The past three years have challenged Australian companies on their ability to adapt and overcome, making them consider whether they have the most efficient supply chain for their operations. Different companies in different industries will benefit more from having an international or domestic supply chain. A few factors to consider are costs from product and labour, freight costs and environmental impact. The Russia-Ukraine conflict, New South Wales and Queensland floods and COVID-19 pandemic have all wreaked havoc on Australians and Australian companies, putting profit margins and the longevity of company operations at risk.
Over the past three years, Australian companies have been under the pump to keep operations running smoothly, a task only a few have achieved. A supply chain is the system by which an organisation operates, integrates, purchases and distributes goods and services. A domestic supply chain is where all these activities occur within an organisation’s country of origin, whilst in an international supply chain activities are conducted internationally and sometimes in multiple countries. In the past three years alone, the COVID-19 pandemic has forced companies to stand-down employees, floods have damaged crops and disrupted freight paths, and the recent Russia-Ukraine conflict has ignited global shortages of oil, fertiliser, iron and steel.
By comparing two locally owned Australian companies, Select Harvests and Kogan.com, and how they have handled the challenges that they have been presented with over the past three years, other companies can identify which form of supply chain would suit their operations best.
Recent and Ongoing Pressures on Supply Chains
In the past three years, there have been three major pressures put on supply chains in Australia, these are; the COVID-19 pandemic, major floods in New South Wales and Queensland, and, more recently, the Russia-Ukraine conflict.
Although we are recovering from the COVID-19 pandemic and major floods, with climate change and globalisation becoming increasingly prevalent, global warming related disasters are only going to occur more frequently and future disease outbreaks are predicted to spread further and faster.
THE COVID-19 PANDEMIC:
Companies across the economy experienced labour shortages throughout the pandemic, with logistics, freight and warehouse workers at a high risk of contracting COVID-19. To help cope with shortages, the Victorian Government allowed trucks to break truck curfews, with this decision to be reviewed in June 2022. As restrictions begin to ease throughout Australia more workers will be able to return to their jobs, allowing supply chains around the country to run more smoothly. As the pandemic begins to slowly subside and international travel opens up again, there are growing concerns and unknowns moving forward. The movement of exported goods has fared well, but the export of services heavily reliant on the movement of people, such as the tourism and education sectors, continues to be affected.
Container shipping has continued, keeping warehouses, stores and supermarkets stocked with imported wares. Due to its location, well-supported agricultural system and positions as a significant food exporter, Australia is one of the most food secure nations in the world, only importing approximately 11% of its food.
However, several areas of Australia’s supply chain industry remain vulnerable to future pandemics and disasters. These include:
- The reliance of primary and secondary producers on imported inputs to produce goods for export
- A lack of diversity in suppliers
- Vulnerability to protectionism and coercive trade measures
- Australia’s geographical location
- Australia’s inability to adapt, exemplified by a health crisis leading to an economic crisis, which then led to a social crisis
Additionally, the fragility of the international supply chains on which Australia’s market economy relies has the scope to damage societal cohesion. This has been visible over the past three years in:
- Panic buying
- PPE shortages
- Stockpiling
- Extensive global outsourcing of the production of pharmaceutical ingredients, medicines and PPE
THE NEW SOUTH WALES AND QUEENSLAND FLOODS:
Flooding and extreme weather conditions have caused a rise in insured losses, challenging the supply chain environment and leading to delays, shortages and a rise in the price of a range of resources. Many farmers in New South Wales and Queensland fear they may never fully recover, having watched the flood waters destroy and sweep away their livestock, crops and machinery.
Even farmers who still have all their cattle aren’t without problems. Damage to power networks has left facilities inoperable and milk tankers haven’t been able to reach farms, leading to a potential shortage. Attempts to recover will also be hampered by the likely spread of disease, fungus and infections through remaining cattle and crop populations. In addition to farming losses, there has been extraordinary damage to infrastructure, with every business in Lismore devastated and many not predicted to recover for at least three to four months.
THE RUSSIA-UKRAINE CONFLICT:
Russia is one of the world’s leading suppliers of oil, gas, wheat, fertilizer, sunflower oil and barley. Specifically, Australia imports fertilisers, crude oil and salts of inorganic acids and metals from Russia. Within a few days of the conflict breaking out, countries implemented sanctions on Russian exports and prices for all of these resources dramatically increased, sending a shockwave through the consumer market.
