How businesses are dealing with the impact of trade and shipping disruption

Ongoing humanitarian conflicts in addition to recurrent container ship attacks in and around the Red Sea are putting immense pressure on global trade.

The Red Sea is a vital trade route connecting Asia and Europe, and accounts for 12% of global trade.

Supply chain issues have already been causing challenges for businesses in a post-Brexit and Covid world, with delivery times of some raw materials taking months and businesses having to pay over the odds for certain shipments and materials.

But now, the Red Sea crisis is forcing many ships to reroute: shipping giant Maersk warned recently that vessel diversions could continue well into the second half of this year.  In many cases, shipments have been cancelled or suspended.

A recent Bloomberg report said the ongoing chaos could soon eat into companies’ profits.

To mitigate the worst effects of trade disruption, some businesses such as Tesla have been forced to temporarily halt some business operations, while others are expected to pass increased costs on to their client base.

Retail, automotive and fashion are some of the worst affected industries. There are fears too that the crisis could lead to price hikes of certain consumer goods and food inflation. Other business impacts may include:

• price hikes for container hires (a recent British Chamber of Commerce (BCC) report found some firms were faced with a 300% hike, for example)
• material shortages and increased costs of in-demand materials
• reduced revenue due to delayed or suspended shipping, slowed production and fewer sales
• profit erosion.

We spoke to accountants across the UK whose clients are impacted by trade disruption to find out how they’re attempting to mitigate these challenges.

Small businesses are worst affected and support is welcome

Karen Feltham MAAT, Owner, Aligned Accounting

Shipping delays in the Red Sea have disrupted many of my clients in various industries, although automotive and retailers are most affected. The longer this continues, the more likely it is to affect other industries.

Just the nature of retail means it’s fast-moving and when supply can’t meet demand because of the timely movement of goods, the impact is huge. It’s been an issue since late last year.

Shipping delays due to route disruptions have led to port congestion, delays in opening containers and then bottlenecks at customs, all of which have been very hard for businesses to navigate.

Evaluating, adjusting and adapting has been necessary, whether this is through seeking different suppliers or exploring alternative shipping routes with other companies.

Even so, shipping container costs have massively increased, which damages profits. Tough decisions have had to be made, as the costs can only be absorbed so much before they’re passed to the end user. This puts pressure on businesses to maintain their competitive edge.

The impact has been more severe on small businesses than on larger companies, mainly due to the smaller profit margins and pressures on owners and staff to negotiate the challenges in a timely manner. Support for small businesses in this climate would be welcome.

Verdict: Small businesses are worst affected – they’re having to seek alternative shipping routes or pass on increased costs to customers.

Businesses are planning ahead but costs will keep inflation high

Theo Theodoulou, Kreston Global Audit Group Chair

Clients tell us shipping disruptions are having significant effects on their operations. They are failing to receive inventories on time, which is causing frustrations to end clients. This also means that businesses are now unable to plan ahead with orders and deliveries.

In addition, businesses were not able to predict the impact of global conflict when quoting prices. Anyone who quoted the cost of shipping under ‘normal’ conditions will have taken a significant hit on profit margins since shipping costs have increased dramatically. This is a very similar story to that of post-Covid era.

Most businesses are now planning ahead for the delivery orders and piling inventory in advance. Some other clients are looking into air freight options where possible, prices permitting. We have not heard of businesses ceasing operations, however there is the intention to pass increased costs to customers and this will unfortunately maintain high inflation rates for the 2024 economy.

Verdict: Businesses are planning ahead but passing on costs will keep inflation high.

Suez Canal delays taught us to keep smart inventory

Farha Jamadar, Head of Finance, Todd Doors and Treasurer, Scottish Council for Voluntary Organisations

As a business that imports its products, the Middle East conflict has really affected our supply chain and lead times. Additionally, suppliers have had to increase freight costs reactively due to this disruption, which has affected our gross profits and the prices we sell at.

This is not the first time this has happened – we have had a very similar issue when there were delays in the Suez Canal. After that happened we were all able to pivot and contact customers, updating them on the situation.

What we learned the first time around was how much this affected business and our seasonality. So as a precaution, we do keep a smart inventory of stock so only limited amounts of customers are affected.

People are understanding and amenable to problems caused by the conflict in the Middle East. But we have also been working closely with suppliers to overcome this situation.

Verdict: We keep a smart inventory of stock due to lessons learned from previous delays in the Suez Canal.

The situation is dire for many businesses

Vipul Sheth, Chartered accountant and MD, AdvanceTrack

The situation is dire for businesses reliant on timely shipping, particularly wholesalers and manufacturers, with tight turnaround times.

Beyond the obvious financial losses coming from disrupted supply chains, it can mean profound challenges in demand forecasting and inventory management. Companies may struggle to accurately anticipate product demand due to uncertain delivery timelines, leading to potential understocking or overstocking issues. This not only translates to lost sales and revenue, potentially eroding market share, but also jeopardises customer or client satisfaction.

We have spoken with plenty of major international groups who say this is impacting their ability to serve customers. Fast fashion retailers for example who have supply chains in South and South East Asia are having to switch product manufacture based on how quickly they need to change demand. Some faster fashion products are being shipped from Turkey for example, rather than countries like Vietnam or Bangladesh.

Others have reported significant extensions in delivery times.

While it’s exporters, wholesalers, and manufacturers who are the most affected, repercussions from those firms are already impacting others along the supply chain, too.

Companies are doing what they can to minimise impact by:

• recalibrating supply chain strategies
• diversifying transportation modes
• seeking alternative shipping routes to circumvent the affected areas
• revising demand forecasting models and inventory management systems to account for potential disruptions
• exploring contingency plans (allowing extra time for deliveries, prioritising critical shipments or temporarily ceasing non-essential operations to alleviate pressure on strained logistics networks etc.

Unfortunately, these aren’t quick and easy tasks and often come with an additional cost, meaning businesses may need pass on increased shipping expenses to customers and clients.

Verdict: The situation for many businesses is dire, but they are trying to minimise impact by diversifying transportation modes, exploring contingency plans and revising demand forecasting models.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected].

Annie Makoff is a freelance journalist and editor.