The critical importance of improving supply chain resilience

The fragility of our domestic supply networks has been exposed by recent events relating to infrastructure. For example, temporary closures of the Main North Line Railway and SH1 around Kaikōura, the Marsden Point fuel pipeline, Auckland Harbour Bridge, the Ashburton bridge and the Cook Strait Cable.

These closures highlight the fact that our infrastructure lacks redundancy (ie there are no safety nets if systems fail) and is often congested.

Adding to this, Covid-led global supply chain disruptions continue to significantly affect businesses and the economy. War continues, the Marsden Point Oil refinery is closing, and strike action has been threatened in various sectors.

How should our supply chains respond to these potential threats? Consider this from a different vantage point. In New Zealand, our building and engineering structures must meet design standards based on extreme events related to our country. Restaurants are certified on food safety, hotels are graded and financial institutions stress tested.

So why don’t we require, or at least recognise, appropriate levels of resilience in supply chain entities? Of course, the complexity of supply chain networks and commercial sensitivity is high, but there is more that can and should be done.

The following are some ideas for affordable improvements to supply chain resilience that cover metrics, inventories, capacity, facilities, systems and technology, and people. The list is indicative rather than comprehensive:

While my focus is on enterprise, government does have a role. We could learn from the US government’s June 2021 publication Building Resilient Supply Chains, Revitalising American Manufacturing, and Fostering Broad-based Growth. The Australian government has been funding investment in capabilities to address supply chain vulnerabilities since 2020, with the “Supply Chain Resilience Initiative” now in its second round and, since April 2021, part of a trilateral Indo-Pacific initiative with Japan and India.

New Zealand has an interagency government group that is yet to present recommendations, but on April 20 the Ministry of Transport released a consultation document, New Zealand Freight and Supply Chain Issues.

Arguably, there is also much the private sector can learn about resilience from our Defence Force logistics capability and our National Emergency Management Agency.

First, performance needs to be measured. We should become more familiar with and employ resilience-related metrics, such as those developed by Professor David Simchi-Levi (MIT) and others in 2014.

Consider an entity in a supply chain experiencing a disruption, for example a supplier or a distribution centre. The entity’s Time to Recovery (TTR) is how long it would take before it is fully restored. This may be determined by considering historical data, observations from buyers, or even self-reports from managers. Now consider how long, with the entity down, you could continue to meet your demand, eg from inventory on hand and goods in transit. If this Time to Survive (TTS) is less than the TTR, you’re exposed to risk from the entity.

These supply chain metrics can help a firm determine more efficient and effective allocation of resources. In addition, while commercially sensitive, they also carry market value, akin to a star rating or a QualMark Award in tourism. There is a business opportunity for third parties to audit, assess, or certify (similar to organisations such as Telarc and AsureQuality). They could stress test, verify metrics and undertake supply chain operations forensics and include evaluating traceability options or auditing for modern slavery.

During turbulent periods the first port of call often involves increasing inventories. Clearly, item perishability, obsolescence, and holding costs must be considered, but this can be achieved by changing safety stock parameters. We should also consider extending national reserves beyond products such as PPE and Tamiflu to include imported items such as food ingredients, lubricants, and petroleum to safeguard both local supply and exports. We could rotate this inventory to ensure limited waste.

In this, we could learn from Switzerland, where a public-private partnership has maintained a system of compulsory stocks for decades. The Federal Office for National Economic Supply (Fones) mandates stocks of two to six months’ supply of products such as soap, screws, lubricants, sugar, oils, cereals, and fuel.

In involving about 300 private sector firms (which own the stock), efficiency is improved and risk reduced. Holding costs are recovered by higher prices, estimated to be less than NZ$25 per capita per year. These strategic reserves have allowed Switzerland to navigate pandemic supply chain disruptions well and they are supplemented by household emergency supplies – Fones recommends households maintain a one-week supply of a basket of goods, including food and drink.

Naturally, the ideal basket of goods for us would differ, as we have quite different import/export dependence, and while not landlocked, we have very long lead times, lower population density, and are more prone to natural disasters. We may consider prioritising imported goods and materials, including common intermediate goods, that would protect our export sector’s ability to operate. And if we do this well, the management systems could perhaps become part of our government-to-government offering.

Another approach to improving resilience is to add surge processing capacity, particularly flexible equipment. The ideal mix will depend on costs, how critical responsiveness is, the viability of producing or storing items in an intermediate form, and item perishability. Capacity can also entail additional, potentially multi-use, facilities purposefully run at lower levels of utilisation during “normal” times.

Systems and technology can also facilitate higher resilience. That could involve software and platforms for information sharing and product/material/component/equipment pooling or sharing, control towers for improved visibility, or digital twins to simulate performance. Or it could mean investing in demand planning - just in the past year, I’ve observed several organisations, each with tens of millions of dollars in inventory, with no item-level demand forecasting and often only rudimentary (and often “one-size-fits-all”) supply planning.

Finally, and perhaps most importantly, our people are key to our ability to respond to shocks. Investing in health and wellbeing, training for crises, and business continuity planning would provide additional resilience capacity. Param Iyer - a PhD student at the University of Auckland - suggests we consider following the Defence Force in creating reservists in other fields such as healthcare.

Improved resilience is achievable. It will take creative thinking, an analytical approach, and people with insight and foresight. It would be aided by public sector acknowledgement of the strategic nature of the problem for NZ Inc, and appropriate resource allocation - following Australia, Switzerland, and the US. But it will also require perseverance after the current challenges fade.

The article was first published in the Supply Chain Link newsletter by the Centre for Supply Chain Management in the Auckland Business School.