With some 30% of global container traffic passing through the Suez Canal, the Red Sea crisis is having a massive impact on global supply chains. Houthi rebel attacks on cargo ships are driving a nearly fivefold increase in the cost of shipping between Asia and Europe, fueling inflation by adding up to 0.7% to the cost of global core goods. 

Even the best alternative routes are adding thousands of miles, a dozen days and hundreds of thousands of dollars in fuel cost. And, given the global nature of our economy, few companies or industries are immune from the impact. The increased cost of raw materials and supplies, longer lead times, production delays and distribution challenges will have knock-on effects across the entire manufacturing sector long after the crisis is contained. 

This, of course, is just the latest supply chain disruption to plague manufacturing, and it certainly won’t be the last. That’s why manufacturers must take immediate steps, not only to mitigate the damage, but also develop supply chain flexibility and prepare for inevitable future disruptions.

Developing a risk matrix for the Red Sea crisis should be the first step toward building supply chain resilience. The risk matrix is a proven model, used since the late 1970s, to assess the impact of various scenarios based on the likelihood of occurrence and the severity of consequences. It’s a relatively simple diagram that can provide a foundation for critical decision making. 

To develop a risk matrix for handling supply chain disruptions, manufacturers should ask themselves these questions:

• What can go wrong? Identify the variables and failure modes that could impact your supply chain. These could include pirates in critical waterways; geopolitical conflict; and a natural disaster such as hurricane or typhoon, domestic unrest or even a cyber-attack. It should cover a wide variety of scenarios: If you’re even questioning whether you should plan for a specific scenario, the answer is “Yes.”
• What’s the likelihood of it happening? Use historical data to conduct probability assessments. For example, the Middle East has been a center of turmoil for over 2,000 years, so the likelihood of supply chain disruption there is chronically high. Similarly, don’t expect relations between the U.S. and China to thaw anytime soon. And don’t forget the constant threat of a natural disaster.
• What is the impact? Assess and rank the potential impact each of these variables on the business, including delays in parts or raw materials delivery, increased cost, productivity loss, margin erosion, or inability to source inputs or even fulfill orders at all.
• What will we do? Develop mitigation strategies to address each variable by identifying a range of solutions at every level, such as using alternative transportation channels, reshoring your production and finding alternative materials to retool designs. 
• How well will it work? Model various scenarios to test the options for handling supply chain disruptions by conducting SWOT (strengths, weaknesses, opportunities and threats) analysis on each potential mitigation. You don’t want to inadvertently create a new problem in the process of trying to solve another.
• How long will it last? Consider the expected duration of any potential disruption. Establish trigger actions that denote when escalated mitigation strategies will be implemented. What happens if a situation goes on longer than two weeks, a month, or more? For example, you may be able to absorb some shipping delays with your current stockpile for a month, and you may be able to afford alternative shipping routes or modes for three months. Then what? Decide in advance how long you can tolerate pain points before it’s time to move to the next-level mitigation strategy.

Risk matrices should be living documents that companies adapt and evolve regularly to align with changing global dynamics. This is not a one-and-done exercise to file on a shelf. 

Be sure to include downstream operations. The risk matrix must also integrate with and address production planning, sales, marketing and distribution. What good is it to schedule production or make a bunch of product if you can’t ship or deliver materials?  

While building a risk matrix for the Red Sea crisis is a must for manufacturers, you should still take a step back even further. Today it’s the Houthi rebels seizing containers in the Red Sea, but tomorrow it could be a traffic jam in the Panama Canal, a hurricane that hits a major shipping port or a public health emergency that shuts down suppliers.

A risk matrix provides a strong defense, but a strong risk-management strategy should also include an aggressive offensive. Consider tactics like dual-sourcing of materials and supplies, nearshoring manufacturing, or reshoring the supply chain. 

Another option is value analysis value engineering (VAVE), to identify alternative components and materials in the design phase of the product. Including supply chain risk assessment as part of the product development process allows you to design around potential risks, save yourself tremendous hassle down the road, and out-maneuver the competition when a crisis occurs. 

Finally, driving efficiency across operations by addressing things like scrap rates and rework and scrutinizing production processes can uncover trapped productivity to help offset the increased cost of supply chain events.

The bottom line is that if you’re still viewing supply chain disruptions as one-off or random occurrences, you’re doing it wrong. These events are chronic and inevitable. It’s time to proactively build risk into your strategy to manage any crisis.

Bill Remy is chief executive officer of TBM Consulting.