The global supply chain disruption caused by the effective closure of the Strait of Hormuz is a system-level event, not a commodity fluctuation. An important artery of global trade is under severe strain. Shipping flows have dropped around 94 percent since late February. Vessels passing through the strait carry around 28 percent of the world’s global crude oil, 20 percent of its liquefied natural gas (LNG), and represent $1.3 trillion in trade annually, or $3.5 billion a day.
Prices are reacting sharply, with freight costs up 130 percent at the time of writing. The cost of natural gas is up 57 percent, diesel and jet fuel are up 110 percent, and fertilizers are up 30 percent and counting. Let’s take a closer look at the likely business risks and impacts, and what procurement professionals should be doing right now to mitigate them.
From price shock to system shock
The direct effects of this event include price spikes, supply disruptions, and logistics constraints. These are soon joined by spillover effects, including restricted supply across petrochemicals, fertilizers, and metals. Following on, the macro effects include inflation, policy responses, and demand destruction.
The current situation also represents a physical constraint on the system, with 10 percent or more of the global container fleet impacted, and tanker and LNG capacity constrained. Financial pressure is currently building through working capital, which translates into higher inventory buffers, port delays and surcharges, and rising insurance and logistics costs.
Cascading effects across value chains
Beyond energy disruption, the situation raises very real risks of multi-industry margin shocks for agriculture as fertilizer and diesel costs surge. Difficulties in chemical industries, including the higher cost of energy, are likely to translate into higher feedstock prices.
Manufacturing is likely to feel the heat from pressure on metals prices and as intermediates face cost pressures. In the realms of logistics, freight, and insurance, costs may compound to make current arrangements unsustainable. Supplier instability is increasing, with force majeure risk steadily rising.
Regionally, at a high level, Asia is most exposed due to its energy and feedstock dependence. Europe faces pricing and inflation pain. North America is relatively buffered on supply but exposed to inflation. And most companies have only up to two months of inventory cover.
What procurement leaders must do now:
- Stand up a nerve center immediately. Track materials, suppliers, and logistics risks in real time and enable rapid decision-making. This should include capturing demand signals such as order volatility, customer pullbacks, and substitution effects.
- Build a granular, end-to-end view of exposure. Segment inputs based on availability risk, price risk, and demand sensitivity. Integrate inventory levels, supplier dependency, and logistics exposure.
- Recast the fact base for supplier negotiations. Use clean-sheet models, value-chain transparency, and updated should-costs to distinguish justified increases from noise.
- Manage continuity, cost, and cash simultaneously. Secure supply and alternatives, manage inflation through indexation and levers, and actively control working capital across inventory and payment terms.
- Prepare for volatility—not just inflation. Enable rapid renegotiation, capture the downside when markets turn, and adjust contracts dynamically. This will mean investing in relationships as well as legal services. Incorporate demand-destruction scenarios into decision-making.
A structural shift, not a one-off incident
If margins are to be protected, leaders must embrace new levels of complexity and interdependencies in their operations. Navigating disruptions of this nature is not just about hunkering down but about changing existing ways of working. In some cases, this may mean replacing those ways entirely. Leaders must integrate procurement, pricing, finance, and operations to manage cost, price, mix, and volume together through coordinated decisions.
Geopolitical shifts mean that the aspects of global trade that once made the system strong and resilient, now represent weakness and risk. Businesses need multitier visibility systems through which they can track input costs across value chains. Both scenario modeling and digital twins, for example, enable integrated, data-driven decision-making, and investing in them is long overdue for many organizations.
The bottom line
Building transparency and acting decisively will help organizations on their mission to stabilize supply in turbulent times. We expect the turbulence to continue, and for high-impact events to become more frequent. Leadership teams and procurement professionals need to be ready to deal with the fallout, manage the downside, and help their organization bounce back, even to profit, from such volatility.
The time to shift decisively from reactive to predictive procurement is here.