Trade Lanes and Supply Chains

Trade Lanes can change for a variety of both short and long term factors. But that does automatically equate to a situation that will affect or influence your organisation’s supply chains.

Trade Lanes provide information on the direction of a trade, typically across international borders between ports, countries, or regions. Trade Lanes are linked with economic, political, and geographic factors and are an input to an organisation’s logistics strategies. However, a Supply Chain has a wider scope. It is the network of organisations, resources, activities and technologies involved in the production, sale and delivery of a product from materials at farms and mines, through the production stages at supplier’s suppliers to delivery at the customer’s customers. 

The Supply Chains group in an organisation must be aware of whether changes to Trade Lanes could affect or influence the organisation’s supply chains. For example, while re-routing ships around Africa to avoid the Red Sea and Suez Canal is a change to a trade lane, it does not change the supply chain for a business as the departing and arrival port remain the same.

Change to structure of Supply Chains

Events that have a long term ‘driver’, have some involvement of government(s) and a response from multi-national companies (MNC), are more likely to effect change in one or more of an organisation’s supply chains.

The current ‘driver’ for thinking about change in supply chains is use of terms ‘de-linking’ and ‘de-coupling’ where trade between countries is biased in favour of one. Emphasising diversification of supply markets has provided an example of supply chain resilience, as companies can identify suppliers and owned or contracted manufacturing locations to rebalance their trading risk exposure.

This has also been highlighted by discussions about ‘strategic sectors’ and ‘critical materials’. The former are industry sectors (such as banking or agriculture) that must be protected (through laws, tariffs and subsidies) in a country’s national interest. For ‘critical materials’ the current emphasis is on electricity generation and electric vehicles (EV). The International Energy Agency (IEA) has identified that an onshore wind turbine farm requires nine times more mineral resources than a gas fired power station with an equivalent output. And, the typical EV requires six times the mineral inputs of an internal combustion engine (ICE) vehicle.

This has generated the argument that countries should build sovereign capability for materials and items that have high risks attached. An example is the proposed ‘democratic supply network’. The potential members are the G7 countries: US, Germany, Japan, UK, France, Italy and Canada, plus South Korea and Australia. The group accounts for nearly 50 percent of the global economy by value. Of these nations, Canada and Australia are the major sources of critical raw materials required for renewable energy generation equipment.

The press release stated that the group would “redraw the global trading system for essential inputs to ‘green’ technology and set a precedent for other sectors, where countries of the group want to establish China free supply chains”.

However, China is resilient and as the world’s major exporter of manufactured goods, will adjust its supply chains. Similarly, the situation for Russia since the Ukraine war has seen a re-direction of its trade. In addition, sanctions, tariffs, industry promotion (or protection) and carbon emissions reduction measures by countries or trading blocs will also be enablers for re-directing trade and changing supply chains. It will most likely enhance membership of trading blocs (called ‘free trade agreements’) that attract countries with mutual trade policies.

Supply Chains group perspective

These developments require an organisation’s Supply Chains group to have a global perspective, with Procurement given responsibility for managing risk in inbound supply chains. A minimum range of global risks should be tracked and their relevance to the business and its supply chains evaluated.

To increase visibility of the Supply Chains group, a quarterly review of the relevant risk factors should be presented to senior management. This could be in the form of a ‘radar’ chart, identifying the main business risk factors that can affect supply chains. For example:

Climate

• International/National regulations to reduce carbon emissions
• Seasonal severe weather events: storms (hurricanes, typhoons, cyclones), droughts and wildfires that stop commerce

Geopolitics

• Geopolitical tensions that affect commerce
• Trade Lanes tensions at sea transport choke points
• Conflict between countries over land and water

Health

• Next pandemic
• Travel restrictions

Information technology

• Global cyber attacks
• Digital communication networks collapse

Trade Lane flows

• Economic/financial crisis
• Breakdown in global trade system due to protectionism (tariffs and quotas)
• Export/Import controls on main production inputs

For each type of business risk, score the rating for each quarter of the year. The supporting risk analysis document identifies the extent to which the organisation’s supply chains are affected or influenced by global events. It addresses the main four areas of risk for the Supply Chains group: Supply Chains risk (including Power and Dependency risks); external risks to the Supply Network; internal (enterprise) risks and Supply Chains group risk.

It will be an advantage to identify critical suppliers at lower supply Tiers, for it is at these levels where exposure to geopolitical events and the associated concentration of supply can hide. Development of the Supply Chains Network Design Map and Supply Markets Intelligence is now a critical requirement. These documents will highlight specific suppliers for evaluation of: supplier internal risk; supplier location risk; supplier’s supply chain risk and supplier’s external risk. Where necessary, Scenario Analysis can be used to provide options for senior management.

The reality is that whatever the events that could influence a major change, the time to change supply chains will not be short. With analysis of trade-offs and choices as an input to meetings (and hopefully decisions), then planning and implementation, a minimum of five years for a major change in supply chains should be expected.

The events and disruptions in supply chains has the potential for the global supply market to move from relatively open to fragmented, with more regional supply chains. To be better prepared for addressing future challenges, companies need to implement a process that considers options for their core supply chains to improve resilience.