Navigating Uncertainty with the Right Supply Chain Strategy
In one of the most challenging periods for global supply chains, retailers have plenty of reasons to cut back on costs. Supply Chain Insights explores why making strategic investments in supply chain infrastructure and processes can not only help to weather short-term storms but set up businesses for sustained success.
In July 2023, the Reserve Bank lifted its official interest rate to 4.1%, a level not seen since early 2012. The bank's board decided to lift the cash rate target for the second month in a row, amid concerns inflation was taking too long to come down.
The national inflation indicator accelerated in August, led by surging fuel prices and rising rents. The consumer price index jumped to 5.2%, which was the first increase in four months, seemingly undoing the recent progress in reducing inflation.
Mounting concerns over a supply deficit after output cuts by Saudia Arabia and Russia have increased global oil prices. Australia has seen a 13.9% rise in fuel prices over the last year, with unleaded petrol prices averaging $2.11 per litre across the country in August, compared to a $1.86 average over the year. Higher fuel prices will only lead to cost increases in other parts of the economy, likely stalling any hope of a cutting of interest rates, which isn’t predicted to happen until March next year.
A combination of factors is leading to Australians tightening their retail spending, with the cost-of-living squeeze meaning more shoppers are prioritising supermarket staples over non-essentials like clothes and household goods. A recent Commonwealth Bank of Australia report showed spending growth has declined nationally to just 1.3% this year, while national accounts showed the weakest rise in national gross domestic product (GDP) since the September 2021 COVID-19 lockdowns.
How the economy is impacting supply chains
Suppliers are dealing with higher operating costs, leading to companies having to renegotiate with suppliers to drive preferential terms or work more closely to drive costs down across both businesses and the overall supply chain.
James Lisica, Supply Chain Futurist and Strategist explains how costs pressures are putting the onus on capital decisions impacting inventory.
“Lowering inventory has been a natural reaction because the costs of holding stock at higher level interest rates is becoming a real challenge and roadblock for organisations. This puts more pressure on companies to have a better understanding of their footprint – a more agile footprint – and better supplier relationships so that they can maximise their industry inventory and be very quick and flexible as to how they position inventory throughout their network,” James said.
Changing consumer habits throws up complications for organisation’s demand forecasting, especially those who are still using traditional demand signals. Marcus Carmont. CCO at TMX Transform, explains how trying conditions have fundamentally changed decision making in supply chains.
“The predictability of demand for retailers isn’t what it has been in the past. Consumer buying behaviours have changed immeasurably and the ability of businesses to be able to understand how this translates in terms of the operational business requirements is really crystal ball stuff at the moment,” he said.
Standing still is being left behind
An efficient and agile supply chain is a top priority for business leaders, with a recognition that a ‘do nothing’ approach isn’t an option. This doesn’t mean every business needs to dive into all the technological bells and whistles at once, but investing in new and emerging technologies which directly improve throughput creates an advantage over competitors.
Capabilities such as visibility, integration, data harmonisation and automation are now table stakes for supply chain success, particularly in retail, pharmaceuticals, and fast-moving consumer goods. By the same token, mainstream technologies for improving data for better integration and visibility have been around for years – businesses who ignore this simply won’t be able to compete in the new market.
“History is littered with organisations that don't exist anymore because they didn't invest in their supply chains,” James explained. “Companies like Apple and Amazon who have grown over decades have proven that a capable supply chain can be a competitive advantage. Typically, companies who invest when times are the most challenging are the companies that disrupt markets and grow the quickest. I don’t think any company regardless of the industry can afford to stand still.”
For Lisica, visibility is one of the biggest advantages in an effective supply chain. The pandemic shone a light on the fact that many companies weren’t able to see their own supply chain and know where inventory is, so being able to make decisions by using real time data and analytics is becoming critical to the way that organisations move forward.
Automation on the rise despite financial challenges
While there is hope rising general costs will stabilise, Australia’s supply chains are having to cope with a shortage of workers, which in turn puts more pressure on wages and the cost of labour. Vacancy rates for industrial property are at almost-record lows in Sydney and Melbourne, forcing operations to reconsider their networks to avoid the rising cost of land in premium locations.
With increased financing costs for leased equipment and facilities impacting capital availability for broader supply chain ventures, some businesses are taking a more risk averse approach to investment. However, automation in the supply chain isn’t slowing down, explains David Lamb, Senior Systems Consultant at Dematic.
