We live in a time where we can get what we want almost instantly. When we order something on the internet, it can usually be delivered within a few days. When we go to the store, we expect to shop from fully stocked shelves.
The past few years have exposed the vulnerabilities of the global supply chain – something that businesses in most industries have felt the impacts of. These changes have required logistics companies to adapt to a constantly changing environment in order to move products and goods throughout the world.
Due to everchanging supply chain issues, businesses have become experts in shipping logistics. “This has pushed companies outside of their comfort zones to try to find alternate ways to get their products out,” said Karla Scott, senior managing director of ocean marine at The Hartford. “So, while I do think the supply chain disruption is a short-term problem, it’s also creating more issues for businesses, like increased costs, inventory and risks.”
Many businesses use a shipping logistics company to manage order processing and the transportation of goods and products. From receiving, processing, delivering and storing inventory, it’s the shipping logistics company’s responsibility to move the product through the supply chain.
What Are the Current Supply Chain Issues?
Supply chain efficiency is essential. Delays and bottlenecks are friction points for an already stressed process. Many factors contribute to current supply chain issues, with the main ones being demand, material supply, bottlenecks and labor shortages, Scott explained.
On top of that, material shortages add another layer of complexity to manufacturing. For example, a semiconductor chip shortage continues to affect the electronics, technology and automobile industries. Semiconductor chips are present in some of the most common technologies. They are responsible for powering consumer electronics, automobiles, data centers, critical infrastructure and virtually all military systems.1
Currently, Taiwan produces 90% of the world’s semiconductor chips, which makes them a leader in the market.2 Because the majority of production operates in one country, even a short disruption could cause issues throughout the entire supply chain that could last up to a year.3
In addition, there’s also an equipment shortage in which companies are trying to operate with existing machinery and tools while also investing in and waiting for more advanced or greener environmentally friendly technology.
How Bottlenecks and Shipping Delays Impact Logistics
Bottlenecks throughout the supply chain are causing extensive delays. In March 2021, the Ever Given, a 20,000-ton cargo ship that can carry 20,000 containers, became wedged in the Suez Canal, blocking ocean traffic for six days. It’s estimated that the jam prevented $10 billion in cargo a day from moving through the Suez Canal.1
It’s not just during transport, either. Port inefficiencies are a major cause of the supply chain bottleneck. If ships get held up at a port or they can’t unload cargo quickly, the delay has a rippling effect on the supply chain.
Some ports, like the Port of Long Beach, are investing in newer equipment, like environmentally friendly autonomous cranes, to help improve efficiency, Scott explained. But it’ll take more than a year for these cranes to be built and delivered, which means the ports will continue to face logjams.
“Investment in port infrastructure is happening but perhaps hasn’t kept pace with the growth in size of container ships and demand,” Scott explained.
Shipping Logistics: Ocean Freight vs. Air Freight
Typically, companies rely on ocean freight to transport goods. “About 90% of all global trade goes through ocean vessel,” said Scott. This is due to the cost of air freight being exponentially more than shipping by sea.
The other big difference between ocean and air freight is speed. Shipping goods on a plane means they’ll reach their destination faster than traveling by sea. Because of this, using a cargo plane is generally reserved for more expensive goods or perishable products.
“A shipping container can be 40-feet long or 20-feet long and can hold a lot of materials. With air cargo, you’re sending goods by pallet. The physics of a plane can’t hold the same amount of weight as a shipping container,” Scott explained. “You can’t just flip a switch and immediately start using air freight.”
She added that companies may begin to rely more on-air freight as online orders increase and people choose not to go to a physical store.
“It is expensive to do this, though, and it ties into inflation,” she noted. “The cost for goods won’t be the same.”
Positive Trends for Core Inflation Rates
As we continue to navigate supply chain disruptions, some trends are improving. Inflation, excluding food and energy, declined from 5.3% to 4.8% in July 2023. Within this category, goods inflation fell to 1.3% while services fell to 6.2%.4
Many contributors to inflation have fallen across the board due to supply chain improvements and goods moderation. As supply chain concerns even out, goods inflation will continue to normalize. This in turn will lower the cost of goods, as items will be more accessible.