Cost- Benefit Analysis of Domestic and International Supply Chains
Depending on the industry, choosing to have a domestic or international supply chain can determine success or failure for a company’s operations.
Below is a general costs and benefits table that can be applied to a range of business activities. Different industries will benefit more from internationally sourcing or locally sourcing their products and inputs.
Optimising Supply Chains and the Benefits They Can Bring to Industries
The top three verticals that are heavily impacted by disruptions and shortages in Australia are manufacturing, freight transport and retail. Impacts that disruptions and shortages can have on these industries include:
- Longer lead times for goods and services
- Added costs to facilitate “express items”
- Delays and setbacks lowering consumer trust
- Unstable supply chains creating internal instability and uncertainty
To prepare for, and prevent, damages from a constantly changing operating environment, companies may benefit from creating backup plans and diversifying suppliers and services to be more agile in these circumstances. Businesses that rely on an international manufacturing and supply chain may benefit from researching and developing a local supply chain and preparing for the possibility of higher local demand.
Industries that rely on the freight industry to operate, such as retail, need to be well researched on the supply chain, where there might be gaps in their operations and in what areas they could potentially swap out suppliers to ensure they have a steady flow of products.
OPPORTUNITIES AND THREATS
The current circumstances have created a huge opportunity for local suppliers, as procurement and logistics teams will be busy battling a rise in prices by turning to local resources and suppliers. The risk however, is that businesses may need to be wary of local suppliers promising and under delivering.
Companies pivoting to a local supply chain may mean that producers are able to deliver goods and services at times when their competitors can’t, giving them a chance to gain market share, and allow companies to be nimbler and faster in reacting to changes in consumer behaviour. However, there may be more supply chain interruptions as local demand increases and outstrips local suppliers, resulting in shortages.
Is Moving Operations to a Local Supply Chain the Answer?
A more localised supply chain can mean increased costs for a company, but it may also deliver more benefits. A local supply chain gains a lot of consumer trust and builds loyalty and demand. Local suppliers benefit as they already know the market and understand trends on a micro level.
While moving to a local supply chain may lower lead times, prices for local goods will likely increase as the cost of inputs for businesses increase. This may be offset somewhat by saving slightly on international freight charges. However, steady companies may need to raise their own prices to preserve margins. If this occurs in a competitive industry with low concentration (an industry made up of lots of small players who compete on pricing) it could result in a significant loss of long-term revenue. Companies may instead need to consider temporarily reducing margins to maintain their customer base.
Company Performance Comparison
Select Harvests
Fruit and Vegetable Processing in Australia
Select Harvests is a public and Australian owned company that employs over 600 full-time staff and creates revenue from processing and distributing nuts, dried fruits, seeds and other healthy snack items. The company’s head office is in Thomastown, Melbourne, with operations across New South Wales, Victoria and South Australia.
Market prices for almonds and other edible nuts fluctuated heavily during 2020-21. Due to aggressive selling in California, the export price for almonds dropped and drove demand for almonds up about 22% as buyers took advantage of low prices. As global demand for almond products increased, Select Harvests was able to take advantage of temporarily higher prices for their products. Select Harvests’ recent dip in performance can be explained by the decision to trim down its business operations. In 2021, Select Harvests made the decision to sell the Lucky and Sunsol brands and discontinue operations at the Thomastown production facility.
Discussing the company’s forecasts for 2021-22, managing director Paul Thompson suggested that they don’t expect much change in market pricing until the condition of the 2022 US almond crop has been determined in light of recent droughts in California. As demand for almonds continues to grow around the world, global shipping congestion is causing ongoing delays to customer deliveries, leading to higher levels of physical stock holdings, resulting in a pricing reduction.
Select Harvests’ geo-diverse almond orchards operate in Victoria, South Australia and New South Wales, totalling more than 9,262 hectares of company owned and leased almond orchards. These orchards, as well as other independent orchards, supply the processing facility at Carina West in Victoria.
In 2020, there was a dip in almond pricing due to a record crop being produced in the United States, which lead to an increase in global supply. Prices solidified during 2020-21 but remained 9.3% lower than the previous year due to floods in California and Select Harvests’ increasing exports. Despite continuing droughts in California putting pressure on the global market, the global price for almonds is currently stable. However, congestion in key ports, slowing the movement of stock, along with stocks still being held by export markets from purchases of the 2020 US crop has meant that demand has slowed. Additionally, a number of sellers are not entering into the market as they expect that prices will rise.
