Supply chain managers need to balance cost with resilience
A new whitepaper from Melbourne Business School and Accenture is urging organisations to rethink the way they approach supply chain optimisation after COVID-19.
Sudden changes in consumer demands, unprecedented goods and labour shortages, infrastructure disruptions and long and unreliable lead times during COVID-19 exposed the increasing complexity and fragility of supply chains.
Australia's unique position as an island with limited logistical avenues and heavy reliance on ports only exacerbated those problems during pandemic.
To help firms mitigate these issues, our Centre of Business and Analytics partnered with Accenture to develop a whitepaper providing guidance on how organisations can build a resilient supply chain in Australia.
The dangers of running lean
Effective supply chain management requires firms to strike the right balance between reliability and costs, says Professor Yalçın Akçay, Centre Director co-lead author on the whitepaper.
"Traditionally, most firms have opted to focus on the monetary side of the equation and created incredibly lean, cost-efficient operations," Professor Akçay says.
"This is because before 2020, capacity problems were rare and consumer demand was generally predictable, so these lean supply chains were able to withstand isolated incidents – the need to develop a more reliable and resilient supply chain was not a priority."
During the pandemic however, businesses reported increasing 'unknowns' in their supply chains, including long and unreliable lead times from suppliers, uncommon material and labour shortages, infrastructure failures, unprecedented demand and forecasts that didn't reflect reality.
"Many firms resorted to crisis management approaches, however we saw that this is just not sustainable," he says.
Unsustainable results of this approach included dramatic increases to supply chain costs, with material and transportation costs rising by up to 50 per cent, and an over reliance on 'Plan B' options.
Major projects were delayed and many firms saw lost sales or poor customer outcomes from outbound delays.
"We identified a real need to examine the issue from the Australian perspective and outline some practical solutions organisations could implement to avoid further negative outcomes," Professor Akçay says.
Moving beyond crisis management
The new whitepaper (PDF, 11.6MB) urges firms to resist the temptation to return to business-as-usual supply chain management that over-emphasises cost efficiency after the shock of COVID-19.
"This would be repeating the mistakes of the past all over again," Professor Akçay says.
"Academics had laid down the blueprint of supply chain resiliency immediately after the terror attacks in the United States on 11 September, 2001 and very little has changed from what they suggested over 20 years ago.
"However, we see that businesses conveniently chose to 'forget' about that disruption and go back to their old ways very quickly. We should not let that happen again."
Vivek Luthra, Managing Director of Supply Chain and Operations Growth Markets Lead at Accenture and co-lead author on the whitepaper agrees, stating that the fragilities that have been recently exposed are not due to the pandemic – only highlighted by it.
"They will not simply be resolved as the world opens up again," Mr Luthra says.
"Climate change, for one, is unfortunately not going anywhere. In addition, the disruptions to transport capacity caused by the war in Ukraine and the ongoing labour shortages are likely to be ongoing for some time."
The threat of labour shortages was evident in a recent report by the American Trucking Association which estimated the current driver shortage of 80,000 drivers could extend to more than 160,000 drivers by 2030, and the situation in Australia is no different – in April this year, SEEK was reporting more than 20,900 vacant positions for truck drivers.
The whitepaper urges organisations to learn from their experience of the past few years and move beyond a crisis management mentality. Instead, the authors argue they should build resilience into their supply chains so they can anticipate and get ahead of future disruptions, rather than remaining unaware until they are forced to react to the next crisis.
"Firms need to take proactive steps to protect their supply chains now or face significant disruptions and potential economic losses," Mr Luthra says.
Identifying the risks
There are several factors which firms need to consider when evaluating their current supply chains.
One of the main issues that firms face is a lack of visibility over their networks and an increasing rise in 'unknowns'.
"Organisations need to be able to map their entire supply chain networks to understand where the potential faults might lie," Mr Luthra says.
"This extends beyond knowing just your own suppliers, but also the networks your suppliers rely on – which can be difficult, with some smaller firms reluctant to share details for fear they might be squeezed out of the market."
Changing company culture is another big factor.
An optimised, resilient supply chain is not necessarily the most cost efficient one, explains Mr Luthra, but one where you can achieve the right level of reliability at the minimum possible cost.
"This is a big shift in mindset from the pre-pandemic outlook of running extremely lean, cost-efficient operations," he says.
"Adding safety stock, building warehouses, working with alternative suppliers and adopting new digital technologies will increase operating costs – but what really matters is finding the right balance between the burden of additional costs and the enhanced risk management capabilities they enable in the face of disruption."
The Australian challenge
Local organisations have an added layer of complexity and challenges to navigate due to the geographical isolation of Australia, says Professor Akçay.
"As an island nation, we already conduct 98 per cent of our trade through ports compared to the global average of 90 per cent," he says.
"Add to that our overreliance on imports, which make up 21.60 per cent of GDP, and there is so much pressure on Australian ports that any disruptions to sea freight and shipping container costs can have detrimental effects."
Australia's vast landmass and the location of capital cities on the coastal fringes poses another challenge for internal logistics.
"Internal freight is already expensive, but an increasing shortages of truck drivers, coupled with surging fuel prices due geopolitical uncertainty in Ukraine, are further exacerbating the issue," Professor Akçay says.
"Extreme weather events brought on by climate change are also putting local transport infrastructure at risk, with the New South Wales Floods earlier in the year exposing how vulnerable we are."The NSW floods saw a huge disruption to the supply of fresh fruit and vegetables to many areas of Australia, with Victoria also reporting shortages in basic goods such as tissues and toilet papers again."
We also cannot rely upon neighbouring countries to help reduce uncertainty in long supply chains or minimise labour costs, Professor Akçay says.
"To reduce unpredictability in long supply chains, many countries have started onshoring and near-shoring strategies. Unfortunately, Australia’s cost of labour is significantly higher than that in the US, and our island nation has no 'neighbouring' countries offering cheaper alternatives."
Digital supply chain modelling
The whitepaper proposes some practical solutions for firms looking to alleviate the multitude of risks.
Resilience is not a single solution, says Mr Luthra – it requires organisations to develop fit-for-purpose capabilities across their network.
One of the key elements is structural visibility – the ability to see your entire supply chain including the networks of multi-tier suppliers – at any point in time.
"We recommend organisations use a Supply Chain Digital Twin to create visibility of their end-to-end supply chain, test for weaknesses and understand related revenue at risk," he says.
A digital twin is a virtual rendition of an organisation's physical supply chain, created by integrating information from multiple sources into a data lake.
With the availability of global databases and supply chain platform technologies, it is now feasible to build digital twins that can simulate complex supplier networks and understand the weakest links by assessing various disruption scenarios.
"With the technology now available you can model exactly what would happen to your supply chain if there was a sudden spike or drop in demand for a specific product, or if there is a disruption to a port or hub, or a shortage of transportation labour," he says.
"By using data, technology and artificial intelligence you remove the uncertainty. Once you know the risks, you can immediately identify areas for improvement and develop future mitigation strategies.
"We recommend firms identify immediate areas for improvement that will make real financial impact, as well as future mitigation strategies which could range from policy or process changes, to diversifying your supplier base or identifying back up distributors."
You can download a full copy of the whitepaper here (PDF, 11.6MB).
For more analytics information and research, visit our Centre for Business Analytics page.