One of the major drivers of the wave of inflation currently sweeping the global economy (and the New Zealand economy) are the issues arising from stretched or broken supply chains. 

You would have to be comatose not to have noticed shortages in the past couple of years as they have affected almost all products – dunny rolls, medical supplies, personal protective equipment, new cars, computer chips, cleaning supplies – even food. And because these shortages started manifesting themselves about the same time that the COVID-19 pandemic started spreading around the globe, it is easy to assume that the pandemic has “caused” the supply issues.

They are not unrelated. The pandemic certainly caused some demand surges that were not able to be immediately met by inventories on hand, and staff shortages due to illness combined with lockdowns to cause production and logistic slowdowns.

Significant choke-points have arisen in the world’s transport and logistics industries – shipping container shortages, congestion at major ports and rail shipping hubs, lack of capacity in road transport (to name only a few).

In short, the pandemic has resulted in widespread disruptions, dislocations and delays. And transport costs have risen significantly, up to about 10x for container shipping.

However, to attribute the supply chain issues solely to the pandemic (or, in fact, to any single cause) is an oversimplification that will not serve us well in adjusting to the new operating environment. The pandemic may well have been the snowflake that started the avalanche (or the proverbial last straw that broke the camel’s back), but the real causes are systemic weaknesses that we have spent the past decades building into our supply chain management and inventory policies.

It is important to acknowledge that the pandemic exposed the supply chain and inventory management problems rather than causing them because if the pandemic was the cause we could think that the problems might be fixed with a vaccine. But the problems are far more complex and are unlikely to be resolved quickly, even if the pandemic quickly came to an end.

For many decades we have been focused on cost-cutting in the areas of transportation, warehousing, and inventory carrying costs by implementing “Just-in-Time” manufacturing and logistics, zero-inventory (or at least very minimal inventory) policies, and lean supply chains. This has been very effective at reducing costs in all three areas of transportation, warehousing and inventory carrying costs as long as there were no supply-chain disruptions or supply/demand shocks.

But the reality is that there will always be disruptions and shocks from time to time. When that happens, the worst-affected economies and businesses will be those with the longest supply chains (i.e. those furthest from the sources) and those for which transport costs (rather than warehousing or inventory carrying costs) represent a larger proportion of the costs of goods. This does not bode well for New Zealand businesses and consumers, because we are relatively remote from most sources of supply (excluding primary industry goods) and transport costs are a significant part of our cost structure.

Of course, all businesses are different and business owners need to think about the implications of the supply chain “new normal” as it affects their own business. There are seldom any solutions that are universally appropriate for everyone.

The leaning of supply chains and inventories have been very effective in cutting business costs and improving competitiveness, so it would be counter-productive to throw out the baby with the bathwater. What is needed is a more nuanced approach that identifies which supplies are critical to business continuity and planning for more buffer stock of those critical items to keep the business going through supply chain shocks.

There may be no need to increase inventories of non-critical items.

The analysis needs to be informed by a detailed analysis of total costs to ensure that savings in warehousing costs and inventory carrying costs are not eaten by increased transport costs. It also needs to be informed by supply chain risk and resilience considerations, and by sound continuity of operations planning.

The Alternative Board - OwnersAuckland NorthRethinking Inventory Planning and Supply Chain Logistics
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