The attacks in the Red Sea have been another seismic disruption to global trade and supply chain operations. Alex Toews, Senior Director of Product Management at Fusion Risk Management, joins this Executive Perspectives episode to discuss what the Red Sea disturbance means for supply chain stakeholders, as well as the strategies and technologies organizations can leverage to navigate and prepare for such events in the future.
This interview was edited and formatted for clarity.
Tyler Fussner, Managing Editor, Supply Chain Connect
Alex, thank you for joining us today.
Alex Toews, Senior Director of Product Management, Fusion Risk Management
Absolutely. Thank you for having me.
Fussner
If you could please introduce yourself to our audience.
Toews 0:27
My name is Alex Toews. I’m the Senior Director of a project management group, an organization called Fusion Risk Management. I’ve been with Fusion in the technology space for a little more than five years at this point. I’ve spent a lot of my career prior to joining Fusion and prior to getting involved in the technology space as a management consultant, and that part of my career spanned about 12 years or so.
My focus, although in a couple of different roles at a couple of different organizations, was on risk management as a broad competency—everything from getting involved with compliance groups, internal audit, enterprise risk, third party risk, operational risk. I focused my time in a consulting capacity on helping organizations solve problems and figure out how to best tackle and create programs to manage, mitigate and understand the risks that they’re exposed to on an ongoing basis. I spent most of my time as a practitioner and consultant in this space and made the shift over into the technology area to start applying everything I learned, the different organizations that I saw struggle, the things that we helped stand up to let those organizations get their hands around the compliance obligations and mandates and understand everything that goes with it. I wanted to get into the technology space to really build and think about solving those problems in a sustainable and digital way, which is how the world operates today.
So, that’s a little bit about me.
Fussner 2:01
Alex, it sounds like you are the perfect person to speak to on this subject I wanted to bring up today, and that is the situation in the Red Sea. With your [experience] in managing risk and navigating turmoil, I want to hear your perspective. Can you give me a brief overview, before we dive into it, on the situation in the Red Sea and the attacks on commercial vessels? Maybe we can start with what is the significance of this sea in terms of global trade?
Toews 2:30
There’s obviously a lot happening in that area right now, and that part of the world, spanning greater than just the sea itself. There are geopolitical impacts and events that have probably exacerbated or at least stressed this environment that much more.
But, to put our finger on exactly what’s happening today, this situation in the Red Sea reminds me a lot of different kinds of vessel-type disruptions and supply chain disruptions that happened with the Somali pirates. Very, very similar. And so, to use that as some of the context for what’s happening in the Red Sea right now… That specific part of the world… When we think about supply chain and trade routes, it’s a massive route of trade, especially for things like oil.
And within the Strait and the surrounding areas, and part of the broader area, a lot of the disruptions that are happening are part of conflict that has been brewing and continuing within Yemen and has for a long time. The attacks that are happening the Strait right now… it’s such a strategic choke point for maritime travel in that part of the world. I referenced most specifically oil, which is one of the most systemic economic assets that the world relies on in lots of different ways. It really enables and facilitates a lot of different goods and other economic assets that the world relies on.
And so, the specific aggressors in this area have targeted ships attempting to disrupt the maritime traffic and try to exert leverage in their own conflict. Some of these attacks have included the use of missiles, sea mines, boats, both human-occupied as well as remote control, which is interesting. But there’s been significant both regional and international impact. At its core, just like a lot of the incidents with the Somali pirates and cargo ships and other trade routes, it has truly raised concern about the security of maritime travel. And when we think about supply chain, getting goods from A to B, and in this case globally to C, D, and the rest of the alphabet and beyond, about figuring out how to navigate these types of conflicts, and most importantly, protect people that are involved in these things.
There are broader humanitarian and geopolitical concerns, but at its core, there is some significant geopolitical tension. And even broader, we think about what’s happening in Israel and with Hamas and the Gaza Strip and there are ties between some of those groups as well. There’s been anecdotes that a lot of these attacks are actually in support of the Palestinian Islamist group Hamas or other things happening to Gaza Strip. There have been a lot of different forces working together here, and at the end of the day, those in Yemen who are targeting these ships, they’ve vowed to target all ships regardless of their nationality. This isn’t just U.S. ships. This isn’t just European ships. This is anybody passing through that area. They’ve warned all international shipping companies about moving through this area.
It is a very deep-seated context as far as what’s going on and the different forces at play here. But at its core, this is a significant disruption in the supply chain, and for an economic asset in oil that has a broad systemic impact when that type of trade flow is disrupted.
Hopefully that summarized it a bit. There is obviously a lot to get into and I am happy to expand on any and all, but that is the quick summary.
