Chain reactions
Covid forces rethink on the flow of goods
simply stop servicing countries like New Zealand, leaving a gap for smaller players.
We’ve had a taste of both scenarios already. Customs Brokers and Freight Forwarders Federation chief executive Rosemarie Dawson says Maersk, who are part of the 2M alliance (one of three big shipping alliances who collectively dominate over 80 per cent of the global sea trade), have been reducing the frequency of their calls at Ports of Auckland since October.
A northbound call has omitted Auckland for several months and a service from the US has been reduced to a fortnightly call.
A ‘‘significant’’ number of shipping calls from other lines have been cut back, too.
‘‘We’ve lost about 20 vessel calls in the last few months,’’ Dawson says.
‘‘That’s impacting on the shipping companies’ ability to reposition its container stock.
‘‘It’s impacting on the ability of import cargo to come in and export cargo to go out, and it’s not expected to be sorted out until June.’’
Then Dawson pauses and adds one word: ‘‘Maybe.’’
Levinson says corporate boards around the globe will need to change their thinking on some of these issues and look at building extra redundancy into their supply chains as insurance against these disruptions.
‘‘You can always make more money if you just think about today and don’t worry about tomorrow.
‘‘And part of the job of a board of directors and of a CEO is to look beyond today and to think about the future of your organisation.
‘‘Yes, for this year’s profits it’s probably going to be worse, on average, to invest in risk reduction, but if you take a look at the future of the company over the next 10 years, risk reduction is probably going to make a fair amount of sense.’’
Building backup capacity into the system might not involve bringing things like manufacturing ability onshore.
If you earlier relied on one factory overseas you arguably haven’t diversified your risk much by simply relying on a single domestic factory instead, Levinson argues.
Having backup manufacturing capability for everything in a small market like New Zealand might be too costly.
Along with carrying more inventory, one way to manage risk is by not relying on a single supplier for any product.
In other words, source most of our products from a preferred supplier in one country and the rest from another region – so one can take over from the other if necessary.
Which is why Sleepwell is hunting around Europe for somebody else who produces bed springs. So far director David Kyle thinks they might have found one in Turkey, but nothing has been signed yet.
Sounds good in theory, but when the chaos brought on by Covid-19 settles it might be difficult to convince boards they should be maintaining a costly backup just in case.
And even if you do source materials from different companies in different countries you might find they’re still connected to a small group of suppliers in one geographic area.
Car manufacturers reliant on semiconductor chips found this out recently when they were confronted with a global shortage brought on by shipping and production delays out of the
handful of factories in Asia that produced them.
Cars worth tens of thousands of dollars couldn’t be sold because they were missing chips worth less than $1.
To mitigate future disruptions, governments might need to play a part helping companies shoulder some the costs of maintaining these backups, but if they do, Levinson argues it should only be for items of ‘‘strategic’’ importance.
‘‘As a matter of national policy do we really care that almost all of the world’s socks come from China? Probably not,’’ he says.
‘‘If we’re talking about critical types of semi-conductors or
certain types of pharmaceuticals I might have a different opinion.’’
Strategic importance can be hard to judge. Personal protective equipment, for instance, would be considered a strategic good now, but before the pandemic, little attention was paid to the risks of being reliant on China for stocks.
However, we have made these sorts of judgment calls in the past. The Climate Commission’s draft advice to Government mentions steel as one potentially strategic industry for the country due its importance in construction and infrastructure.
Manufacturing Alliance spokesman and Metals NZ chief executive Nick Collins says Government procurement policy could better recognise steel’s importance by supporting the industry to keep this on-shore backup capacity going with government contracts.
In the event of a disruption this would pay off for NZ Inc, because the steel industry is critical for the equipment needed to keep our primary industries going.
So how much will this redundancy – strategic or otherwise – cost? Levinson says he doesn’t know, and it will differ by industry, but he encourages us to think about supply chain redundancy the same way we think about insurance.
‘‘After the fact, your insurance policy is always a waste of money, right? Because you didn’t have a claim and so you say ‘I could have gotten by without it’.
‘‘If it turns out there was no interruption to business anywhere in the last year then having redundant production cost your company money, but I think boards of directors are increasingly understanding business interruption is a risk.
‘‘It [supply chain redundancy] doesn’t come free, but then again I think we’ve seen that the cost can be really heavy if your stuff doesn’t get delivered on time.’’