Australia: Supply Chain Disruption – The Risk To Global Economic Recovery

Source: Federal Reserve Bank of New York

Source: Food and Agriculture Organization of the United Nations

Implications for the Construction Industry

Material and labour costs are rising rapidly – in Australia, costs increased by around 15 per cent in 2021, which is more than the price rises seen over the previous seven years. Essential construction materials, such as reinforcing steel and structural timber rose by more than 40 per cent over 2021.¹⁰

Any slowdown in the housing and commercial property markets could restrict the construction industry further, with constrained builders likely to fall into insolvency. Recent high-profile collapses include Probuild and Condev and the FTI Consulting-managed insolvencies of Privium and BA Murphy. Some contractors are now asking for 'rise and fall' provisions to be included in contracts and seeking extensions for completing jobs because of materials shortages.

Builders can help manage their risks by:

• building extra time into contracts to allow for supply chain delays
• requiring contractors to allow for a buffer for key supply items
• requiring contractors to price in the risk of delays and then fixing the cost subsequently
• requiring contractors to pay deposits for offshore supplies earlier than usual
• sourcing items locally.

Construction Materials - Key Groups¹¹
(Weighted average of 6 capital cities)

Implications for the Fuel Industry

The ongoing conflict in Europe, along with tightening oil markets and increased demand for transport fuels post pandemic, has led to uncertainty, price increases and disruption to supply chains for fuel. In some countries, supply chains have had to be restructured as they move away from Russian oil. This has caused increases in both retail and wholesale prices.¹²

• Fuel companies should look at sourcing fuel from a wider number of countries and storing it in a diverse number of locations to ensure supply chain flexibility. For example, AMPOL has established strong partnerships with producers in the US, improving sourcing capability and diversifying its supply chain.^{13 14}
• Fuel companies should engage with market participants to understand market dynamics and pre-empt the impacts of global disruption on local suppliers. This could inform key decision-making as supply chains rebalance in response to these disruptions.
• Finally, fuel companies should try to coordinate activities on a national scale in response to a supply chain crisis rather than work in isolation. The benefits of working together to ensure security of supply could outweigh any short-term competition concerns.

Key Supply Chain Strategies

It could cost businesses more to promote supply chain resilience in the short term but in the long term, a more resilient supply chain will reduce the impact of external shocks on the bottom line. Most businesses affected by supply chain shocks during the pandemic have said they intend to make their supply chains more flexible, agile and resilient. The following outlines some of their strategies.

Inventory cushions

• This means having 'extra' stock or component parts on hand should the supply source face disruption. While it may be hard to justify the cost of additional inventory, recent experience has shown the cost to business if there is a delay in obtaining such inventory. For example, the global microchip shortage has put the automotive and electrical industries under stress and left thousands of laptop orders unfilled.¹⁶
• Alternatively, businesses might stockpile inventory, carefully considering when to release it and at what price.

Digitalisation

• Businesses could use AI to identify risks and potential shocks or underperformance in the supply chain well before they get out of hand. Access to sales information and predictions could allow suppliers to more accurately determine the amount of stock that is needed.
• Technology can also be used to map a business's supply chain more accurately, not only to the first tier (the business's direct supplier) but to the second tier (the business's supplier's supplier) and beyond. An accurate and in-depth supply chain map can more clearly identify riskier points along the chain, allowing businesses to mitigate that risk and make their chain more reliable.

Localisation and 'nearshoring'

• Some firms are taking advantage of more local materials in an attempt to rely less on international trade and supply chains.
• Nearshoring means relying on suppliers that are geographically closer to production facilities to reduce transport costs and time, improve product quality and reduce risk. Sometimes nearshoring is a better or more realistic alternative to localisation, as some products may use materials that cannot be sourced locally.¹⁷
• Production can also be brought onshore - in July 2022, the US Congress passed the CHIPS Act to strengthen domestic semiconductor manufacturing, design and research, and to reinforce America's chip supply chains.¹⁸

Diversification of suppliers

• The shortage of component parts for the automotive industry shows the importance of having multiple sources of supply.
• Prior to the pandemic, Vietnam had positioned itself as an alternative supply chain hub – its proximity to China, trade arrangements that promote exports, and a strong component supply economy gave it such an opportunity.¹⁹

Strategic partnerships

• Partnering with suppliers of key raw materials can increase visibility and a business's control of their supply chain.
• This may have implications for business restructuring as well as for competition policy.

Monitoring free trade agreements

• Supply chain professionals should keep abreast of free trade agreements and what they mean for their respective supply chains. There have been recent efforts to promote free trade in the APAC region, including the Regional Comprehensive Economic Partnership Agreement,²⁰ the Comprehensive and Progressive Agreement for Trans-Pacific Partnership,²¹ and the Pacific Agreement on Closer Economic Relations Plus.²² Such agreements can affect decisions on competitive locations for plants, distribution functions, sales and sourcing inputs.

Government initiatives

• Government can play a role in facilitating smooth trade and putting in place temporary supportive measures to help businesses struggling with supply chain disruption.

Customs clearance:

• removing non-tariff barriers to trade
• reducing costly constraints to smooth operation of supply chains such as customs and clearance checks.

Price flexibility:

• playing a role in preventing businesses from gouging in an environment of rising and volatile prices by introducing temporary restrictions on pricing behaviour.²³

Protections for struggling businesses:

• helping businesses struggling with rising input prices and scarcity of raw materials by introducing temporary measures that prevent a business from shutting down permanently (for example, through domestic contracts).
• Trade facilitation: supporting regional cooperation by maintaining open trade policies and mutually beneficial initiatives (such as the Supply Chain Resilience Initiative),²⁴ building trust in trading commitments and avoiding policy interventions that impede smooth trade.

Overview

Where companies once focused on cost efficiency, they have now turned their attention to increasing the resilience of their supply chains. Increasingly, ensuring supply means improving the visibility of the different links and dependencies in the chain. One way companies can improve transparency is by using data analytics and AI to uncover vulnerabilities ahead of a potential disruption. Another is to use more flexible contractual arrangements – it's often easier to achieve transparency when dealing with just one supplier.

Agility is also vital. Supply chains need to be able to respond to rapid changes in retail demand, quickly divert goods to another location or find alternative sources of supply. To achieve this, companies need to consider whether to pursue diversity of supply or rely on the convenience of just one supplier. Consolidation and mergers with a view to bringing links in the supply chain 'in-house' will have implications for business restructuring and potentially for competition policy.

Alongside these concerns, sustainability and carbon neutrality are big talking points, not only among businesses and consumers, but among investors and regulators. Supply chains make up 60 per cent of all carbon emissions globally.²⁵ To achieve net zero means that supply chains may need to be reconfigured.

Going forward, some of the key trends we are likely to see in supply chains are:

• Visibility – increasing the transparency of supply chains and using technology to make proactive decisions. This will avert the need to engage a host of different links and suppliers in the chain and navigate their respective systems.
• Resilience – developing chains that are resilient and agile by strategically choosing suppliers.
• Environmental goals – pursuing environmental goals among businesses and consumers, which will affect how supply chains are structured.

How FTI Consulting Can Help

Disruptions in global supply chains and rising materials and labour costs present considerable challenges and opportunities in a range of areas including:

• demand forecasting
• cost forecasting
• dispute resolution
• business forecasting
• asset valuation.

The Economic & Financial Consulting team at FTI Consulting has deep experience providing advice on these issues and can help businesses navigate the challenges and the opportunities. For more information on these issues, please reach out to a member of our team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.