×

A Rethink of Australia’s Supply Chains

April 4, 2020
Editor(s): Henry Liu
Writer(s): Lan Yao, Oliver Soo, Vickram Mehtaanii

There is no doubt that globalisation has improved the lives of many in the past, whether it be in the Western world due to an influx of cheap products, or in developing countries where work and a source of income is provided. Following events such as the COVID-19 crisis however, there have been calls to rethink Australia’s supply chains.

One aspect of globalisation is the increasing interconnectedness of buyers and sellers across the world, resulting in a heightened reliance on other countries to maintain a fully functioning supply chain. Globalisation has also made it possible for goods to be produced in one part of the globe and then be transported to another part of the globe. As an example with the iPhone, different components are sourced from multiple countries such China, South Korea and Malaysia, with the assembled product eventually being shipped to the United States and other parts of the world where it is sold.

While globalisation has made the world more interconnected, it has some dire and unfortunate implications. In the case of a breakdown in one part of the supply chain, the entire network feels its impacts, leading to delays and disruptions in the production and movement of goods. This means that if there is any disturbance in one country which the supply chain runs through, it affects the entire supply chain leading to chaos and confusion. As an example in 2011 after the Fukushima nuclear disaster in Japan, there was a lengthy delay in the delivery of components in the electronics industry leading to disruptions in the supply chain. Unfortunately, the current state of affairs in other parts of the world is not any different. The supply chains have been heavily affected due to the outbreak of COVID-19 forcing a temporary shutdown of manufacturing operations around the world.

Like most countries, Australia has felt the full force of supply chain disruptions during the COVID-19 pandemic. The uncertainty this has caused has created both social and economic impacts on our day-to-day lives.

The most publicised impact might just be panic buying. Disruptions to the supply chain have created masses of what we could call ‘irrational decision makers’, as people fight to maintain their usual standards of living. The most noticeable products that have been affected are food and sanitary goods. While spokespeople from supermarkets like Coles and Woolworths assure us that supply chains are ‘robust’, we the general public know this is not the full truth. If supply chains are so resilient then why are toilet paper rolls costing us nearly a $1 each? Why are there limits on the amount of essential products people can buy?

Despite these annoyances, we Australians are in a relatively fortunate position. The Food and Agriculture Organisation (a specialised agency of the United Nations) ranks Australia as 3rd in the world for the highest self-sufficiency ratio (207%) which involves a ratio of Australia’s food exports to imports.

However, we must have a global perspective and remember that while Australia is less impacted by agricultural supply issues, there are people in other countries that will go hungry because of this pandemic, whether it be due to panic buying or a loss of income. Even in Australia many people are experiencing the collapse of their personal finances (just look at those Centrelink Queues!). According to UBank (NAB’s ‘Discount’ bank brand), their Science of Spending & Saving Experiment found that 35% of Australians didn’t have a dedicated savings account in 2017. With economists at Westpac forecasting a possible unemployment rate of 11.1% in Australia, many people are finding it difficult to get by day-to-day. If we add the fact that Australia has one of the highest-debt to income ratios in the world (190% according to the RBA in March 2020), we have a perfect storm.

Having a robust supply chain would help protect against price gouging and shortages of essentials. The last thing unemployed Australians with high levels of debt want to see is the inflation of their cost of living.

As well as impacting people with low incomes, supply chain struggles also threaten the lives of some of the world’s highest earning people. Doctors. The fact that many businesses appear to only produce enough goods and services when times are good is a scary thought. We are seeing doctors dying around the world as they feel obligated to lead the fight against the pandemic yet lack the protective equipment they need. In Italy as of March 30, 8358 Italian health workers had tested positive for the Coronavirus.

As Warren Buffet has said “It’s only when the tide goes out that you learn who has been swimming naked”. We are going to see businesses go under, but hopefully those that survive this wicked form of natural selection are the ones with sustainable supply chains that can meet consumers’ needs through thick and thin. 

Chance always favours the prepared. Even though COVID-19 reveals the vulnerability of the current global supply chains and distribution networks, it should be considered as a wake-up call for supply chain leaders to reshuffle the outdated rickety system that dominates production today.

One lesson from the pandemic is that you should never put all your eggs in one basket. Excessive reliance on a single or limited sourcing and international industrial transfer to other countries with much cheaper labour costs make firms under-prepared when such black swan incidents happen. To build resilience, greater geographical diversification in terms of sourcing and manufacturing stays high on the corporate agenda. Opportunities might also be opened up for home markets in case of unexpected disruption outside the country along with more investment in capacity and technology.

At the same time, the conventional old wisdom, lean manufacturing and just-in-time (JIT) delivery, has been questioned and companies are rethinking a far-sighted shift in the business model. First floated by Toyota in the 1970s, the JIT system boasts its zero wastage and high efficiency, which criticizes redundancy in unnecessary stocks strikingly. While the current epidemic sheds light on the fragility of the JIT system, business entities will have to rectify this by having more safety stock or buffer stock as a backup. Storage costs shall undoubtedly spike and then shrink the companies’ near-term profits to make way for a more resilient system. Certain efficiency has to be traded off for redundancy.

Finally, the development of automation technology might be a panacea to operate production when people are barred from leaving home. Robots could shoulder the responsibility of producing products in the factory as well as delivering goods efficiently and effectively without being infected while real employees can just control them remotely. Additionally, robots are able to work longer hours and less likely to suffer from accidents. The COVID-19 crisis calls for more investment and perhaps even the introduction of collaborative robots to industries.

References

https://en.wikipedia.org/wiki/List_of_countries_by_food_self-sufficiency_rate

https://www.canstar.com.au/savings-accounts/nation-spenders-australias-poor-saving-habits-revealed/

https://www.savings.com.au/savings-accounts/westpac-forecasts-unemployment-to-hit-11-by-june

https://www.rba.gov.au/chart-pack/household-sector.html

https://edition.cnn.com/world/live-news/coronavirus-outbreak-03-30-20-intl-hnk/h_d385acb67991afbdcf4c87aed856f0e6

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Henry Liu
Editor

Henry is a third-year Bachelor of Commerce student who will be majoring in Finance and Accounting at the University of Melbourne. He is interested in topics that help to explain asset price fluctuations as well as other issues that provide insights into the future.

Lan Yao
Writer

Lan is a postgraduate accounting student at Unimelb with international experience across three countries and diverse industry exposure ranging from educational services to energy. In her spare time, you can always find her cooking or baking in the kitchen to satisfy her taste buds.

Oliver Soo
Writer

Oliver is a first year Bachelor of commerce student. He is interested in finance and hopes to improve his written communication skills by writing for CAINZ. When not focusing on Uni commitments he is either playing video games, participating in some form of sport or reading a book.

Vickram Mehtaanii
Writer

Vickram is a third year Bachelor of Commerce student majoring in Accounting and Management. In his spare time, Vickram can be found in the gym, trying his hand in the kitchen or watching football (soccer).