- Businesses can’t control the shocks disrupting their supply chains, but can take actions to make their supply chains more resilient.
- Shortening supply chains so they are closer to the home market (aka onshoring), significantly improves resilience for manufacturing businesses.
- China is at the forefront of using connected devices in the Internet of Things and AI to improve supply-chain efficiency.
Following almost two years of battering by a global pandemic, by early summer 2021 many of Australia’s already brittle supply chains were strained to breaking point. Bare supermarket shelves were just one of the consequences as the Omicron variant of COVID-19 took hold.
In January, almost half of Australia’s truck drivers were absent from work due to COVID-19. Staff shortages at container terminals, warehouses and retail outlets meant empty shelves confronted shoppers across the country. In New Zealand, the impact was felt in February when supermarkets set buying limits on some food items.
These sudden shifts in supply and demand have put enormous pressure on transport infrastructure. Most noticeably, they play havoc with global shipping.
How did we get to this point?
Before the pandemic, the shipping industry was overcome with excess capacity. Shipping was so cheap and making a profit out of it so difficult that it attracted very little investment.
When the pandemic hit and demand for household goods soared among home-bound consumers around the world, global shipping was faced with a shortage of container space. Freight prices in some instances increased ten-fold.
There is hope that these bottlenecks will be resolved in the next few months, though some economists warn that some problems, including freight hikes, represent much deeper structural problems in the global economy. A 2020 McKinsey study predicted that supply-chain disruptions that last longer than a month can now be expected to occur every three to four years.
Asialink Business’s September 2021 survey of Australian businesses, Disruption & Innovation: Reshaping Regional Supply Chains, shows this uncertainty is hitting small business hardest, with 32% of those surveyed reporting that restrictions on business could threaten their operations, compared to 15% of medium-sized businesses and 8% of large businesses.
Businesses need robust advice from many sources, including their accountants, on how to structure their businesses for the challenges ahead. While businesses can’t control the shocks disrupting their supply chains, there are actions they can take to make their supply chains more resilient.
“While businesses can’t control the shocks disrupting their supply chains, there are actions they can take to make their supply chains more resilient.”
The argument for onshoring
For the first time in decades, ‘onshoring’ and ‘nearshoring’ – bringing supply chains back to or closer to the home market – are being adopted by businesses that regard the risks of globally extended supply chains as too great to justify the cost savings.
Asialink’s survey of Australian businesses found that 16% are considering reshoring or onshoring to increase supply chain resilience, and 15% are considering nearshoring. It also found onshoring is most attractive to small businesses, with 30% saying they are considering it to improve supply-chain resilience, compared with 15% of medium size businesses and 8% of large businesses.
Since short supply chains are generally more flexible and responsive when disruptions strike, onshoring can significantly improve resilience for manufacturing businesses.
“Since short supply chains are generally more flexible and responsive, onshoring can significantly improve resilience for manufacturing businesses”
An example of this is the Australian and New Zealand printed circuit board (PCB) industry, which has suffered disruptions since moving towards offshore production in the past decade.
PCBs are needed for every industrial product, from microwaves to satellites. There were 14 significant plants producing PCBs in Australia and New Zealand in 2000 but a decade later the industry had been almost entirely moved offshore.
At around this time [in 2010], Circuit Labs in Auckland began operations and has since gradually expanded to serve customers across Australia and New Zealand. Circuit Labs does not attempt to compete on cost with Asian suppliers. Instead, it’s been able to grow by offering fast turnaround of prototypes and small manufacturing runs that can be delivered quickly.
When COVID-19 disrupted Chinese supply in early 2020 the company saw a spike in orders. It is now partnering with Melbourne-based contract electronics manufacturer Alfatron to start PCB production in Australia.
How new technology is transforming supply chains
Over the past two years, East Asian economies – particularly China’s – have led in the application of the internet of things (IoT) and artificial intelligence (AI) to absorb shocks and improve the efficiency of operations.
The internet of things describes a network of devices connected by sensors that collect, send and receive data. This can include the temperature, humidity, light levels, movement, speed, handling and other factors in an environment.
In the supply chain, IoT devices monitor the storage conditions of products to enhance quality management. Devices also use GPS technologies, enabling businesses to track and authenticate products in transport and delivery. This means that information previously collected by people is increasingly machine generated.
IoT applications are becoming increasingly affordable and in coming years promise to transform warehouses by replacing manual inventory recording with data collected by sensors connected to cloud platforms.
Chinese businesses have been adopting the latest IoT technologies particularly quickly as they adapt to serve the world’s largest e-commerce market. Hangzhou-based logistics company Cainiao, launched by Alibaba Group, is a global leader in warehouse automation, enabling it to serve Alibaba’s enormous business-to-consumer platform, Tmall.
Its IoT platform integrates storage facilities with one of the world’s largest fleets of autonomous vehicles, including shuttles for last-mile delivery.
Cainiao also operates an open collaboration platform for 3000 logistics partners, including 100 operating internationally. It uses cloud computing to reach into this vast network to optimise delivery. By leveraging all these capabilities, it can deliver a one-kilogram package anywhere in China in 24 hours for about 30 cents.
How AI smooths supply-chain stress
Drawing on vast amounts of data, AI applications can evaluate options faced by supply chain managers against dynamic and complex sets of risks and constraints.
In some sectors, AI can be used in procurement to integrate data with suppliers, enabling automated orders to optimise timing for storage considerations and price.
AI applications allow for the dynamic optimisation of routing, freight contracting and vessel sharing, which increases speed and reduces costs and environmental impact.
The Chinese government has made investment in AI to support supply chains a major priority, surpassing or extending its lead over the United States on key metrics. China also now has more than twice the number of high-performing supercomputers as the US.
Last-mile delivery solutions
As fast delivery becomes the norm, businesses need to optimise their supply chains to reduce lead times by moving fulfilment centres closer to consumers or using retail stores to fill online orders. One of the most time-consuming and costly phases in the supply chain is last-mile delivery.
Last-mile delivery is an important bottleneck to address as these deliveries are expected to grow by 78% by 2030, according to a recent World Economic Forum report. Data analytics can help optimise routes to deliver the largest number of items in the shortest time while autonomous vehicles and drones also have potential to increase efficiency.
Many Asian companies rely on efficient partners to speed up last-mile delivery. Walmart in China uses its stores to offer one-hour grocery delivery, for example, and Lazada in Singapore has partnered with 7-Eleven and Ninja Van to turn 350 7-Eleven stores into parcel collection points.
[NB] This article contains extracts and edited parts from Disruption & Innovation: Reshaping Regional Supply Chains.