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  May 15th, 2024 | Written by

Navigating the Long-Term Consequences of the Red Sea Crisis for Retailers

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Retail supply chains are no strangers to disruption — especially since the COVID-19 pandemic — but the current Red Sea crisis has escalated things. As Houthi rebel groups continue to attack ships crossing these waters, many retailers are having to rethink their near and long-term supply chain strategies.

Read also: How The Red Sea Disruption Is Affecting Industry

The Houthis have attacked dozens of ships in the Red Sea since November, when they hijacked a vessel in response to the ongoing war in the Gaza Strip. Many of these cases have resulted in material damage. As this trend continues, its long-term impact on retailers and their supply chains will keep growing.

How the Red Sea Crisis Affects Retail Supply Chains

The Red Sea plays a crucial role in many retailer’s supply chains, even those that don’t source directly from the Middle East. As the fastest maritime route between Europe and Asia, the Suez Canal sees more than 20,000 ships pass through each year. These vessels represent a considerable chunk of global trade and their total cargo is worth billions — if not trillions — of dollars.

Given that importance, retailers face an uncomfortable choice when confronting the rebel attacks in the Red Sea. Letting ships pass through as normal could endanger crews and put their cargo in jeopardy. Understandably, most have opted to avoid these waters in response, but this comes with challenges, too.

The most straightforward alternative to passing through the Suez Canal is going around the Cape of Good Hope along Africa’s southernmost coast. While currently safer, this route takes 10-14 days longer than going through the Red Sea. It also brings abnormally high traffic to South African ports, creating the potential for further delays and costs.

On a larger scale, the Red Sea crisis highlights the fragility of global supply chains. Retailers thousands of miles away from the Middle East must grapple with disruption from a conflict they and their suppliers have little to no involvement in. It’s the latest in a series of events since the COVID-19 pandemic to emphasize how unpredictable and sensitive current sourcing and shipping practices are.

Temporary Fixes

Retailers have taken varied measures in response to this ongoing crisis. Some, like IKEA, have embraced longer lead times from rerouting shipments around the Cape of Good Hope. In light of how unexpected delays can lead to a loss of customer loyalty, they’ve informed customers upfront that some products may take longer to ship or face limited availability.

Other retailers have opted to ship products by air instead of switching to a longer sea route. While this strategy prevents delays, it’s far more expensive. As demand for air cargo rises, rates could go up, too — leading to even higher costs. Retailers may have to pass on these price hikes to customers or temporarily accept a smaller profit margin as a result.

Some businesses have embraced a hybrid strategy, recognizing that neither side alone is ideal. Delays can impact consumer confidence, but air freight is too expensive to justify for all products. Shipping high-value or time-sensitive items by air and using longer sea routes for the rest may offer a more comfortable balance. 

A Move Toward Diversification

Of course, all three of these strategies are only temporary fixes. Viewing this crisis as the latest in a growing pattern of disruptions highlights the importance of more long-term solutions. For many, these adjustments start with supplier diversification.

Reliance on a single supplier or even one part of the world makes retailers more prone to issues like the current Red Sea situation. These events wouldn’t be so disruptive if this one route didn’t account for so much of some company’s supply. Sourcing from a more geographically diverse set of partners is more expensive upfront, but it mitigates these crises when they arise.

Previous studies suggest diversification can cut potential losses in half when supply chain disruptions arise. Strategies built around that idea do assume that these unexpected events will happen — they don’t pay off unless they do. However, considering how many of these situations have arisen in the past few years alone, that’s a reasonably safe bet for many retailers.

Emphasis on Transparency

Any effective diversification strategy also needs to emphasize supply chain transparency. This is often a struggling point for retailers. Many businesses lack full visibility into their on-hand inventory, much less over what their broader supply chain looks like.

Bridging that gap will require investment in new technologies. Multi-tier digital inventory systems and Internet of Things (IoT) tracking solutions ensure businesses create the most efficient supply chains by providing a complete view of them. Having real-time data across the supply chain makes it easier to see where potential disruption-prone processes lie.

Once retailers recognize their weak points, they can take measures to prevent extremes like the Red Sea crisis. Because conditions can change quickly, these strategies must continually review real-time supply chain data to ensure long-term resilience.

Planning for Future Disruption

Similarly, the Houthi attacks will likely spur further investment in scenario modeling. Disruptions have become too common for retailers to not include their likelihood in long-term planning. Even before this current crisis, freight rates rose nearly 10 times over after the onset of COVID-19. The only way to minimize the damage is to plan for likely disruptive events like this in the future.

Retailers can’t predict everything, but they can review their supply chains to see what kinds of disruptions are more likely than others. Then, they can use tools like AI and digital twins to determine the best way to prepare for them.

For some companies, this may look like switching to a supplier further away from the coast to minimize the threat of extreme weather. For others, it could mean reshoring to shorten travel distances and reduce touchpoints for supply chain fraud to occur. Whatever the details, case-specific scenario modeling will make retailers more resilient.

The Red Sea Crisis Could Reshape Retail Supply Chains

It’s difficult to predict how long the current Red Sea situation will last and what its total economic toll will be. What is certain, though, is that retail supply chains can’t continue the way they have if they hope to avoid similar situations in the future.

The Red Sea crisis will serve as a wake-up call for some retailers. Disruptions like this signify it’s time to embrace a more resilient long-term supply chain strategy, even if that means higher upfront costs.