Strait of Hormuz is a sea passage between the Gulf Cooperation Council countries and Iran which is one of the most important choke point of world. This is the main source through which around 30 percent of world's crude oil flow through cargo ship and transmitted to different countries. This report is about the issues that are arises between Iran and American government, there are chance that Strait of Hormuz get closed which highly affect the international trade. So, this assignment talks about the importance of Strait of Hormuz in global trade and impact of this decision over GCC importers and other countries (Rahmanpoor and et. al., 2014). Further it describes about various logistic services and resources that will be highly demanded after commencement of this decision and routes through which import activities can be continue by GCC countries. Apart from this it also explains about various measures that can be used by GCC distributors for safeguarding their inventories.
(a) Importance of Strait of Hormuz in global trade
Straits of Hormuz is a narrow strait which links the Persian Gulf (west) with the Gulf of Oman and the Arabian Sea (south-east). This strait is 35 to 60 miles wider and separates the Arabian Peninsula from Iran. This straits is the main sources of import export operations between Iran and various ports of Persian Gulf through marine (Bastami and et. al., 2013). But due to political issues between Iran government and American, they are planning to close this strait. If this strait gets closed then it would be the biggest loss to oil import-export transactions. As it is the main way through which oil is exchanged throughout the world. The straits of Hormuz is very essential for global trade because,
- Every day, around 17 million barrels’ oil travel through the Straits of Hormuz.
- World's biggest natural gas or oil importers depends on this strait for exchanging of commodities.
- Up-to 90 percent of global oil is flowing through this narrow strait through cargo ships and massive oil tankers (Why is the Strait of Hormuz important,2018).
Hence, if this strait is get closed then it would be the biggest loss to Iran as if all the U.S allies refuse to import oil from Iran then the oil is expected to drop lower than 1 million barrels per day (Iran Is Threatening to Close the Strait of Hormuz, 2018). Its current rate is 20million barrels per day.
(b) Impact of closure over GCC countries
GCC is abbreviated as Golf Cooperation Council, which is a political alliance of six major countries of Arabian Peninsula. It includes Bahrain, Qatar, Saudi Arabia, Kuwait, Oman and United Arab Emirates. It promotes security, economic, cultural and social cooperation between six countries. As strait of Hormuz and Persian Gulf are connected with marine environment, closer of this strait would have a huge impact over the ecosystem of these connected regions (Bauman and et. al., 2013). As Gulf is the major source of drinking water for millions of inhabitant reside in GCC countries, with the help of desalinization plant. Any contamination to this water will affect the population reside in that area.
Apart from this, water of Gulf is home for variety of species including turtles, fin-less porpoise, fishes etc. which get affected with the closer of this strait, as this action will lead to increase in pollution in water. These species are also the major source of food for millions of bird that migrate to reside in this region during winter. On the other hand, it also affects the GCC countries economical as countries like Qatar, Saudi Arabia and Oman are consider to be the largest exporter of oil. This is major source of countries financial health, as they finals the deal of millions every day. Straits of Hormuz closer will affect the revenue of these countries to a large extent.
(c) Impact of closer over countries which import from GCC countries
The closer of Straits of Hormuz will have a huge impact over the economy of countries that are the biggest importers of GCC countries. As, GCC countries are consider to be the biggest export of oil and natural gases which they transmit through this strait using cargo ships. It exports approx. 90 percent of total oil in the world and if this strait gets close it will affect the importer countries. As the price of oil increases and they have to pay more for importing oil because after closing this straits supply of oil decreases which automatically increase the price of oil. Hence it affects the economic and financial condition of the country (Dadolahi Sohrab and Nazarizadeh Dehkordi, 2013). Apart from this they have to choose different alternatives to import oil from GCC countries such as through airways which costs higher than cargo ships.
On the other hand, it also results in decreasing the employment rate and job losses with the cutting off of import activities. As companies that relies over importing raw material for producing its final product are required to opt for different sources such as by air and others for importing their inputs (Khan, 2013). This leads to increase in their cost of production and may also get sever losses which results in closure of factories. This will lead to job losses, which further affect the economy of country.
(a)Demand related to logistic services after the closer of Straits of Hormuz
Due to various political issue arises between the Iran government and Americans creates the chances of closing the Straits of Hormuz which a narrow strait of linking the Arabian and Persian sea . This will have a great impact over the import export activities of various countries which in turn will also affect the logistic companies functions. Therefore, being a regional business development manager of middle east division it is very essential to identify impact of this decision over the demand of logistic services for future planning. As majority of distributor clients belongs to GCC group countries and are involve in importing and distributing FMCG goods. Following are the logistic services that will be in demand after the closing of Straits of Hormuz:
- Air transport:-After the closing of sea route, import activities of GCC countries will highly affected as this strait is the major sources of exchanging commodities. So in order to continue import activities, Global Logistic company can provide air transport services to their client. Air transport activities will have incurred more cost for completing the exchange related tasks. But apart from this, it will help them in continuing their import-export activities to different countries. Therefore, air transport will be highly demanded logistic service for importers of GCC countries (Hu and Sheng, 2014). As airway will be the major source of transmitting the good or services through which clients of Global Logistic company can import their FMCG goods in their countries. Though this will be costly but will be more beneficial as large number of goods can be moved more quickly. In addition to this it will also decreases the time required for delivering FMCG goods from one place to another.
