The weakness of our supply chains revealed
The coronavirus pandemic has wreaked havoc across a wide range of industries worldwide, but nothing has been more apparent than the previously seldom explored weakness of global supply chains.
Weekly trips to our local supermarkets were a learned process, until one day we walked in and our shelves were bare. Rarely, if ever, have Aussies faced empty shelves to the extent encountered over the past several months.
It is then that the supply of goods, or a lack thereof, began to interest us ordinary folk. As our government enacted restrictions aimed at slowing the spread of COVID-19, apocalyptic scenes from our local supermarkets began to fill our newsfeeds.
The toilet paper shortage, the buying spree of all things canned and surgical mask shortages that put dentists out of work, exposed frightening weaknesses in how our everyday goods are sourced, distributed and stored.
But aside from the obvious broken links in the way things run at home, we’ve also been privy to our overreliance on overseas markets.
A long delay on our mattresses, presumably Aussie made, and a lack of the usual low-priced favourites like the Kmart $3 dinner plates, pushed us to question the origins of our commodities.
But long before we, the citizens, even witnessed the cracks, talk around town was that Australia could be suffering a medicine shortage, having become dangerously dependent on imported goods.
Namely, the Institute for Integrated Economic Research – Australia published a report earlier this year claiming that over 90 per cent of our medicine is imported, exposing us to possible medicine shortages arising from factors outside of our control, like the coronavirus crisis.
All these things and more gave rise to great concern, prompting our experts to demand change.
Ageing, male workforce
Early on in Australia’s panic buying craze, Deakin’s Centre for Supply Chain and Logistics (CSCL) issued a stern warning to us all.
“Australia cannot afford to underestimate society’s reliance on supply chains and the people they employ to keep our businesses moving – yet, until the pandemic, we have done,” says industry professor and CSCL director Dr Hermione Parsons.
Dr Parsons points out that even prior to the coronavirus crisis, Aussies displayed an increased demand for ‘always available products’ and ‘just-in-time’ services.
These, she explains, were compounded in recent years by fast-changing consumer behaviours driven by advances in technologies such as e-commerce, aka online shopping.
But according to Dr Parsons, it is not just our rising demands and fear of the coronavirus that have landed us in hot water, but also an inadequate workforce in supply chain and freight logistics.
Referring to it as ageing and male dominated, she said its skills mostly lie in a bygone era.
“There’s no replacement pipeline of workers in sight; and no comprehensive national education and training program exists in Australia,” says Dr Parsons.
“We need to start thinking more creatively about these workforce development needs, so we’re protected in future times of drought, bushfires, floods and pandemics.
“We need to be prepared, and we need to build resilience in Australia’s supply chain and freight logistics workforce.”
Interdependence of markets
But aside from our questionable workforce capabilities, the coronavirus has exposed another major problem.
Are you familiar with a typical global supply chain system?
Well, in typical circumstances (those outside of a pandemic), raw materials are sourced from one country, the components designed in another, parts made in a third, with the pieces then shipped to various assembly plants where labour costs are low.
The finished products are then packaged and transported across the globe. Sometimes for more manufacturing or pre-sale preparation at the point of sale.
But, with the COVID-19 pandemic forcing shut large parts of economies, including our borders, this interdependence of markets has resulted in major disruptions to global supply chains. Especially for an island nation such as Australia, that’s overly used to leaning on its peers for products.
As such, CSCL industry research and knowledge exchange strategist Adam Voak has deemed the supply problems we’ve witnessed since March as inevitable.
Evident to him, and to us now too, is that only one key economy or segment needs to malfunction in a global network to cause disruptions along the entire chain.
“This is why we’re now seeing issues in terms of access to vital medical personal protective equipment, chemical reagents for testing, supply of isotopes for cancer treatments and many other critical final products and precursor elements,” Mr Voak says.
Being a predominantly import-dominated nation, many of our goods are produced in other countries and come to us through the global supply chain, and it is those products that can face significant barriers in terms of time, efficiency, cost and security.
It is for this reason that in April, Andrew Liveris, the former CEO and chair of Dow Chemical, told The Australian Financial Review: “Australia drank the free-trade juice and decided that offshoring was OK. Well, that era is gone.”
The man behind Obama’s manufacturing policy didn’t spare Australia, urging policy makers to explore onshoring key capabilities.
“I don’t think you tilt as far as we’ve tilted, in which 20 per cent is domestic and 80 per cent imported,” he said.
But as we look to reverse the damage, much like Dr Parsons, Mr Voak believes that part of the remedy lies in a new, skilled workforce.
“Managing critical medical and food supplies, reducing food waste, improving the competitiveness of our food export industry through end-to-end supply chain traceability, and protecting our environment from packaging and e-commerce related transport emissions and congestion are all critical supply chain issues requiring a newly skilled and knowledgeable workforce,” Mr Voak said.
“Much more needs to be done in terms of planning, skills and knowledge development, investment and safety stockpiling at the state and national levels to design our supply chains to better protect society in the future.”
More robust systems needed
And, looking around the globe, things certainly are shifting.
Countries are waking up to the realisation that more robust systems must be built. These robust systems need to not only ensure sources of supply are moved away from any one country, or company, in favour of a more regionalised network, but they need to return manufacturing home.
And according to Rich Thompson, who leads the global supply chain consulting practice for JLL, lessons have been learnt.
“Having learnt a big lesson from this recent pandemic, countries will be focused on developing ‘domestic supply chain independence’ to avoid another situation of national emergency where they are reliant on importing vital medical supplies,” says Mr Thompson.
He gives the example of the US, where 95 per cent of surgical masks and 70 per cent of tighter-fitting respirators are made overseas. Having become aware of this, he predicts countries will now repatriate critical industries.
“We’re likely to see a repatriation of critical industries or the manufacturing of products such as medical devices and pharmaceuticals as a result of this pandemic, which will, in turn, lead to a change in the domestic warehousing and logistics landscape,” notes Mr Thompson.
The good news is a number of industries are already looking to regionalise their operations in a bid to mitigate the risks associated with one central point of manufacturing.
French fashion house Louis Vuitton, for example, recently opened a manufacturing operation in Texas. While in the auto industry, Mercedes-Benz, which used to build solely in Germany, now manufactures in numerous markets, mirroring similar moves by Toyota and VW.
But bringing things home is not the only problem Australia has. What else, you ask?
Distribution a weak link
Our distribution is also in need of critical diversification.
JLL believes that with trucking responsible for the movement of 80 per cent of the world’s goods, greater reliance will need to be placed on rail and/or intermodal shipping to reduce dependence.
“We’ll see more companies invest in locations that can provide multi-modal transportation options with distribution solutions that are in close proximity to parcel hubs or intermodal rail terminals to mitigate the risk of tightened trucking capacity or sky rocketing freight rates,” Mr Thompson says.
However, even when we’ve achieved a well-diversified distribution network, what will we do about inventory?
As discussed earlier, inventory was not a strong suit of our local supermarket chains. But the pandemic has forced companies to re-evaluate how much stock they hold and how they distribute it to their customer base.
“If there’s one lesson to be learned from this current crisis, it’s to maintain additional inventories of the most critical items,” says Mr Thomson.
“In a world of low interest rates, companies should create regionalised buffer stocks of essential parts, raw materials and/or finished goods in alternative distribution locations in the event of an emergency so they can continue to satisfy customer demand.”
As they do this, Mr Thomson predicts the demand for manufacturing facilities, last mile delivery and fulfilment centres will increase – changing the industrial landscape for decades to come.