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In today's blog, we will confront the biggest challenge that is often faced by companies around the globe and sometimes even nations seem to bear the cost. Trade around the world and working of these companies seem to be just perfect and seamless but have you ever wondered what goes behind the scenes?
The entire system of supply chains is what keeps the world going. The major aspect of any business lies in its supply chain management. In simple words: A company cannot go on without first establishing a proper supply chain department.
So, let's start with an introduction of what is supply chain in general terms.
Supply chain for an e-commerce company:
Anybody reading this blog must have at least ordered a product online once. The process goes like this: the e-commerce company operates a website, and that website sells various products. When you place an order for a product, the order is being processed by technology such as a checkout cart. Then comes the payment processors which deal with the payment transactions for the order, which opens up a new supply chain.
When your order is placed, the warehouse receives the order and ensures the product is ready for delivery. The warehousing company can be either in-house or a third-party logistics provider. You can locate the warehouse while you are tracking your order.
The order then goes from the warehouse to the shipping company. Once again, the shipping may be in-house or a third-party shipping company. After shipping, the package arrives at our door and the customer receives it.
Now, we might have never given it a thought but this is what a complete chain of supply looks like.
Generic supply chain:
The other one is generic supply chain which involves the sourcing and extraction of raw materials. Raw materials are taken by a logistics provider to a supplier, which acts as the wholesaler. The materials are then taken to a manufacturer, or probably to various manufacturers that refine and process them into a finished product.
Afterward, it goes to a distributor that wholesales the finished product, which is next delivered to a retailer. The retailer sells the product in a store to consumers. Once the consumer buys it, this completes the cycle. Due to continuous demand, this cycle continues.
These are two very simple and individualistic examples and I used them for your better understanding. When we look at the global aggregated demand and supply, the process of supply chain becomes more like a complex mesh. It isn't just limited to logistics or management, it has many more branches. But due to the extensive nature of the topic, we shall limit ourselves to the various passages through which transportation occurs.
If you would like to know more about it, tell me in the comments and I will come up with a separate blog on it very soon!
Importance of having a supply chain management:
''You only know the value of something when it's gone'' - This saying stands very true here. It's difficult to imagine a world without supply chains because they contribute to our lives, improve our quality of life, create job opportunities, and most importantly, help in the exchange of commodities.
But yet, we often overlook its importance until it becomes problematic. The recent event where a giant ship, Ever Given blocked the Suez Canal that led to a total trade loss of roughly $54 billion in just six days is a perfect example of the inconvenience that the world may experience because of a disrupted supply chain.
The global supply chain management market size was valued at $15.85 billion in 2019, and is projected to reach at $37.41billion by 2027. But according to McKinsey on average, companies can expect to lose half of a year’s profits over the course of a decade and that's just because of disruptions like the recent one.
Also, COVID has shone a spotlight on the ''weak links'' in the supply chain ecosystem. As countries are going into lockdowns, there are border controls and customs regulations which leads to longer wait times and therefore, the entire process get delayed.
The most important driver - Transportation:
I can still recall the times when I stood on the Jeddah Islamic Port, watching my father instruct the people unloading the huge containers. I always wondered where those things come from because all I could see was the vast ocean and back then I was too young to understand that the ocean has many other purposes than just being the largest water body.
When we say transportation, import and export are the core aspect of it. Companies, nations all indulge in this activity and that's where the waterways come into use. These are the major shipping routes for global trade. While some transporters of goods have turned to rail, that option has barely made a dent as about 90% of world trade is transported by sea. It is less costly, more efficient, more time-consuming though as it can take weeks or even more than that at times but the pros overweight the cons and that is the reason why a majority of traders use these routes. Let us get an understanding of all the major lanes and routes:
Panama Canal: The Panama Canal connects the Atlantic Ocean to the Pacific ocean and helps in the navigation of about 14,000 ships every year. These ships usually carry vegetable oil and fats, canned and refrigerated foods, chemicals and petroleum chemicals, lumber, machinery parts and, grains.
It is a manmade canal and before its existence ships would need to sail through Cape Horn at the southern tip of South America and there, they come across strong winds and currents which made it a tedious journey.
The English Channel: Known as the busiest, it connects the North Sea to the Atlantic ocean. Also, it serves as a border between England and France. Almost 500 ships travel through it each day carrying products like grain, minerals, steel and, oil.
Strait of Malacca: This is the shortest route between the Pacific and the Indian oceans. It connects all the major Asian economies such as India, Indonesia, Malaysia, Singapore, China, Japan, Taiwan and, South Korea which makes it the world's second-busiest waterway. Around 1 lakh ships pass through it each year carrying goods which include coal, palm oil, Indonesian coffee and, liquefied natural gas.
What makes it even more important is the fact that it facilitates around 25% of the world's trade due to its geographical location.
Bosphorus Strait: This is a Turkish strait that connects the Black Sea to the Atlantic ocean. The strait is 19 miles long, 120-408 feet deep, and has a maximum width of 2.3 miles. Because of its size, it serves more like a boundary between Europe and Asia than as a trade route but it is significant because this is the route through which oil, commercial and military trade takes place. About 48,000 ships navigate the Bosphorus each year. These include general cargo ships, bulk carriers, chemical tankers, containerships, livestock carriers, and liquid petroleum gas carriers.
The Suez Canal: So, here comes the most talked about route in recent times. We know that the Suez Canal was blocked by a giant ship. But why did that create a hiatus and became a piece of global news?
That's because of the geographical location of the canal and also because it carries over 10% of global trade. It is the shortest maritime route between the Atlantic and Indian oceans. Today, it’s considered one of the world’s most heavily used shipping lanes, with more than 100 vessels traversing it daily carrying commodities such as petroleum, coal, metals, wood, oilseeds, cement, and fertilizers. But all these ships travel one-way and that's because the canal can't regulate two-way traffic.
Some of the other lanes which I haven't mentioned but are equally important are: Strait of Hormuz, which connects the Gulf of Oman with the Persian Gulf. It is a critical route for oil transportation.
Danish Straits, which consists of not one but three channels namely, the Oresund, the Great Belt, and the Little Belt. These interlink the North sea to the Baltic.
Saint Lawrence Seaway, which permits ships to travel from the Atlantic Ocean to the Great Lakes of North America.
Now that we know the important lanes through which the majority of trade takes place around the world, we can realize the economic impact that it will have if one of them suddenly stops working for some reason. The scenario will be the same as the Suez Canal or can even be worse. Take this example. The Suez Canal has about 100 ships passing through it each day and the blockage lead to a world trade loss of $9 billion per day. Now imagine, if a giant carrier blocked the English Channel or the Strait of Malacca which allows the passage of about 500 - 3000 ships each day. What do you think will be the economic impact?