Types of supply chain disruptions
The term ‘supply chain disruption’ has only recently entered our business lexicon. It could be caused by a rapid decline in demand, a pandemic, extreme weather, talent gaps, shortages of staff, lack of raw materials, political issues, cyberattacks, industrial action, or changing border regulations, to name a few.
These crises can happen anywhere along your supply chain, from the source of raw materials to the manufacturer, distributor or end user. Sometimes it’s not obvious that a link in the supply chain carries risk until something goes wrong. This can be a nasty surprise, especially if you have never worried where every component or product you use comes from.
Supply chain disruption impacts businesses differently, depending on the crisis. For some, the crisis may trigger unprecedented demand, where suppliers cannot keep pace with what you need. This can leave customers unhappy and you with lost potential sales. The opposite can also occur, where demand slumps and the very existence of the business is at stake. Others may find minimal impact on their business but are interrupted by collateral damage such as rising costs of freight or scarcity of product.
Vulnerabilities in Australian supply chains
We have a particular challenge of distance, where many businesses are a long way from their local markets, customers and suppliers. Importing or exporting adds another layer of distance complexity. See below for some of the challenges the Australian supply chain faces.
- It’s often more difficult and expensive to transport goods and services around the country. If roads, ports, airports or rail fail to maintain capacity, the fallout can be significant.
- We’re dependent on imports for much of what we consume (directly or indirectly). A disaster in a country we trade with is very likely to disrupt a wide circle of Australian businesses.
- Our economy is typically concentrated in a few key industries such as mining, agriculture, and tourism. Disruptions to these industries affect smaller businesses who rely on undisturbed demand.
- Technology connects almost everything we do, from managing payments, logistics, medical records, and manufacturer, supplier, grower or customer data. A cyber disaster could cause chaos.
- Australia can be prone to natural disasters such as bushfires, floods, droughts and cyclones all which have considerable impacts on your supply chain.
A good example during COVID was the accelerated demand for gardening and home improvement products, which highlighted our reliance on manufactured goods from China. This triggered a process to assess alternatives to avoid a loss of supply in the future, while disposable incomes were diverted away from tourism and retail.
Strategies for supply chain disruptions
It’s important to have a plan in place to reduce the likelihood of supply shock before they occur. Develop worst case supply scenarios at each step of your existing supply chain, then set up actions to either mitigate or solve when problems happen. See below for contingency plans to consider.
- Diversify who you buy from, as hard as that may be. It’s better to have three or four suppliers you rely on than one, in case that one cannot deliver. Make sure the suppliers are from different regions or countries to spread the risk. If possible, use local suppliers to reduce distance travelled.
- If it’s too difficult to diversify your suppliers, supplement your main supplier with smaller purchases from others to build a purchasing track record. It may cost a little more as you may not get volume discounts, but the slight loss of margin could be worthwhile if disaster strikes and your supply chain remains intact.
- Review your business’s access to logistics infrastructure such as ports, airports and road networks. Consider moving parts of your business closer to these supply lifelines, or away from areas that are regularly affected by natural disasters such as flooding.
- If you have products or services that are particularly at risk of supply chain disruptions or continually troublesome, consider discontinuing them. Yes, it’s hard if that product is a core deliverable or connected to other products you sell, but it could be economically viable to axe the problem at source.
- Set up an industry resource sharing network. There may be businesses in your industry that are prepared to share resources when one region suffers, with the expectation to return the favour.
- If cash flow and working capital allows, increase the amount of inventory or raw materials you hold. It may mean investing in more storage space which increases costs, but if the components or ingredients are mission critical, either absorb the costs or pass on to customers with a price increase.
- You could remove the supplier issue by integrating them into the chain. This could involve buying the supplier so they only sell to you, opening an offshore business to control the source of imports, or buying a customer to guarantee a sales outlet.
Indirect solutions to supply chain problems
There can be circumstances secondary to your direct supply chain that can trip you up. To help overcome these things consider adding the below into your planning include:
- Make sure you have assessed any cybersecurity threats. Add multi-factor authentication to all your processes, test for vulnerabilities, and ensure staff, suppliers and customers comply with your security processes and policies. Learn more about Protecting your business against cyber threats.
- Use your inventory or task management software this technology to set up a system of detecting deteriorating inventory or sales ratios that signals supply danger ahead. It’s better to have a few months’ notice you may run out of product than a few weeks.
- Join your industry’s groups or associations. Chances are they will be working out how to solve the supply chain dilemma. You’re not on your own. Suppliers, manufacturers, distributors, retailers, freight, wholesalers and the online channels will all be in the same boat.
Finally, be ready. Have a documented disaster response plan so everyone knows what to do, who to call, which customers need contacting, what to lock down and what to open. A communication plan everyone can access will help you manage supplier and customer relationships and expectations.
How NAB can help
Here at NAB, we have a range of support mechanisms to help when your supply plans go awry. We can fund against your inventory or the value of your receivables with NAB Invoice and Debtor Finance, and assist with increased cash if you need to hold more inventory and supply chain finance with Trade finance. Reach out to speak to our Trade and Working Capital teams to help find the right solution for your business.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.