Fussner 6:08
I think there is a lot to untangle. Like you said, there’s so much that goes into this situation. Now, I certainly am not qualified to speak on the geopolitical or humanitarian impacts that the situation is causing. And I don’t mean to minimize the impact that that has on personal safety and the lives of these victims, but I would like to narrow in this conversation on how this impacts trade, how this is going to impact the global supply chain.
What have we seen as the immediate ramifications of these attacks? Certainly, anyone that is moving goods and relying on these commercial vehicles to navigate the Red Sea should be anticipating disruptions and delays and difficulties. How is this going to impact that trade route? How is this going to impact business in terms of being able to operate and get the goods that typically travel through that sea?
Toews 6:58
Totally agree with you, I’m absolutely not the person to opine on the broader implications, albeit tragic, on what’s happening here. But the impact on the economy and what’s happening from a from a trade route and supply chain perspective, the impacts are very indicative of other disruptions that have happened either in the recent past or further back, where you think of the Evergreen getting stuck in the Suez Canal, Somali pirates and other disruptions. The impacts here are broad and some of them are felt a little bit more rapidly but oftentimes, this is a snowball effect of how this will impact and when it will impact your modern consumer, which is really when attention is paid—when that consumer is feeling the impact of these things.
If I can organize and summarize my thoughts around the most significant implications when it comes to this is the disruption of, in this case, the maritime traffic, is going to simply disrupt the flow of goods. This will immediately lead to delays and rerouting of shipments, which in that part of the world can take a long time, especially when it’s secured or being moved by maritime traffic.
Again, referencing this part of the world and the types of trade routes that flow through here, there’s going to be an impact on oil prices. Given the volume of oil that passes through this region. When you have a disruption of this severity, the uncertainty and the risk that’s associated with that, whether it’s speculation or actual impact, it is going to lead to extreme price volatility. And so, we’ll start to see more and more of that moving forward. When it comes to the bottom lines of different organizations trying to either receive or move these goods, there’s going to be increased shipping costs; there’s going to be higher insurance premiums due to increased risk and speculation over future risks.
Oftentimes when things like this happen, we had hoped or wished we would have planned better to mitigate some of this. But when it happens, there’s going to be a premium moving forward as organizations try to move goods, at least in the immediate future, in this part of the world. This will incur additional costs and rerouting across a myriad of different organizations.
There’s going to be, broadly, significant supply chain delays. When I get back to my point around the disruption and what that’s going to do from a ‘getting things from A to B perspective,’ there’s going to be a global supply chain delay. It’s going to affect things like manufacturing, which relies on things like oil in heavy amounts to be able to process their goods or run their manufacturing lines or produce their widgets, whatever it may be. There’s going to be significant impact on things like retail and other like sectors that are dependent on things such as just in time delivery where other organizations are going to be essentially affecting strategies to hedge the cost or the supply of oil to be able to do what they can do.
From that perspective, the industry impact will likely be cascading and those which are first to receive are going to feel the impacts first and those who are dependent on that next chain—when we think about supply and value chain—it’s going to continue to ripple and cascade down that chain. But those impacts will be felt.
The last part of this (and this is more of a silver lining when we think about what the impact is—and this is less economic, but global and systemic in nature) is that companies are going to be forced to develop alternative or improved or enhanced supply chain strategies to help mitigate these types of risks. And we can get into some of those strategies and typically what happens as a result of this type of disruption, but they’re going to have to diversify shipping routes and understand things like concentration risk and maintain higher levels of inventory or identify alternate trade routes. There are a number of different things that I think will be employed as a result, which you hope that some of these things were better thought out or planned beforehand, but typically as a response to this, you see organizations start to pay attention and focus on what they’re doing about their broader third-party ecosystem, in this case, those which are more reliant on physical supply chain.
Fussner 11:17
You started to touch on exactly what I wanted to ask you. For those businesses and organizations that are feeling the impact and are feeling the pressure of this situation, is it too late to do anything now to mitigate such instances? Everyone’s going to have to go with rerouting and try to find ways to get the goods through that were already in route. What can they do today to help mitigate or is there anything that they can do today to relieve? Or is this going to be like, “Okay, we’re going to have to get back to the drawing board and reassess our business strategy at a much larger scale?”
Toews 11:51
It’s a good question, and I think there’s probably some truth in the mantra of “it’s never too late.” For some organizations, unfortunately, it might be too late depending on the size or scale or ability for certain organizations to weather this type of storm; it may be too late for some of those. But I think, more broadly, there are things that can be done, at least in the short term, to mitigate or stop the bleeding in a sense. A lot of what is going to be done is going to be improving the future outlook of these types of events and how they disrupt your ability to operate. I think that will be a large swath of what’s being done here.
