Volcano Disrupts European Supply Chains

I’ve been waiting to hear how supply chains have been disrupted by the Icelandic volcano that is spewing massive amounts of ash into the atmosphere. For those of you have been in a cave over the past week or so, it turns out that the ash makes it dangerous to fly. As a result, most airports in Europe have been closed for several days and air cargo has been grounded. Only in the past few days have some flights resumed.

An article in the Financial Times (“Pressure grows on supply chains”) noted the following:

Air freight accounts for a tiny amount of world trade by weight – about 0.5 per cent for the UK. But the disruption has highlighted how it plays a vital role in supplying key, high-value components to many manufacturers. In spite of its tiny volume, it accounts for 25 per cent of UK trade by value. 

Among the carmakers, BMW and Nissan said they plan to suspend some production this week because of disruption to supplies. Audi said it might have to cancel shifts because of missing parts.

Although all three mainly use suppliers based near their factories and use road and sea for most deliveries, they depend on air freight for a small number of high-value electronic components. Nissan, for example, said it might have to halt production of its Cube, Murano SUV and Rogue crossover models because it lacked supplies of a critical sensor made in Ireland.

Remo Eigenmann, head of air freight for Damco, the logistics arm of Denmark’s AP Moller-Maersk, said the situation had been exacerbated by a fall since the economic downturn in prices to use air cargo. That had made customers who would previously have used other modes or a mixture of air freight and sea freight switch entirely to air freight.

It doesn’t surprise me that the distribution of electronics components has been affected. They are high value, low weight goods.

According to a Boston Globe article, the distribution of high-value fresh produce has also been affected. 

Kenya has thrown away 10 million flowers—mostly roses—since the volcano eruption. Asparagus, broccoli and green beans meant for European dinner tables are being fed to Kenyan cattle because storage facilities are filled to capacity… Kenya exports 1,000 tons a day of produce and flowers—including roses, carnations and lilies…

Again, this is not too surprising.  High value, perishable goods are often routed through Amsterdam in a hub and spoke delivery chain. 

What did surprise me was not reading anything about the pharmaceutical supply chain being impacted. My understanding is that virtually all drugs pass through either Puerto Rico or (more to the point) Ireland for some form of valued-added packaging or manufacturing. This is done to reduce the taxes paid on these products. The disruption of the pharma supply chain has not yet been reported on.

I called Chris Jones, Executive Vice President at Descartes Systems Group, a Logistics Viewpoints sponsor and ARC client, to get his insights. Descartes is a leading provider of solutions for air freight forwarders.

Chris agreed, in addition to electronic components and high value perishables, pharmaceuticals and fine chemicals are industries that heavily make use of air cargo.   

I asked Chris about whether it would take longer to unwind these problems for air cargo than for passengers. Chris explained that some cargo flies in the bottom of passenger flights, while other goods are transported on planes devoted to cargo. The economic recession has led air carriers to mothball passenger planes. This has led to almost all passenger flights being full. This means the planes are heavier, so there is less capacity to carry freight. The mothballed planes cannot be brought back into service quickly. Consequently, there is little ability for passenger flights to carry more cargo. 

Our conversation then turned to supply chain risk management. To what extent might contingency planning have allowed companies to avert or mitigate the deleterious effects of this continent-wide disruption to air travel? My view is that for the perishable supply chain, other modes are just not practical, although it might lead to producers taking out more insurance in the future.

Chris agreed that contingency planning around air disruptions is much more difficult to plan for than for other modes of transportation. He viewed this kind of a continent-wide crisis as being a once in a hundred years, or even rarer, kind of event. In such a situation, adding inventory buffers or buying insurance might not make financial sense. He did think that this crisis could serve as impetus for European companies to increase the level at which they source regionally or engage in near-shore sourcing.   

I’d be interested in your views on this crisis. What other implications have not been reported on in the press? What impact has this crisis had on your supply chains? Feel free to email me at sbanker@arcweb.com or post a comment.

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