“A lot of the business case drivers for automating are sweating the asset,” he notes. “In your facility, you might only be running operations for one shift because it's hard to find people to come in and work from 6:00 PM to 2:00 AM. Installing automation allows you to run that facility 24/7. Secondly, you're saving on lease costs of manual equipment that you may no longer need.
“We are seeing significant footprint challenges. Typical, manual facilities have wasted space for people to walk up and down aisles or access pick slots. Automation such as AutoStore, ASRS and other technologies are helping to densify footprints, doing more with what you have.”
Flexibility and agility
TMX’s Marcus Carmont says developing efficiencies through flexibility is crucial to forward-planning.
“You need to adapt to change in the most practical way possible, which comes in the form of understanding what solution can be best tailored to provide a level of flexibility. Business cases are being more heavily scrutinised and sensitivity analysis is quite exhaustive in terms of businesses now wanting to understand very intimate workings of changes across a range of business decisions.”
David Lamb of Dematic echoes this sentiment.
“Hope is not a strategy, but neither is being able to predict the future. But agility is a strategy. Some of the best performing supply chains test themselves for agility. Forming strategies through asking questions like, what if land availability continues to be really tough and I keep growing? What if I outgrow my manual warehouse? What if my competitors are automating and I'm not? Once businesses start to consider these different scenarios, they can then better plan to build a supply chain around resilience and agility.”
Developing the business case for automation and technology
When embarking on any new project, return on investment will be front and centre for supply chain managers and leaders. Brett Newstead, Director of Sales at Zebra Technologies, says the mentality is shifting, however, to also consider the cost of reduced output from not transforming operations when deciding which investment will provide the most value.
“There's a lot of discussion around opportunities to disrupt and emerge in a stronger position. It does still come back to the state of the business and if they can afford to do so, but we are seeing those changes. We're seeing most are seeking investments that will drive up properly in line sales.
Another key area is reducing shrinkage and balancing out investments because it can be dangerous to invest in just one part of the business. A lot of companies are viewing supply chain as an opportunity, not just a business-as-usual cycle.”
The dip in consumer spending is creating more competition for companies who are heavily weighted towards discretionary products. As a result, more organisations are looking to adapt and prioritise being more agile – empowering workers to utilise technology which can be adaptable to different areas of the warehouse.
Brett says the business cases are also there for organisations who aren’t particularly risk-taking.
“Being really cost-conscious doesn’t mean you shouldn’t be investing in supply chain, but you should be investing in more mainstream technologies which have been proven to reduce costs and don’t cost as much to implement,” he explains.
Collaboration for future success
For business-changing projects such as taking on fixed automation, voice and mobility systems or moving into a new distribution centre, addressing immediate fixes first helps to cement benefits of the change to business outcomes. To plan for the future, however, more businesses are embedding flexibility into business plans, according to TMX Transform’s Marcus Carmont.
“Smart businesses are understanding the current climate, but looking beyond that period and exploring what technologies are available in terms of being able to be modular and adapting to change,” he says.
“The supply chain director never had a seat at the board table. Now they do, the challenge is understanding what the future looks like. You almost need to be a clairvoyant to understand what you’re building for, but the way to overcome this is clearly understanding what the business requirements are and therefore understanding how to develop flexibility longer term to be able to accommodate change as and when it comes to play.”
Dematic’s David Lamb says a willingness to share your experience and business needs and a willingness to learn is a crucial mindset to have when taking on fixed automation, a new distribution centre or other advancements.
“Warehouse equipment alone is not a solution. A warehouse solution is also not an off the shelf commodity, it is custom designed and needs to be suitable for your business. Selecting an experienced integration partner and trusting them with all your business processes, all your data, all your growth forecasts is really the best way to ensure the solution that you receive in the end is tailored for the needs of the business.”
Lamb understands it’s easy to be distracted by the cost of individual pieces of equipment, but businesses should consider the whole operation beyond just materials handling. For instance, tailored solutions can do some clever things with really dense automation to save thousands of square meters.
“It’s crucial to pay most attention to the data analysis. Does the integrator understand your business? What about your growth projections? If you are 80% retail today, but in 10 years you might be 80% e-commerce, is the solution that you are designing and implementing going to be suitable for the future of your business? When we ask these questions, we put ourselves in the best position to succeed in an evolving market landscape.”