As far as what can be done in the short term, and this is less to save your bottom line but more to maintain the ethics and the efficacy of your of your organization, is to make sure that first and foremost you are protecting your people and protecting the assets that they are driving. Organizations have an obligation and a mandate to protect their employees and make sure that they’re not foregoing their safety to try and risk a crossing in this part of the world. That’s from an-almost-ESG-perspective, right? They have to be able to make decisions that may not be in the best interest of their business right now, but that are also protecting their people and doing right by the tenants of their organization. So, first and foremost, that needs to be the most important and first focus for these organizations that are operating in this part of the world—they need to protect their human capital at all costs.
The next piece will be to diversify and change and figure out how you can change your routes and suppliers. Is there a way to diversify immediately or are there different supply routes that you can take (albeit they may be a bit longer)? Within the same vein of protecting your people, that’s an obvious first maneuver for a lot of organizations.
Longer term, they’ll have to evaluate and think about how they reduce their dependency on a single point of failure—just using this one route to be able to move goods.
The longer-term piece, outside of being able to identify different routes or different modes of transportation (whether that’s air or other), the result of this will be more transformational, which is oftentimes a really good result. As I spoke to earlier when we think about silver linings, usually some positive change happens. Some of it sustains; some of it is shorter term and organizations forget and move forward without maintaining this enhanced level of risk awareness; but for the most part, the organizations that will be around for a long time and continue to serve their customers and clients the best will be the ones that make the change, sustain that change and enhance their programs end to end. When I think about the program structure overall of how you not necessarily avoid but be able to navigate this disruption in a way where your customers and clients don’t necessarily feel the impact… because really at the end of the day, that’s the expectation. Your customers and clients don’t really care what’s happening to you. They expect to receive their services or receive their goods or receive their products no matter what. They expect you to just be in business. And so, the job of these organizations is to understand how they can remain in business and operate in spite of disruption, that no matter what happens, we need to continue to operate.
There are some core parts of a program that will start to change in the very short term. Enhanced monitoring and intelligence around understanding some of the broader, long-standing geopolitical conflict in that part of the world. That’s not new. These are things that have been happening either in a sustained nature or triggered by one-off type events. This part of the world has been disrupted for a long time. As an organization, if you haven’t thought of or analyzed or assessed risk traveling in that part of the world, you probably didn’t have a program to do so. Having an enhanced monitoring and intelligence capability, leveraging things like technology, if you’re not using technology, if you’re still in spreadsheets or operating on proprietary tools, it may be time to invest in your tech stack. Leverage more real-time monitoring, understanding where you may be risk-exposed, so that you can anticipate and respond to potential disruptions more effectively. That’s the core tenant of, regardless of the risk management program be it operational, third-party, enterprise, it is to understand—proactively—what is the potential impact of something happening in this part of my business.
You have to be able to have a process (and hopefully a digital technology-driven process) to understand and analyze those effectively so that you can make the appropriate decisions proactively.
It’s going to lead to a lot (if organizations haven’t done it already) more flexible logistics and contingency planning strategies, which means alternate modes of transportation. Looking at things like contingency plans in place; ensuring that you have practiced or gone through situational role-playing or tabletop exercises to see how you would respond to (regardless of the event itself) being disrupted in a major part of your supply chain. You need to be practicing and table-topping and exercising and running scenarios (as simple as they may be) to understand what you do about that. That’s a huge part of planning.
As always, with things like these, there’s going to be broader risk assessment and management changes. They should be conducted to understand very specific threats and their impacts in the way that you do business. I talk about this often: A lot of organizations assess risk, but you need to be able to assess risk with very specific risk context. Risk in the context of “what.” In the way that you conduct this process; in the way that you move your goods in this part of the world; in the way that you operate; in the people you have; in either an A, B or C location. You have to target your business and the unique way that you operate. It’s likely the reason why you are either successful or not. You’re in your market for a reason. You have customers for reasons, because you do something different. There’s some differentiator. You need to be able to assess risk specific to the way that you operate, not just the way that everybody operates or assesses risk broadly. It has to be set in context. When you set it in context, either focused on the way that you operate in a certain part of the world, the way that you move goods, the speed at which you move those, the modes of transportation that you leverage, when you assess risk specific to the way that you do business that’s really when you can actually manage risk the most effectively and make the decisions that are in your best interest and aligned to the way that you operate.
