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Blog: Wednesday, 14 April 2021

Global supply chains have repeatedly been disrupted by a variety of events, including terrorist attacks, climate change, financial crisis and the Covid-19 pandemic. The impact of those disruptions is aggravated by lack of transparency. Global trade has defined who we are, but in order to sustain into the future, it needs to become transparent.

Yet another global supply chain disruption

The humongous deep sea vessel Ever Given, loaded with 18,000 maritime containers, blocked the Suez Canal, an important artery of global trade, for almost a week. The container vessel is heading for the port of Rotterdam, which is facing an array of similar vessels, all arriving around the same time and hungry for berth and crane capacity to load and unload their containers. Inside these containers are all sorts of products, both consumer goods and parts destined for factories waiting to process them just-in-time into assemblies. The delayed delivery of this large amount of trade – about 80 container vessels, 100 crude oil tankers and 30 bulk carriers faced delays due to the blockage – will disrupt the supply chains of retailers and manufacturers for weeks, and sometimes even months. The blockage of the Suez Canal and its aftermath have immediately triggered a debate around the legitimacy of globalization.

Globalizing companies have dissected their manufacturing and service provision into small processing steps, and they have outsourced these steps to suppliers around the globe, based on favourable conditions such as low wages, specialised skills or lenient regulatory constraints. These companies have also reached out to new markets around the globe. In global supply chains, these product and service components are brought together into final deliveries through global logistics, information and organisational networks (see inaugural address Rob Zuidwijk). Standardization and technological developments have reduced the costs of communication and transportation spectacularly, and the maritime container is the exponent of this development. The title of economist Mark Levinson’s seminal book on containerization articulates this well: "The box: how the shipping container made the world smaller and the world economy bigger."

The exponential growth of global trade and logistics has come at a price. First, important drivers of globalization are the economies of scale reaped by traders and carriers when trade flows and container vessels grew larger, but this has burdened other parties in global supply chains. Second, dissected into many parts, global supply chains have become more complex and less transparent, creating inefficiencies and risks. Third, lack of transparency hinders accounting for environmentally and socially benign practices, which deteriorates the legitimacy of global trade.

The Suez Canal incident reveals that as the size of container vessels remains to grow and challenge the dimensions of supporting infrastructures and services, the operational risks are growing as well.

Logistics: size matters!

The enormous growth of global trade was paired with the growth of the vessels carrying the traded goods, either bulk or containerized products. This brought economies of scale to the deep sea carriers that operated these vessels. But, in order to accommodate these vessels and the accompanying container flows, deep sea ports and artificial shortcuts such as the Suez Canal and Panama Canal, needed to make huge investments in port infrastructure, terminal equipment and inland transportation network infrastructures and services. The International Transport Form published the 2015 report “The impact of mega-ships”, which argues that the economies and diseconomies of scale are not evenly distributed in the container chain. The Suez Canal incident reveals that as the size of container vessels remains to grow and challenge the dimensions of supporting infrastructures and services, the operational risks are growing as well. Together with the time criticality introduced in global supply chains under just-in-time regimes, the pressure on global supply chain operations under a year of Covid-19 pandemic, the Suez Canal blockage is pushing supply chain managers one step further into despair. As Financial Times subheadings emphasise: Stuck container ship symbolises the problems many supply chains are facing after a year-long pandemic.

 

Information: what is happening upstream?

Due to the complexity of global supply chains, disruptions such as delays in the delivery of goods are not easy to solve. Global supply chains typically consist of multiple tiers of suppliers and customers. The receiver of the goods may be aware soon enough of the delay and may scramble to mitigate the consequences of it, but downstream customers may be completely unaware and ill-prepared. Mayor disruptions caused by natural disasters such as earthquakes, flooding and pandemics, geopolitical risks such as Brexit, and operational risks such as blockage of ports and critical infrastructures have repeatedly caught manufacturers by surprise while unknown upstream suppliers were not able to continue production of vital subcomponents. Some companies have started to review their outsourcing, including nearby and remote facilities in their supply base, to manage these risks. Even before the Covid crisis, McKinsey argues in their report “Supply chain risk management is back” that supply chain risk management, including sourcing strategies, remains very relevant.

Transparency among supply chain actors by proper development of information and collaborative systems will help create the visibility needed to manage risks effectively even when goods are sourced remotely and several tiers upstream.

 

Organisation: are we doing the right thing?

Beyond the call for management of disruptions in global supply chains, curbing globalization in order to manage the aforementioned risks is embraced as well, see for example this BBC news item. While globalization brings a lot of wealth to companies and nations, it is not necessarily beneficial for the planet nor inclusive. For example: How do we ensure that smallholder farmers that produce our food receive a fair share of the price we pay? How do we know that the carbon footprint of products we consume is indeed as low as possible? Transparency toward (external) stakeholders will help to account for the legitimacy of trade in terms of fair sharing of benefits and environmentally benign operations.

Despite the vulnerabilities of global supply chains, articulated once more by the Suez Canal blockage, globalization has a future. The way forward includes supply chain transparency. It may support co-ordinated investments in creating even distribution of economies of scale throughout the transport chain, supply chain risk management to engage with multiple sources of disruptions, and proper accounting for sustainability claims to ensure that the benefits of global trade reaches all that contribute to it.

prof.dr. R.A. (Rob) Zuidwijk
Professor of Global Supply Chains and Ports
Rotterdam School of Management (RSM)
Erasmus University Rotterdam
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Rob Zuidwijk

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