If there was a contest to find two words synonymous with the era of Covid-19, ‘supply chain’ would be somewhere on the victory dais. For most of the world’s population, a supply chain is something that somebody else looks after. Even in WA, where long distance supply chains are integral to our isolated existence, not many people understand the length and breadth of supply chains that impact their daily lives.
Covid-19 has changed that. The best way to determine if a pipeline has weak points is to test it under pressure, and the Covid-19 pressurised pipeline that represents many of our critical supply chains is spurting failure like a sprinkler system sprays water.
It’s the knock-on effects that are surprising most people. How many people know that wine needs diammonium phosphate (DAP) as a nitrogen source during fermentation, and that DAP is mostly derived from coal in China, the supply of which is being choked by internal policy?
Throw in Ad-blue, glyphosate and just simple things like sea containers, and industry, globally, has received a lesson in Supply Chain 101.
Underlying all the supply chain woes are two things: Globalisation and Just-In-Time. Let’s look at each.
Globalisation
Trade has been around as long as humans. If South Pacific Island A has a great supply of rock suitable for carving tributes to their chosen deity and neighbouring South Pacific Island B has ample supply of tasty flightless birds, then it makes all the sense in the world for each island to benefit by trading with each other. Both islands’ stomach and soul are satisfied in an efficient manner.
Globalisation is an exponential magnification of these simple trade flows. Sea and air freight have replaced the canoes and every corner of the earth is a potential trade partner, with countries and regions specialising where they are globally competitive. For example, Australia is exemplary in primary resources and the production of farm inputs has become China’s forte.
Critical to globalisation is the physical transit of goods and COVID has thrown a spike-protein-shaped spanner into the workings of ports, airlines and shipping crews, whilst generating new levels of demand from bored internet shoppers. As a result, a canoe may be a better option than a sea container, with delays and unreliability of predicted services a given.
Concurrent to COVID issues, a number of countries have implemented trade barriers that have perverted traditional supply chain flow. China’s ban on importing Australian barley, wine, coal, hay etc have all impacted trade, with some of these having knock-on impacts upstream. For example, the trade constraint in coal meant that the feed source for making fertiliser and glyphosate became scarce in China, which in turn is impacting production of crops (and wine fermentation!)
Just in Time (JIT)
Toyota is attributed with devising the JIT system, as it is popularly known today. The principles are simple. Inputs to a process or sub-process are received as you need them. This has been logical for industries dealing with short product-life for centuries (think wet markets in Asia) but, for motor vehicle production, the opposite was the case. Each process step would have a stockpile of inventory for when the production line stopped for some reason. The downside of inventory is that factories needed to store the stock, carry the working capital to pay for it and get hit with write-offs every time a new model came out making old stock obsolete. It also reduced flexibility for catering for customer variations. All of this meant cost, so production lines were remodelled whereby there was no inventory for each process step, and this quickly spread up and down the supply chain. We now see JIT in every industry.
JIT is all well and good when supply chains work but, when there is a hiccup, there is no buffer. Let’s say a cyclone stops the canoe trade between our South Pacific Islands. For island B, that would mean they could no longer carve gods, but for island A, they would go hungry. The impact is not uniform (which is why the term ‘food security’ comes up in the globalisation discussion every few years or so, but that’s another article!).
Recently, we have seen the impact of JIT on numerous products (eg Ad-blue) but one of the larger ones is related to the birthplace of JIT. Whereas non-JIT motor vehicle supply chains gave us the famous Henry Ford quote ‘you can have any colour as long as it’s black’, JIT supply chains have now given us a new idiom, ‘you can have your Landcruiser in any colour, as long as the delivery date is next year’.
Supply chains will continue to be impacted by the next 'crack in the COVID pressure pipeline’. Product and supply chain complexity makes prediction difficult but, suffice to say, should your new piece of machinery be parked up for an extended period waiting for a semiconductor from Taiwan, both Globalisation and JIT underlie your frustration.
