Australian manufacturing is heavily dependent on international supply chains and susceptible to disruptions. We explore what Australian manufacturers can do to mitigate their supply chain risks and create a buffer against future volatility.
Australian manufacturing is at a critical juncture between its past and future. Following the challenges, disruptions and rapid changes that have defined the past few years, companies up and down the supply chain are looking for ways to stabilise and strengthen their positions.
Australian manufacturing relies on strong ties to international partners. With disruptions to global supply chains causing higher costs and greater inefficiency, it's an important time to take stock.
As part of our Rethinking Manufacturing Webinar Series, we hosted a discussion about what's next for manufacturing supply chains. The panelists identified many challenges, but also proposed solutions which offer a path forward for the sector.
The key themes of the discussion are summarised below, together with relevant findings from our Manufacturing Resilience Review.
Shipping challenges and solutions
Many of the difficulties reverberating up and down the manufacturing supply chain came from disruptions in international shipping during the pandemic. A backlog of ships at major international ports lead to unexpected difficulties, including price spikes for commodities such as timber and steel.
The import-export nature of the supply chain for Australian manufacturers means international developments can have unpredictable impacts. For example, COVID-related closures at ports in China and geopolitical tensions led to backlogs and idle ships – pushing out delivery timeframes and dramatically increasing shipping costs. While shipping costs and the availability of containers have since eased, port congestion – largely attributed to a backlog of quarantined cargo and ongoing worker shortages – remains a pressing issue in Australia.
Our dependency on international supply chains, particularly China, quickly left us exposed when the pandemic hit. To mitigate future risks, Australian manufacturers will need to build the sophistication of their strategic planning. This is especially important because the delays aren't just long, they're hard to predict. Better practices in advance planning represent an important investment area, as does increasing our level of self-reliance and diversifying supply chains.
Trends in nearshoring and reshoring not only decrease the reliance on shipping and transport availability in one location, but offer opportunities to optimise production, minimise waste, introduce efficiencies into the supply chain and take advantage of more favourable tax conditions.
The future of shipping rates
Manufacturers recently faced with the challenge of high shipping rates may wonder whether we are likely to have any stability in future, and whether they should sign shipping contracts to lock in rates. Unfortunately, there is no simple answer. The factors contributing to fluctuations in shipping rates are complex and often unpredictable. Businesses may choose to ‘hedge their bets’ and retain a level of agility by employing a mix of contract and spot pricing.
Among industry thinkers, there's little confidence in any prediction for the future. Rates could rise or fall, on nearly any schedule, and can greatly vary from region to region. Pricing volatility exists around the world, and changes that might seem to point to affordable rates – such as increases in available vessel capacity – aren't cure-alls.
Advance planning in times of turmoil
If the international supply chain is suffering heavy disruption, does forecasting still matter? The short answer is that it does, but companies will have to adjust their methods and expectations.
Monthly snapshots are a valuable tool for manufacturers to look ahead and make projections. Leaders should be cautious about taking too much information from their historical data. In times of turmoil, numbers can be skewed by short-term patterns, and that means past performance should only represent a small fraction of forecasting content.
Operating in silos is another practice that threatens the accuracy of forecasts. When there is communication and integration between customers, manufacturers and suppliers, these groups are all better able to move forward confidently. Top-down forecasting, so important in fields such as finance, is less helpful in making supply chain projections.
Again, the diversification of supply relationships has a role to play when companies are making decisions based on forecasts. Backup and alternative supply lines may prove essential when traditional channels break down: Companies that are looking for the solution may be disappointed. Looking for a solution is a more sensible approach.
Data sources for improving supply chain visibility
Working with data from numerous sources is a valuable method for creating plans that suit the unpredictable conditions affecting manufacturing supply chains. With that said, algorithms don't always tell the whole story in the manufacturing sector.
Statistical models rely on past performance data to predict future patterns. In a time of global uncertainty, when past performance isn’t necessarily a relevant indicator for future planning, active communication with customers is an important added source of insight - perhaps more relevant than the data.
One specific information source for Australian manufacturers is the news from international markets. It's relatively common for economic shocks felt in regions such as Europe to have their impact on the Australian sector with a delay of several months.
The power and limits of government actions supporting manufacturing
It's natural to ask what role the government can play in strengthening manufacturing in Australia. The general answer is that the power of the public sector is real, but limited.
Free-trade agreements, one of the foundations of the Australian manufacturing sector, are more of a baseline of opportunity than an end unto themselves. Direct investment from foreign partners and development of intellectual property are important priorities.
While direct government grants to assist the Australian manufacturing industry have their role, as a limited way to keep businesses running, structural measures to help the sector thrive are worth more than money. Needs for the years ahead will include:
- Access to a base of skilled, trained labour
- A reliable pipeline of essential components
- Diversification of the economic structure.
The National Reconstruction Fund (NRF) – first announced in the October 2022 Federal Budget – will provide another avenue of government funding for manufacturers in identified key sectors. While the 2023 Federal Budget included $61.4 million over four years to establish the NRF Corporation, it provided little in the way of further detail or timelines for provision of funding.
Acting now can help businesses achieve greater stability in future. Industry 4.0 and increased automation will be one of the most important focus areas for Australian manufacturers looking to build a strong future in the sector. Despite relatively high labour costs, Australian businesses lag behind in their use of automation, which could relieve significant pressure in terms of hiring and efficiency.
Dealing with current supply chain volatility - and creating a buffer against further shocks in the future - demands more attention than this part of the manufacturing business has typically received. Supply chains should be placed into the limelight as a major strategic priority for Australian businesses. Information will be the key to supply chain risk mitigation, so manufacturers need to understand what's happening at increasing levels of scale, across their region, throughout the hemisphere and around the world.
Leaders of manufacturing businesses should be diversifying their supply networks, escalating decision-making to strategic organisational leaders and establishing strong relationships with partners – clients and suppliers alike. Knowledge is power, and manufacturers that understand their costs on a deeper level are poised to thrive.
For added insights from this session and throughout the Rethinking Manufacturing series, watch the recordings. Reach out to your local BDO Manufacturing & Wholesale Adviser to find out how you can prepare your manufacturing business for the future.
Manufacturing Resilience Review Insights
Our Manufacturing Resilience Review is designed to help manufacturers assess the impact of key risks facing their business and benchmark against others in the industry.
Supply chain-related areas of particular concern which have emerged from the results include transport disruptions and supply chain demand.
A risk area deemed by respondents to be high impact, transport disruptions don’t only refer directly to distribution channels, but also to transport-related issues which impact an employee’s ability to access their workplace. For example - inadequate public transport, parking difficulties and traffic congestion.
Causes of distribution-related risks include transport closures (e.g. ports), industrial disputes, pollution and traffic congestion. If distribution channels are unavailable or severely impacted, organisations are unable to fulfil orders. We’ve already seen how greater disruption and uncertainty can cause longer lead times or even a complete breakdown in the supply chain of products sourced overseas.
Supply chain – demand
This risk area highlights the potential impact of relying too heavily on past data in forecasting. When changes to buyer behaviour create a surge or dramatic drop off in demand, forecasting errors are highly likely. These can lead to an inability to meet demand, inaccurate procurement, reduced competitiveness or unexpected costs.
Respondents to the resilience review deemed this to be a highly likely risk, but one with a low to medium level of impact. By diversifying forecasting inputs and ensuring good communication across the supply chain, Australian manufacturers can offset supply chain demand risks and increase their resilience.