From The Industry – All at sea: Australia’s supply chain vulnerabilities

There is a complex series of activities that ensure a supply chain works.

Retailers communicate with distributors, distributors connect with manufacturers, and manufacturers engage suppliers of materials and components. On the transport side, there is involvement with shipping lines, airlines, trucking and delivery companies, all of which are facilitated through ports, airports, warehouses, and distribution centres.

Ai Group has released a report that seeks to explore current business experience associated with supply chain pressures (particularly as they relate to sea freight), and connected impacts in other areas of policy with the aim of identifying possible constructive solutions and pathways forward.

Supply chain chaos has been created by a combination of factors including the increase in global demand for goods; lengthy lockdowns and infections of workers; a global shipping container shortage; reduction in shipping services and port skipping; Australian industrial action; and rising costs. Freight rates have reached unprecedented levels, with rates on key global trade routes around seven times higher than they were about two years ago.

This situation is projected to only moderately ease by 2023 and beyond.

These pressures can undermine our economic recovery from the pandemic and ultimately dampen economic growth.

Supply chain problems should be assessed by how essential the goods are to the wellbeing of Australians and how critical they are to the production of an essential good or service whether for domestic consumption or for export.

For example, while Australia is self-sufficient in food production, we do require essential inputs for the agricultural, food processing and transport industries to maintain supply to consumers. Freight constraints can also undermine other areas of policy, such as the strain felt by recyclers who are struggling to manage the rising cost of material exports. This is running the risk that we may lose some recycling capability and jobs altogether, given we are lacking in capability to process and/or market these materials.

There is increasing concern about geostrategic tensions, trade conflicts and their associated unknowns. This creates real risks for businesses reliant on distant suppliers and generates an incentive to change the way they do business, and to avoid over-dependency on particular countries or regions (especially those where trade or diplomatic tensions exist).

We asked businesses whether their ability to source inputs in 2021 had changed compared to 2020 and almost two-thirds (65%) reported that sourcing their usual inputs was much more difficult in 2021 than in 2020.

Given the disruptions in 2021, just over half (52%) of Australian businesses expected their ability to source inputs would continue to be disrupted in 2022, with 17% feeling more optimistic about sourcing supplies in 2022. 27% expected no change to their ability to source inputs in 2022 compared to 2021, but it is unclear whether this is a cause for optimism, or an indication businesses are expecting the same problems and pressures to continue.

Other primary factors impacting businesses in October 2021 included: activity restrictions (24% of businesses), increased demand (27% of businesses), COVID-19 (8% of businesses) and input cost increases (8% of businesses).

While the supply chain problem is obvious, the solutions are less so. We also asked businesses to rank their priorities for improving the reliability and resilience of their supply chains for 2022, with 28% of businesses relying on increasing inventories to ensure inputs are available and in stock when needed. Just over one quarter (26%) will not take any action – due in part to the longevity of existing contracts, difficulties finding alternative suppliers, no improvement from finding alternative suppliers, existing processes delivering satisfactory results and having not yet reached a level of critical inconvenience.

Reports of onshoring may be overstated with only 14% of businesses choosing to find new suppliers within Australia and even less, 12%, conducting a search for suppliers globally. 10% of businesses plan to renegotiate existing supply contracts as their first priority, and for 7%, the first response is to bring production in-house.

When asked what their second action would be, just under a third (30%) of businesses indicated they would look to renegotiate existing supply contracts. Finding new Australian suppliers was the second step for a quarter of respondents (25%) and building inventories a second priority for 16% of respondents.

While we may not be able to control the global factors negatively impacting supply chains, we should not shy away from looking inward and improving our own domestic performance and efficiencies.

The recently announced Productivity Commission inquiry into Australia’s Maritime Logistics System is a positive development that will further identify the impacts that go beyond the productivity on our wharves, the reliability of our supply chains and the high prices faced by businesses and households.

Hopefully, determined actions will follow the report’s recommendations next year.

A copy of the report, Australian Supply Chains: State of Play, is available on the Ai Group website: https://www.aigroup.com.au/news/reports/2021/australian-supply-chains-state-of-play/