- Custom Clearance:-It refers to the process of taking permission from governmental authorities using documentation for entering of imported goods within the country. This event will highly affect the import activities and in order to continue these activities company is required to change routes for transmitting the goods or services. This new route involves various points through which goods flow and in order to move over this new route company is required to take permit from government of that region. As before good are imported within GCC countries through the mean of cargo ship which is a direct route of transmission. But with the closing of this route, when company transport its goods from airways it requires to land their plane over various locations. At each point which comes between the point of origin to destination, distributor is required to take permission from government (Malik and Awadallah, 2013). This will increase the demand for the custom clearance activity. Therefore, Global Logistic company can provide custom clearance services to their clients.
- Warehouses:-With the closing of Straits of Hormuz the route of import transportation changes which also increases the time taken for exchanging the goods. Therefore, demand for warehouses increases as inventories are required to be store for the duration till the merchandise are ready for shipment and ordered by client. As before, inventories are stored in quantity which is demanded by the client and shipped within the shorter period of time. But this event will change and broaden the routes which increases the need of space for storing the goods. As route is changes, large amount of inventory is required to store for fulfilling the future demand and to deal with delays in delivering of goods. Apart from this with the change in route number of location through which inventories flows will also increase (Murray, 2013). This leads to increase in demand of warehouses to store this inventories in order to avoid it from the risk of damage. Therefore, it will be an opportunity for Global Logistic company that they can provide warehouse services to their client.
(b) Alternative routes for continuing import activities
Conflicts arises over Hormuz would be costly for economies of Gulf countries as it is one of the key maritime choke point of world. This narrow strait connects the Indian and Arabian ocean and also the mode for performing several import-export activities. Therefore, the decision of Iran to close the Straits of Hormuz due to some political issue will affect the global trade to a large extent. This will also disturb the import export activities between several countries. So in order to overcome this issue and for continuing the import activities, alternative routes are required to be identify through which goods can be imported within GCC countries . As countries like United Arab Emirates, Oman, Qatar and Kuwait will be highly affected as they are nearer to coast of Persian Gulf and are more involve in import-export activities. These countries highly depends on other nations for fulfilling their need for FMCG product.
In order to satisfy their demand related to import of goods, Global Logistic company have identified alternative routes and mode of transportation through which good can be delivered into countries like United Arab Emirates, Oman, Qatar and Kuwait. Following points describe about various routes that can be used by Global Logistic company for its UAE client are:-
- UAE can import their goods from Iran through air transport in case when country only close the Straits of Hormuz and not the import trading for GCC countries. In order to transmit FMCG goods through this route, company require services like Cargo planes. They are also required custom clearance services as permission of Iran government is required for exporting the goods from their country to UAE (Stephenson, 2014). Apart from this they are also require warehouses to store their inventories at both the places i.e. in Iran as well as UAE.
- In case if Iran restrict the import trading for GCC countries then alternative route for shipping goods can be through Iran to Yemen and then to UAE using air transport services. This will require large number of warehouse at various locations for storing the goods that are to be transmitted to UAE. As goods are required to store at Iran till the merchandise will be ready to shipped and orders by client. After its shipment from Iran, warehouses are required Yemen for storing the inventories till they find the mode of transport for transmitting the goods to its destination. After its shipment from Yemen, warehouses are required at UAE for storing the stock till it is delivered to its owner.
Apart from this, company is also required custom clearance services as before export goods, distributor is required to take permission from the government of Iran for transferring their goods to another country. In addition to this permission from government of Yemen and UAE is required before entering the goods into the country.
(c) Resources to be required for deploying these services
For providing the logistic services to the client of GCC countries, Global Logistic company requires various resources in order to perform their operations effectively (Sooriyaarachchi and et. al., 2015). This will help them in continuing their import-export activities even after closing the Straits of Hormuz but through different routes. Following are the resources that are required by Global Logistic company for deploying services to their client are:-
- Capital:-It is one of major resource which is required by the company for delivering these services effectively. As with the closing of Straits of Hormuz, the route for delivering the goods to GCC countries also changes. This leads company to invest more, over their operations in order to maintain their business activities after the event and provide an option to GCC countries for continuing their import activities. Therefore, for transferring the FMCG goods, company uses air transportation and in order to complete this activities they are required large amount of capital for purchasing cargo plan.
Apart from this they are also required to invest capital for purchasing warehouses at different location. So that inventories can be kept at these stores for keeping them safe for long period of time. In addition to this, capital is also required while completing the formalities related to custom clearance.