Can Moving to Local Manufacturing Solve Supply Chain and Shipping Logistic Issues?
If you try to trace the origins of a product or good, chances are high that it goes through an extensive supply chain that moves through different countries.
Clothing, for instance, isn’t just made in one country. A company must secure the materials, like the fabric and zipper, and then it has to get assembled. These steps likely involve different countries. And once the clothing gets made, it gets transported to another country to be sold.
A common thought is shrinking the supply chain and moving to local manufacturing. That way a company wouldn’t have to deal with delays and other shipping issues. But it’s not that easy, Scott emphasized. A lot of goods, like clothing and technology, are assembled in Asia or South America because of labor costs, she said.
“Most consumers don’t want or can’t afford to have labor costs 100% in their country. It would mean trips to the store would cost $1,000 instead of $200,” she explained. “In addition to the cost increase, the U.S. also doesn’t have the facilities to manufacture all goods.”
Insurance Coverage Amidst Supply Chain Issues
Given the delays and issues in the supply chain, businesses and logistics shipping companies face risks as they try to move products and goods.
It’s why businesses need to make sure their insurance coverage is up to date. The Hartford’s ocean marine insurance coverage helps protect an insured and their products.
The insurance company also launched new products for logistics coverage:
- Transit: Cargo legal liability, freight forwarder legal liability, bill of landing liability
- Inventory: Warehouse legal liability
- First-party transit: Shipper’s interest
- First-party transit/inventory: Bailee/Terminal coverage
- Professional liability: Freight Forwarders E&O
Given the complexity with logistics, Scott said each customer also gets a dedicated claims adjuster who’s experienced in contractual liability.
“We’re covering both sides of the equation from an insurance perspective: first-party liability and the logistics company’s liability,” Scott said. “We’re covering multiple parts of the supply chain, from the manufacturer, distributor and freight along the way.”
Ongoing Supply Chain Issues
Companies are now facing a challenge of evolution in supply chain. Pre-pandemic goods were shipped in what was referred to as “Just In Time” (JIT) delivery where companies kept minimal inventory to reduce costs, constantly drawing on their supply chain on demand, but the pandemic and supply chain bottleneck demonstrated a vulnerability in that JIT model. In 2022, as the supply chain caught up, we had a glut of inventory and severe shortage of inventory space.
In 2023, retailers are facing a world of much less brick/mortar in person shopping and instead have a focus on Ecommerce, where the demand to have goods processed and shipped quickly to individual consumers is a growing dynamic. Many logistics companies are now getting into a bit of 4PL (forth party logistics), whereby they do some kitting, light assembly as part of a value add, and differentiator. This creates a bit of a different challenge from the underwriting side because now logistics companies take care, custody and control of the product.
An International Partnership to Help Protect Businesses Globally
Whether logistics companies and businesses use ocean vessels or air cargo to move their goods and products to customers, having the right insurance coverage is important. Even if a company has existing coverage, it’s a good idea to review coverage details given the current economy, Scott said.
The Hartford manages Syndicate 1221 at Lloyd's of London. This gives both our brokers and their clients the opportunity to access alternative market capacity within The Hartford Group.
It’s a unique “symbiotic relationship,” said Clive Nix, a transport and marine liability underwriter for The Hartford’s international team.
Specialist brokers operating within Lloyd’s may not necessarily know that The Hartford underwrites ocean marine and other related coverages, Nix added.
“This is where the trust element between us and the placing broker is crucial. If we’re able to introduce Karla to the specialist brokers and gain their trust that we won’t cut them out and deal directly with a client, then over time, they’ll see Karla as an extension of their network,” he explained. “This partnership is key because it allows The Hartford and brokers to help improve the coverage portfolio of customers.”
1,2 “Global Insights Interview: Episode 1 | The Hartford,” YouTube, July 2023
3 “Fixing the U.S. Semiconductor Supply Chain,” Harvard Business Review, October 2022
4 “US Inflation (Monthly),” The Hartford’s Global Specialty Insights Center, July 2023