This will also play into inventory management strategies, collaborating closely with other suppliers, other logistics providers, any other partners in your industry or space to help both in some way manage and buffer inventory and share goods and services to either help one another out or to just adopt strategies like holding safety stock (which isn’t always the brightest play, but it’s a way to mitigate this type of impact) to either stockpile, in this case oil reserves, or to source them in different parts of the world. I think inventory management strategies, as always, will be an immediate assessment for these organizations.
There are risk strategies that involve leveraging insurance and financial instruments. From a market perspective, there are entire organizations dedicated to protecting your bottom line in the sense of either writing or understanding options and futures and hedging oil and hedging these commodities in a way that allows you to recoup financial loss in the event that something like this does happen so that from a bottom-line perspective, you’re not completely hamstrung. And that type of approach, especially from a financial perspective, can help cover your financial losses and hedge against those risks. There are also insurance instruments that you can purchase against these as well while thinking of a broader investment view. That’s more of a financial protection rather than operational protection but is very common in the sense of reassessing how these companies can hedge against the commodities in which they operate.
Finally, there’s going to be, and should be, a lot of training and awareness around these types of things, ensuring that your staff are trained, aware and understand the potential risks and also understand the measures that you may or may not have in place to address them. That’s the crucial part of it; it is not just making your employees aware, but also educating them on the things that you have in place to help mitigate those.
So, without belaboring the myriad of things that organizations should be doing, I think those are probably the most critical.
Fussner 20:35
Alex, I think you said it perfectly when you said that shifting into that transformational mindset could be such a benefit; you can maybe even reach that silver lining. Part of that would be integrating those digital technologies and those tools to help you manage that risk and monitor that risk. I’m curious what exactly that process looks like. Because it’s hard to execute on bringing in a new technology. Let’s say you are integrating such tools and let’s use the example of the geological concentration risk that we have been discussing: What does it look like? What exactly am I measuring? What are my benchmarks and how does this technology help me navigate and monitor that risk?
Toews 21:16
The silver lining of a lot of these things (and we can reference non-supply-chain-events, things like COVID, which was very relevant to everybody), these types of disruptions and events are from a legacy perspective often referred to as Black Swan events. These really, really high-impact, very, very low-likelihood types of risk events or scenarios, that I think in the modern age are happening more and more often. The term Black Swan is almost no longer relevant, because it’s the interconnectedness of the world and in this case the global supply chain and the things that can affect it. The more incredible that the world becomes in its connectedness, the more fragile it becomes as well, because everything has this tendril, ripple, domino-type effect. These types of disruptions, the silver lining there is that it does typically lead to digital transformation for organizations that are willing to undertake that journey. Because it is an absolute journey.
Disruption typically happens to be the biggest catalyst for that, because how you manage both in a reaction stance as well as how do you manage proactively, your understanding of impact, can be the deciding factor between whether you stay in business, exist, or not. It’s incredibly common now for organizations to just come and go because they’re not willing to transform and disrupt themselves and enable the transformation that is necessary to be able to survive.
When we think about digital transformation, especially in terms of what’s happening in this part of the world, there’s a necessity to be able to adapt and change and understand technology even (and this is a great example) as we think of oil and that industry generally as a non-tech-driven industry, at least historically, most organizations, even if you think you aren’t, should be approached as a technology company. There have been several anecdotes where large financial services organizations and banks, those are technology companies first at this point in time because they have to be. You have to adopt some perspective, if not invest in, what your digital strategy is and go beyond that understanding or having opinion on it and actually employ that transformation because it’s the only thing that’s going to allow you to both, A, work with speed and be able to work with agility and scale to be successful in whatever market you’re operating in, but also it’s the only way that you can understand the potential impact of risk in as real-time as possible. That’s really the lens that needs to be built in order to be proactive at all. If you’re using information or intelligence or understanding things in reaction to them having already happened, you’re already so far behind that that impact and understanding of it is pretty far gone at that point for you as an organization. The only way to get ahead of some of these things or at least understand what could happen is to leverage technology and to adopt a digital strategy that aligns with both your business and your appetite for risk. With these types of disruptions, typically, for the organizations that will flourish, they adopt that perspective and lens very, very quickly. That’s the positive and the silver lining piece of that.
In line with the digital transformation piece, the next piece of this is how it applies directly to the organizations that are being disrupted by this event in and of itself. This gets into the general supply chain competency array that is even more broadly defined within a third-party risk realm. From a technology lens and within my role we often think about ideating or designing new capabilities or new solutions, the first thing that I typically whiteboard, or at least work with my team on understanding, is what is the problem that the customer (or from a technology perspective, the user) is trying to solve? What is the end-goal or what is the endgame or the question that they need to answer? [What is] the type of data or information they need to avoid or mitigate a significant impact from something like this? It gets into: What are those metrics? What is the data? What is the intelligence?