- Manpower:- For deploying services to their client effectively, Global Logistic company is required to employ large number of employees. So that activities can be performed effectively without any error. As large number of worker are required to manage and transmitting the goods from one place to another. Along this, company also required to appoint legal advisors as with the change in the route of transmission, the demand for custom clearances increases. This directly increase the need of legal activities within their operations. Apart from this Global Logistic company is also required to employ large number of pilots for operating their cargo plane
- Cargo planes:-For transferring the merchandise through air transport to GCC countries, Global Logistic company is required to purchase cargo planes. Charges are generally higher for exchanging good through air route (Chia, 2014). Therefore, it is very essential for company to ensure that planes must be spacious and have the capacity to load maximum of merchandise. This will help company in transferring large amount of commodities in less possible time.
- Land & Building:-Apart from all the above resources, Global Logistic company also required to purchase land & building at different locations. Company can use these buildings to store their merchandise and keep them secure for longer period of time. By keeping warehouses at different locations, company can manage large amount of inventories that can be used to fulfil the need of clients. This help in reducing the delays in exchange operations of company and ensures timely delivery of inventories at its final destination.
Short term safeguard for GCC distributors and their commercial & operational implications
Decision of Iran government to close the straits of Hormuz will highly affect the global business as well as economy of GCC countries. As this is the main way through which these countries export their commodities through cargo ships and import FMCG goods (Abramson, 2017). With the closing of this route, businesses of these countries will be witnessed by heavy loss. So they are required to identifying certain measures that will be beneficial for them in order to deal with this situation till the political issues get solved between the government of Iran and USA. Following are the short term measures that GCC distributors can adopt for dealing with event:
Insurance:- It refer to a contract in which insurer(entity giving insurance) promises the insured (who is taking insurance) to compensate for the loss that may or may not incurred in near future. For safeguarding their inventories, insurance will be the best option for GCC distributors as they can protect themselves from getting financial loss (Arvai, Prasad and Katayama, 2014). There are generally two type of insurance contract that may be opt by these distributors:
- Fire insurance:-It refers to a contract where one party agrees to indemnify the another party from financial loss may occur due to certain reason where subject-matter being damaged or destroyed by fire. By taking this insurance distributors can safeguard their commodities for the risk of fire. As majority of distributors deals in oil, so there is more chances of occurrence of fire accidents. So by taking fire insurance, distributors will be able to safeguard theme selves from financial losses. This insurance help them in ensuring that their inventories will be safe while it resides in warehouses for longer duration.
- Transit Insurance:- It refers to the agreement between insurer and insured which provide protection from the loss that may occur during the transmission of goods from one place to another. By taking this insurance, distributors can safeguard their inventories while they export their goods to another countries (Al-Arenan and et. al., 2016). As while transferring their inventories there may be chance of some uncertainty i.e. breakage, damage of inventories. So, transit insurance will help them in recovering from financial loss that may occur due to damage or breakage of inventories.
Just in time inventors:- This will be the another measure that can be used by GCC distributors for safeguarding themselves. Just in time inventories refers to a strategy where goods are produce only when and up-to that quantity which is demanded by customers. It focuses toward increasing the efficiency and decreasing the waste in production process (Safeguarding Inventory, 2018). By using this approach, distributors can minimize their inventory cost and maximize their operational efficiency. JIT is an inventory management approach that help distributors in keeping their inventory available for meeting the demand.
These are the safeguard measures that can be taken by distributors of GCC countries for protecting themselves from the loss that may be occur due to closing of Straits of Hormuz. By implicating insurance policies in their operations, distributors can perform their operations effectively with the fear of loss. As by entering into insurance contract these distributor can safeguard their inventories from future uncertainty that may result in sever losses. Hence, implication of insurance to their operation will be beneficial for distributor commercially.
Apart from this just in time process will also be beneficial for distributors as they get both commercial and operational benefits (Puig and Yee, 2017). By applying JIT, distributors can manage their stock as per the demand of their clients so it help in simplifying the work and also reduces the operational cost. On the other hand, reduction of wastage and excess storage of inventories will also help provide commercial benefits to distributors. Therefore, both the measures will help in safeguarding the inventories of GCC distributors for short term purpose.
In order to deal with situations that may occur because of the closer of Strait of Hormuz, it is recommended that GCC countries that must try to improve their relation with Iran so that they may drop their decision of closing the way. Apart from this distributors belongs to GCC countries and relays over export activities for operating their business must try to identify different routes through which they can continue their import-export activities. In addition to this they can also use different mode of transportation other than ship, through air ways i.e. cargo planes.
Apart from this options, distributors are also required to safeguard their inventories as this decision leads them to keep their inventories stock for longer period of time. During this period there are chances that inventories get damage or destroyed. So in order to deal with such uncertainties, they can take insurance policies that help them in safeguarding form financial losses. In addition to this they can also apply Just in time inventory approach that help distributors in maintaining their stock according to the demand of their client. This further help in eliminating the chances of wastage.
From the above given report it can be concluded that due the political issues arises between the Iran and USA government chances of closing the Straits of Hormuz increases which will results in heavier loss to international trade. This event has affected the business practices of various distributors which are involve in import-export activities for performing their operations, specially countries belongs to Gulf corporation. So in order to safeguard themselves from this losses they may take some short term measures like Just in time inventory approach and insurance policies for inventory. This will support GCC distributors both operationally as well as commercially.
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