Article:

COVID-19 and the ongoing effects on the supply chain

19 August 2021

Bill Cole, Partner, International Trade |

As COVID-19 became more widespread across the world in the first quarter of 2020, global movement ground to a halt with many travellers and expatriates racing home before flights stopped and borders closed. But beyond travel and the tourism industry, businesses of all sizes have felt the impacts of the crisis in some way. Manufacturers, retailers, wholesalers and suppliers around the world have borne the brunt of the issues and are now taking stock of the continuing global crisis while re-evaluating their operations, supply chain and resilience.

Impacts on business and consumers

Back in 2018, a report by the Australian Manufacturing Growth Centre - Building Resilience in Australian Manufacturing - found that Australian manufacturers were in one of the most volatile economic sectors in the world, with a potential 20% swing from its average production output in both up-cycles and downturns. As a consequence, global disruption of the scale of COVID-19 has had a significant impact on Australian production and business models.

Not only did the sudden closure of Australia’s borders and consequential shut down of passenger routes cause a cessation in human movement, but it also impacted transport cargo capacity in and out of Australia. For businesses looking to move goods in and out of the country, the previous routes were no longer as readily accessible and prices for the limited opportunities available were at a premium. For some this meant a delay in time (and certainty) in their ability to move product in or out of the country, but for others – it was a financial premium that needed to be paid for continuity of supply. The scale of the issue is demonstrated in terms of the daily snapshot (below) of shipments delivering goods and raw materials around the globe.

Shipmap.org - global merchant fleet in 2012

Figure 1: Shipmap.org - global merchant fleet in 2012 (Image credit: Kiln) - click to enlarge

Along with impacts on the volume of trade, it is widely estimated that for every air and sea freight shipment, costs inflated between 5 and 10 times in the space of 6 months.

On top of the ever-increasing physical and political challenges faced in transporting products around the world, businesses are also facing a hardening insurance market — and marine and cargo insurance premiums are not immune, adding to the increased overall costs for the international trade of goods and supplies.

Industry response

In the 2021 Manufacturing CFO Outlook Survey by BDO in the USA, middle market manufacturers identified the number one factor most critical to the manufacturing industry’s recovery as supply chain stability. The report also found that success is no longer just about moving products quickly, or even cheaply for that matter. It’s about the sum of the whole, with all supply chain factors like technology, geo-political location, distance, and back-up supply options contributing to overall success.

Some of the key responses by globally competitive firms has been to reassess their decision making and implementation of supply chain management initiatives (SCM). These have included:

  • Management vision with proactive, visible support and initiatives
  • Adequate information systems including facilitation of information links between and within firms
  • Quality/compliance programs interwoven into all operational activities
  • Active problem solving and engagement among members of the supply chain
  • Reporting capabilities for performance measurement of supply chain activities and results
  • Information resets designed and implemented to update SCM skill sets

Government response

As borders closed and freight slowed, the Government leapt to the aid of critically impacted industries - like agriculture - with the establishment of an air freight assistance program which aimed to maintain critical export of perishable goods.

Since then, the Australian Government has cemented manufacturing as a key component in the nation’s economic recovery and growth over the coming years, launching the Modern Manufacturing Strategy in the 2020 Federal Budget. This $1.5 billion investment from the government supports Australia’s competitive strength and strategic national priorities in short- and long-term initiatives across the next five years, with one of the three streams focused on building supply chain resilience.

Informed by the findings of the Sovereign Manufacturing Capability Plan, the Supply Chain Resilience Initiative (SCRI) has an initial focus on health and medical products, addressing the biggest areas of vulnerability in Australia’s supply chain. It provides nearly $110 million in total support for businesses looking to establish or scale their capabilities to address supply chain vulnerabilities.

Moreover, the Government has worked to bolster trade relationships with many countries –Japan, Indonesia, Taiwan, and Vietnam to name a few.

Another example of an extensive trade network open to Australia is the Trans-Pacific Partnership (TPP-11) which was signed by 11 countries in March 2018 in Santiago, Chile.

Trans-Pacific Partnership (TPP-11) network participants

 

  1. Australia
  2. Brunei Darussalam
  3. Canada
  4. Chile
  5. Japan
  6. Malaysia
  7. Mexico
  8. New Zealand
  9. Peru
  10. Singapore
  11. Vietnam


Figure 2: Trans-Pacific Partnership (TPP-11) network participants - click to expand

The long-awaited Free Trade Agreement between Australia and the United Kingdom is also nearing completion, with anticipated positive impacts on investment and trade along with tariff reductions between the two countries expected over the coming years.

A key expectation is that the expanding Australian trade agreement network will offer a set of new market opportunities and landed cost models for exporters and importers. Manufacturing in Australia is expected to be a key focus for new investment and collaboration, particularly in the areas of technology and defence fabrication. Implicit in these agreements, however, is that they facilitate trade but do not influence the fundamental commercial arrangements, such as supply chain, margin and capital expenditure.

Supply chain transformation

With global supply chains having been tested for resilience over the past 18 months, now is the time for Australian manufacturers and wholesalers to identify and address their vulnerabilities. Supply chain optimisation is no longer a ‘nice to have’; opportunities for transformation should be assessed and developed into a roadmap for future success. 

With the Government identifying and heavily investing in manufacturing as a key priority for economic recovery, manufacturers across the country should be looking at ways to maximise the opportunities available. Be this through research and development, grants, improved trade relations, capital investment or specialised loans, the opportunities are plentiful – but should always be assessed for suitability with an organisation’s strategy and long term plans.

Here to help

If you’re reviewing the resilience of your supply chain operations, or to apply for the Supply Chain Resilience Initiative, we can help to guide you through the process. Contact one of our BDO manufacturing experts for help.

How resilient is your business?

BDO’s Manufacturing Resilience Review helps manufacturing businesses to assess their key risks and impacts. By completing the review, you can drive conversation on your organisation’s risks and resilience. For richer results, we suggest you invite team members to complete the assessment too - allowing you to compare views, reach consensus and make data-driven decisions.

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