If I’m using a platform, when I log in, what does that dashboard tell me? If I’m a C-Suite executive that has 30 seconds to look at this thing before I move on, you need to know the right things at the right time. Data intelligence and metrics are absolutely critical. For supply chain, specifically, it gets into how visible your supply chain is. How much visible intelligence do I have depending on how globally I operate? How can I track and monitor the way my supply chain operates? Including activities, logistics, partners, everything therein to understand exactly where it may be impacted and with that visibility comes the supporting data to give you that visibility. That can only be maintained with a digital approach.
Very simply, even absent applications or tools or technology, you have to have a way to risk assess your supply chain to evaluate the risk associated with each supplier. Considering the factors that motivate that risk, like their financial stability in this case, geopolitical risks, compliance with standards, the list goes on, you have to understand for your suppliers or if you are the supplier, how those different categories of risk impact the way that you do business.
There are a lot of different metrics that can be leveraged to understand some of the finer details. There are metrics like lead time variability. That measures and monitors the consistency or the variability in lead times from suppliers, or as a supplier to your customers. That directly impacts (from your accounting perspective) inventory levels, order fulfillment. Your lead time variability is key. It shows you how volatile your operations are when it comes to moving goods.
To that same point, I referenced inventory levels, what are our inventory levels? What is our turnover? Are you tracking your inventory to assess if there are shortages or excesses absent of disruption? If you already have a lot of volatility with your lead time and volatility and shortages and excesses or anything therein, that’s going to indicate significant supply chain inefficiencies and vulnerabilities, and therefore exacerbate your exposure if there is a disruption if you operate in this part of the world.
A couple others that come to mind. Concentration risk. How do we source our widgets or goods or our raw materials? Where do we move them through? Are there alternate routes? Do we just happen to focus and source our materials in an unstable part of the world? Concentration risk, when you think of it globally, to look at a globe and see where I operate and where I source things, you need to understand exactly what that concentration looks like. And you need to understand that if you are incredibly concentrated, either in your sourcing, your shipping or your supplying, you're incredibly vulnerable if that part of the world is disrupted because that’s the only place that you operate that you support your organization. So, concentration risk is absolutely key in understanding where you operate, where you move things and how you move them—it is critical.
A couple others that come to mind are things like time to recover. That’s a broad metric, but it can be supported by a lot of underlying data and metrics. It is about, “What is the time that it takes for my supply chain to return to normal?” And so, competencies like business continuity, that could be recovery time objective with either people, places or technology that support delivery of goods, but you have to understand, “When I’m hit, how quickly does it take me to get up?” I referenced tabletops, exercises, scenarios; a good way to understand that is to practice it and to simulate what your reaction would be and how long it takes you to get back to at least a somewhat normal operating capacity, or at least maintain some homeostasis in that sense.
The other prevalent metric here, when I think about that dashboard and what I’m seeing, is looking at your incident frequency and the impact of that. Do you not only understand when you’ve been impacted by a risk event or an incident, but are you doing root cause analysis? Are you retroactively looking to see what you can improve to mitigate something similar in the future, or to enhance or improve your processes or the controls you have in place? Being able to not just react and recover from an event, but learn, adapt and evolve from it is absolutely critical. And so, understanding the frequency of these types of events as they may or may not have impacted you is critical to this entire journey and where you’re headed and why you’re headed in a certain direction. Understand the why, the root cause, the ‘what can we do better’ and spend the time absent of the disruption preparing for the next one.
These types of metrics, when they’re monitored regularly, can provide incredibly invaluable insight into not only the risk but the health of your supply chain and allow you to make more enabled decision-making. Manage that risk as proactively as possible and you can only do that if you have the data, you understand the data and you action it—you do something about it.
Fussner 30:40
I think the future is certainly digital, right Alex? Everything you’ve been touching on shows the importance of being able to be plugged in and accessing that visibility—that is like step #1. And if organizational leaders haven’t had their eyes opened from these Black Swan events like you had mentioned, like COVID, the attacks in the Red Sea, you’re not going to be able to navigate such instances if you don’t have that data visibility.
You sum it up perfectly with saying that once you get that data, it only does so much, but you do have to make it actionable; use it, leverage it, and then you can make your way through these seismic events.
Toews 31:18
For sure, yep.
Fussner 31:20
Alex, thank you again for taking the time to join us today and sharing your perspective and expertise. We really appreciate it.
Toews 31:26
I really appreciated the time today, Tyler. Obviously, there’s a lot to cover when it comes to supply chain disruption and everything therein, but really enjoyed the conversation today.