The global market for almond production remains positive due to an increase of wealth and consumer lifestyle changes. However, supply chains continue to be impacted by the residual effects of the COVID-19 pandemic, including delays in available shipping and storage spaces and disruptions in ports. Looking forward, Select Harvests is likely to be successful in delivering almonds both internationally and domestically.
Kogan.com
Domestic Appliance Retailing in Australia
Kogan.com Limited is an Australian-owned publicly listed company, that derives its revenue from a wide range of business activities, though principally through online retailing and marketplaces. The company is administered from its head office in South Melbourne, but employs approximately 150 people for operations in Australia and New Zealand, with smaller operations overseas.
Despite delivering record sales for the first half of 2021-22, Kogan’s EBITDA dropped by 58% year-on-year with the company attributing the fall to continuous supply chain interruptions as a result of the COVID-19 pandemic and fluctuations in demand. Ruslan Kogan, the company’s chief executive, suggested that the current operating environment is challenging amid shortages, inflationary pressures, supply chain disruptions and global conflicts.
To combat Australia Post’s under-fire freight delivery service, Kogan created their own freight service, Kogan Delivery Service, to deliver their products straight to consumers. Kogan Delivery Service has already delivered more than 100,000 orders since it was launched.
Even though Kogan has warehouses in Australia, the majority of its supply chain operations take place internationally, with warehouses in multiple locations, most notably in Hong Kong for smaller items (phones and tablets) and Auckland for larger products (fridges and other kitchen appliances).
Additionally, Kogan.com’s share value has fallen in recent years, largely due to supply chain disruptions forcing the company to spend more on storing inventory in warehouses, product distribution and marketing campaigns. The company was under pressure to cut pricing to clear excess stock and inventory and counter shrinking margins. Kogan was able to transfer savings onto consumers by streamlining and cutting overheads in supply chains and marketing.
Supply Chain Comparison:
As it operates locally, Select Harvests’ orchards and processing facilities aren’t as affected by international-scale disruptions, which allows it to be more proactive and open up trade overseas, further expanding operations. Also, as Select Harvests has multiple locations across Australia, if there is a more localised disaster, it can still continue operations interstate.
During the pandemic, Australia was well placed to be able to continue operations. With extended lockdowns in Victoria, the Victorian orchards and processing facilities were affected but South Australian locations were able to continue as normal with minimal lockdowns and restrictions, the worst being halting operations for a short period. Similarly with the Russia-Ukraine conflict, operations in orchards and the transport of goods would have been impacted by increased fuel prices and fertiliser but were still able to continue.
Compared with Select Harvests, Kogan being internationally placed, with the majority of its operations and supplies coming from Hong Kong, means that its operations are more vulnerable to international disruptions and changing market reactions. Kogan may have to eliminate risky suppliers or production strategies to avoid future delays and minimise further disruptions to their supply chain. In addition to warehouses in Hong Kong, Kogan also has warehouses in New Zealand, Australia and other international locations.
Operating on an international scale with multiple warehouses across the globe, Kogan should be well-placed to be able to withstand disasters occurring in individual locations. However, over the past few years there have been multiple global-scale disasters. Competition ensures that consumers will always want and search for lower prices, if Kogan were to move a majority of their operations to Australia they could struggle to keep their prices competitive. The majority of Kogan’s operations occur in Hong Kong, which has a more efficient transport hub system compared with Australia.
Kogan has been too slow to react to changes in the market, and for the past few years customers have complained about slow delivery times on large items, which was only exacerbated by the COVID-19 pandemic. This feedback led the company to implement their own freight system in late 2021 to compete against Australia Post, in hindsight something that may have had larger benefits if it were implemented years ago.
Despite the recent challenges, Kogan still reaps the benefits of implementing a global supply chain. International freight costs are lower, reducing the price of products for customers. Additionally, there is a wider variety of products and resources to source from. Having a wider pool of resources and suppliers can bring greater diversification of final products, creating a competitive advantage, as well as better ideas and tools to be more efficient in supply chain operations.
Select Harvests, as a company with local supply chains, is better placed to be proactive to changes in consumer behaviour and fill gaps in the international market. By being domestically located, Select Harvests has been able to avoid major global disasters, continue operations and remain profitable. As a result, it has been able to keep up with consumer changes, such as an increase in demand for plant-based products, and export to the United States when they suffer shortages.
