Chain reaction

Companies that adapt to ongoing supply chain disruption will have a distinct advantage.

Just how much global supply chain constraints are hurting Australian businesses was evident during the recent mid-year company reporting season. Conglomerate Wesfarmers, for example, reported a drop in profits after incurring additional costs and experiencing stock shortages as a result of ongoing global supply chain disruptions, elevated staff absenteeism and delays with third-party logistics providers.

Super Retail — which owns Rebel, Supercheap Auto and BCF — said supply chains were so log- jammed it was forced to hire furniture removalists to move stock. And at building materials group Boral, the half-year profit result was hit by higher energy prices, prompting the company to raise national prices out of cycle.

CEO Zlatko Todorcevski MAICD says supply chain constraints were a bigger issue and, alongside labour shortages, are expected to continue in the second half of FY22. The company also expects delays on some projects to continue due to labour and supply chain constraints, and cost inflation to impact timeframe to execution.

Ai Group CEO Innes Willox recently observed in the Australian CEO Survey 2021-22, “The COVID-19 pandemic has exposed deep weaknesses in the operations of global and domestic supply chains and laid bare many Australian vulnerabilities as an island nation with 98 per cent of trade and most jobs connected to or reliant on sea freight in some way.”

Indeed, the survey revealed that almost two- thirds of businesses found sourcing their usual inputs much more difficult in 2021 than in 2020. Willox says the situation is projected to only moderately ease by 2023 and beyond.

Freight rates

Mark Skipper FAICD, chair of JJ Bronson Jacobs and a member of the Australian Small Business Advisory Panel, says the biggest issues facing businesses relate to international air and sea freight. He says there are delays in booking ships and the costs are double to triple normal container shipping costs. Delays at US West Coast ports mean that exporters are routing ships via three to four Asian ports instead of direct to Australia. Plus, there’s a shortage of pallets in Australia. Companies need to order earlier and carry more stock, which pushes up storage and inventory holding costs. The issue for boards, he adds, is whether to absorb the rising costs for a few years and hope things go back to normal, or to increase prices now.

Dr Hermione Parsons GAICD, a director of the Melbourne Market Authority and director of Deakin University Centre for Supply Chain and Logistics, says, “Freight rates for cargo transported in the belly of planes to and from Australia are not expected to return to pre-pandemic levels for many years, if at all. That means businesses need to look to new ways of getting components or spare parts, or be prepared to pay a lot more.”

Parsons, who is also an adviser to the board of VicTrack, notes that the International Air Transport Association predicts it will be three years before the world’s airlines get back to pre-pandemic levels. “They are saying that as a minimum,” she says. “Australian boards have to be entirely realistic about the fact we are an island nation, a long way away from the major East-West global trade routes. Plus, we are a very small market of 26 million and have been the most locked-down country in the world.”

Kyle Rogers, co-founder and director of warehousing matchmaker uTenant and a director of the Supply Chain & Logistics Association of Australia (SCLAA), says a big issue is a lack of warehousing space, especially on Australia’s eastern seaboard. “I have so many customers looking for facilities and there’s just nothing [available].”

He adds that China has been identified as a source of stink bugs, which are dangerous to Australian vegetation. “This means some containers need to be fumigated and checked by government officials — creating further delays in the supply chain and adding more costs to businesses.”

Plus, the price of fuel has risen, especially in the wake of war between Russia and Ukraine, making freight shipments and trucking more expensive. There’s also a shortage of truck drivers. “It’s hard to find people who want to work in those conditions,” he says. It’s not perceived as an attractive job right now, particularly in proportion to its importance to the economy. As the saying goes: without trucks, Australia stops.”

Weak links in the chain

In addition to a lack of truck drivers, Parsons warns of other skills shortages. She’s co-chair of the Wayfinder: Supply Chain Careers for Women initiative, which recently released research identifying supply chain skills gaps in areas such as data analytics, robotics, cybersecurity, risk, engineering, customs brokers and operations.

The survey noted that supply chains have been traditionally seen as a “Cinderella sector” — poorly understood, underfunded and an unappealing second-tier career option. In addition, not enough has been done to promote supply chain careers at universities and more broadly. To address this, Wayfinder has created a national education network involving 26 universities and TAFEs. Parsons notes that those with the right operational skills are usually in their late forties, or more often in their fifties, and COVID-19 has seen many leave the industry. Meanwhile, the industry remains significantly male-dominated.

Tim McLean GAICD managing director of TXM Lean Solutions, says the risks in the supply chain are directly proportional to the length of the supply chain. “If something is coming from the other side of the world and it’s going to take three months to get here, there’s a lot more risk than if I go just around the corner to a local manufacturer.”

McLean notes that in the past, companies have sourced inputs and goods from low-cost countries, particularly China, and were blind to all the risks they were facing. “Now the chickens are coming home to roost,” he says. “COVID-19 has turbocharged a lot of trends that were already there. A whole lot of rethinking about long supply chains was already happening in the Northern Hemisphere because costs, particularly in China, have increased rapidly over the past 10 years. In Australia, we were burying our heads in the sand. Now we’re having to pull our heads back out because we’re finally realising these long supply chains from China are no longer so cheap and the risks are very high.”

He adds that some companies are moving out of China to countries such as Vietnam or India, where production costs are lower. However, he notes that governance and infrastructure are often poor in some of these countries and supply chains can be even longer. “You can also get into some corporate social responsibility issues,” he says. “It’s not just the risks of supply.”

Dealing with the risk

Research by McKinsey & Company found that on average, supply chain managers reported a major disruptive event, affecting the supply chain for more than a month, every 3.7 years. “People are starting to realise that the cost of those events could easily eat up all the savings you’re gaining from outsourcing to another low-cost country,” says McLean. “Particularly when you’re exposed with an extended, complex supply chain and without stock of a critical input for a month or more.”

He says that too many companies are simply reacting to the situation. “They’re not thinking strategically about it.”

SCLAA vice chair and non-executive director of Newcastle Airport Samantha Martin-Williams FAICD says some nimble companies have been highly successful in repositioning themselves to minimise the negative impact of shortages, but this is not possible for many businesses. “It’s a different scenario for every business, with a number of factors at play,” she says. “Boards and companies that have repositioned swiftly seem to have certain things in common — existing clear supply chain visibility and a shared understanding of expectations with primary, secondary and tertiary partners.”

Similarly, says Parsons, the boards of the major logistics companies, including those involved in transport freight forwarding, FMCG (fast-moving consumer goods) and supermarkets, are doing an amazing job in very difficult times.

“They understand global shipping, global markets, supply chains and the interdependencies between one mode of transport and the next,” says Parsons. “But many boards don’t have supply chain expertise in the boardroom and would be finding the current situation very difficult.”

Martin-Williams thinks organisations are accelerating their digital transformations and introducing capabilities such as real-time order monitoring, predictive analytics and end-to-end inventory transparency. “They are making the most of the current opportunity to reset and refresh logistics operating models in order to increase operational effectiveness and efficiency,” she says.