that the costs involved are also astronomical. “Ship charter rates have multiplied in some cases by anything upwards of 300%. Short-term charter rates of between two and three months for a 5 000 TEU (twenty-foot equivalent unit) ship have topped US$135 000 (R1.9-million) a day. Longer term charters (3 to 5 years) are reaching US$50 000 (R727 000) a day. “Currently, carriers are posting record financial results which have placed huge pressure on forwarders in the supply chain to manage their clients’ expectations.”
In the view of Bidvest International Logistics (BIL), where lead times were previously seven days door-to-door, 21 days are now recommended to accommodate unexpected delays. However, Logistics Service Providers (LSPs) should expect at least some blowback.
Because customers are facing their own pressures, perceptions of LSP service failures will mount when supply agreements don’t go according to plan. “The key,” Du Preez says, “is knowing how to approach such situations.”
Among the options available to LSPs is drawing attention to Standard Trading Conditions, or declaring force majeure if such a clause is included in the service contract.
With most carriers already fully booked due to limited space and Chinese ports experiencing backlogs, it stands to reason that Standard Trading Conditions will be severely hampered. Yet, as much as adverse influencing factors may be true, customers will still only see a failing supply chain, delayed deliveries to clients, penalties, lack of stock and lost sales. “No matter how justified or valid the LSP’s reasons, the despairing customers want solutions, not excuses.”
There is a solution, however. According to Du Preez, these tensions can be mitigated and even avoided but for that to happen, there needs to be clarity between the LSP and customer from the outset. It starts with the take-on of the Scope of Work (SOW) service contract, including a thorough interrogation of the customer’s business model and specifically the supply chain.
There are three important questions which the customer and the LSP must jointly and honestly interrogate, namely:
- Is the customer’s business model dependent on imports and/or exports for the survival of the business? If the answer is “yes”, meaning there is no alternative local supply, then the answers to question 2 and 3 become vital.
- Does the customer have a robust international supply chain that will sustain its business through 2021 and beyond? If the answer is “yes”, test it by considering multiple disruptive “What if” scenarios. If the answer is still “yes” then proceed in overcoming the challenges, or draining the swamp, so to speak. If the answer is ever “no”, remember the end objective is to drain the swamp. It may therefore be time for a thorough review of the customer’s supply chain. Consider all alternative options to keep the supply chain moving through disruptive global events.
- In the event of an unanticipated disaster or disruptive incident, are all parties unambiguously clear on the point where risk transfers from the seller to the buyer? In the event of a maritime disaster or disruptive incident, the importance of this question lies in the correct use and understanding of the Incoterms® rules, specifically the point where the seller has fulfilled its final obligation under the sales contract and risk has transferred from seller to buyer. It also pertains to understanding the obligations of the merchant as defined in the transport document to the ocean carrier/consignor (as contracting party) and air carrier.
The past two years have not been an easy time and apart from the havoc caused by the global financial crisis in 2008/9, businesses which are dependent on international supply chains have rarely seen such unpredictable consequences arising from disruptive global events. “However,” says Du Preez, “the key to success in these times is – and will continue to be – resilience and knowing how to achieve it.”