Friday, 21 January 2022

The emergence of Covid-19 in early 2020 changed the world in a myriad of ways.

Apart from massive repercussions to people’s health, it introduced a raft of new terms associated with its management; think ‘flatten the curve’, ‘contact tracing’, ‘lockdown’, even the waggish ‘quarantini’. As the pandemic evolved, another phrase became part of everyone’s lexicon. ‘Supply chain’ shot to attention when panic buying of toilet paper hit supermarkets at the beginning of nationwide lockdowns in early 2020. A scarcity mentality among shoppers led to empty shelves around the country and a physical battle or two in the supermarket aisles.  

Fast track ahead two years and supply chain issues are still making global news and being compounded by the surge in Omicron cases and labour shortages. A prime example is Wesfarmers Kmart operations who incurred increased logistics and inventory expenses to keep shelves stocked for Christmas and have now reduced January trading hours due to COVID related absenteeism. But supply chain issues are not just a Covid problem. About 90 per cent of world trade moves by sea, and when that trade is disrupted, whether by a pandemic or a behemoth stuck sideways in the Suez Canal, the outcome is the same. Global product shortages resulting in long wait times for everything from new cars to timber to wine producers struggling to find enough glass to bottle their latest vintages.  

Businesses have been managing the ongoing market volatility with short term supply shortages, but they can be left with an oversupply of product sitting in warehouses as either demand ebbs, or as a consequence of over ordering to manage the shortage.  

Before the emergence of Covid-19 and its variants drove staff shortages around the world into freefall, global supply chains had been under increasing pressure. Online shopping had been growing exponentially and it accelerated rapidly during Covid-19 lockdowns, choking delivery networks. Self-interest posturing among trading partners such as America and China, and Australia and China, together with the economic fallout from Brexit, resulted in new trade protections and tariffs which contributed to both supply chain issues and inflation.   

Increasing numbers of natural disasters, like the drought and frost which killed 20% of Brazil’s coffee plants in 2020/21 also played a part in disrupting global supply chains. Brazil is responsible for 40% of world coffee production and prices have increased by at least 45% because of the disasters. Meanwhile, a drought in Taiwan dried up manufacturers' reservoirs of semi-conductors, which require enormous quantities of water to produce. Worldwide delays in many microchip-dependent products are now resulting, with production of cars and mobile phones slowing noticeably. Ford Motor and General Motors both recorded profit falls last year, attributed mainly to the global shortage of computer chips.  

And as any fifth grader can tell you, extreme weather events aren’t going anywhere fast.  

For many businesses, the combination of supply chain issues, and inflation has led to reduced profitability, increased funding requirements and greater business complexity and risk. Discussing the effect of the pandemic and geo-political tensions over the past two years on supply chains, the Sydney Morning Herald’s Stephen Bartholomeusz wrote, “corporate strategies will shift from that just in time, lean manufacturing approach to one of “just in case.”” 

Clients have increasingly been coming to us with impacts in their businesses, such as contracted sales and supply arrangements no longer fit for purpose, needing to reforecast their financial outlook and working capital requirements, having to diversify sole supplier arrangements, needing to quickly test and ‘re-tool’ manufacturing lines, sourcing alternate transport and logistics solutions and re-directing their workforce to pressing issues. Each situation is typically a combination of short-term pain and longer term, permanent market changes. 

For future success, a strong starting position is key. The stronger the starting position, the more options are available for boards and executive management looking for solutions under pressure. Working with clients over the past two years shows there is a direct correlation between how prepared, organised and structured they were before the pandemic and how they’re managing it now. Business resilience reflected in a financial, commercial, and operational context is winning the long game.  

If resilience is already built in, businesses can stabilise quickly during a shock by rigorously prioritising what matters most, having the right skills and resources in place, communicating efficiently with their Board, and managing customer and supplier relationships. 

But not all businesses start from a position of strength. Some CEOs are overwhelmed as they ‘live the supply chain shocks’. They’re facing countless issues from multiple directions and may not have the bandwidth to lead a response initiative whilst keeping the business operational as supply chains increasingly teeter. Philip MacGregor is managing director of family-held Sydney business Hardware & General, and he’s overseen booms and busts in Sydney’s building industry for the past 35 years, including the GFC. But he recently told AFR Weekend the worsening shortage of timber, steel and other supplies hitting his industry is simply “overwhelming”. “This is bigger than all of those [other shocks] because it’s widespread,” he said. 

The supply chain issues which businesses have been managing over the last two years are continuing. Markets are more volatile, and businesses need to manage and continually learn from the challenges. They need to plan and manage through ongoing market unevenness and unpredictability, while remembering that any decision made now will have future ramifications. Navigating this tension will only become more challenging but in return, business opportunities will no doubt present to those that ‘never let a good crisis go to waste’.