Redesigning Supply Chains: The Australian Case

Thanks to the Covid-19 pandemic, we’re more aware of the weaknesses of globalisation and the flaws of managing supply and demand through just-in-time practices.

The problem is clear for Australia’s policymakers, but the solution less so. Some hanker for a return to 1970s-style Australian manufacturing, forgetting it was an inefficient and highly subsidised artefact of an economic policy designed to manage unemployment. Others seek a return to globalisation, dismissing the sovereignty challenges of an increasingly complex and dangerous geopolitical world.

Neither form of extreme optimism is a sufficient risk-mitigation strategy. Whatever approach is adopted, this new insurance policy will come with a price tag that the market won’t meet.

The push to enhance Australia’s sovereign manufacturing capability, particularly in the defence arena, hasn’t yet produced the jobs or economic benefits promised. The defence industry policy statement in 2016 aimed to foster sovereign capability, but there has been virtually no increase in the ratio of defence acquisition dollars spent locally to those going overseas. Good intentions aside, we can’t and shouldn’t manufacture everything.

What should Australia manufacture and how do we decide what’s important? These decisions shouldn’t be based solely on current market forces, or on overly simplistic assessments of future returns on investment for shareholders.

Stockpiling is an oft-discussed response to supply-chain challenges. The 2020 defence force structure plan committed ‘up to $1.1 billion towards building up sovereign weapon-manufacturing capacity and between $20.3 billion and $30.4 billion towards weapon-inventory surety between 2025 and 2040’.

On the face of it, stockpiling appears to be a good idea, but it is expensive to set up, has the potential to distort markets, and risks stockpiling things that become obsolete. Commodities such as fuel have a shelf life, so stocking up when prices are low is only effective when your economy has the scale to turn over that stock. The government-led wool- and wheat-stockpile arrangements of past eras provide stark lessons of the failure of stockpiling to influence markets, manage commodity pricing and shore up supply chains.

The recent effort to map supply chains is welcome, but modern supply chains are complex and mapping takes time. The result may be an impressive infographic that attempts to simplify the picture, but then what? On what basis do we determine which parts of the supply chain are more critical than others? How do we assess the importance of one supply chain over another? Who would be brave enough to prioritise fertiliser over baby formula?

Supply-chain mapping may identify risks, but it won’t help us identify vulnerabilities to ensure resilience. This point was highlighted in the 2021 by the Productivity Commission, which noted that managing risks ‘does not mean that all disruptions identified by a firm can be avoided’ and that it also has costs.

There’s no question that our supply chains need to be resilient to withstand disruption, which in turn suggests a need to focus on the vulnerable parts of supply chains. The problem is that what makes a supply chain, or part of one, resilient can change and often what makes a supply chain vulnerable is out of our control.

Last year’s shortage of AdBlue (a diesel exhaust additive to reduce emissions made from urea) provides the perfect case study. The supply chain was ‘resilient’ up until the point that a trading partner, in this case China, made policy adjustments in response to domestic needs. The first factor was that the price of fertiliser (urea) was increasing, which was increasing the cost of food production and therefore the cost of food for Chinese consumers. The second was the need to improve Beijing’s air quality in the lead-up to the 2022 Winter Olympics.

China’s policymakers decided to have more urea available for domestic use and to make more AdBlue available for diesel vehicles in Beijing. These two decisions reduced the amount of fertiliser and AdBlue available for import into Australia. The result: a supply-chain vulnerability that we did not foresee.

This example highlights that a confluence of factors can lay the groundwork for a perfect storm that results in a supply chain becoming vulnerable. It also highlights the reactive nature of Australia’s approach to supply chains. Asking, ‘What’s the next AdBlue?’ is the wrong question. Instead, we should focus on what we can influence and what confluence of factors may render a supply chain vulnerable.

If we’re expecting to leverage northern Australia’s geostrategic position, we must appreciate that the north will need to accommodate surges in Australian and allied expeditionary forces. That will generate surges in demand for housing, water, food and fuel in addition to the air, land and sea capability that militaries rely upon.

Lifting supply-chain resilience and understanding potential vulnerabilities are essential if northern Australia is to play an effective role in our defence and security. It is a mistake to assume that we can transplant into northern Australia at a moment’s notice anything we need. Accepting that highways and rail in the north can be cut for weeks during the wet season positions it as a pseudo–developing nation and a highly ineffective geostrategic contributor.

Leveraging the north for defence and security goes beyond ensuring that infrastructure there is robust; it must have what’s expected in a modern advanced nation. Getting there will require articulation of the whole-of-community capability needed in the north and how governments, businesses and communities will collaborate to establish that capability. And it must be acknowledged that it will take time and coordinated investment to develop and sustain the workforce, build the operational capability, and establish the social infrastructure essential for the north to play its role effectively.

Policy decisions by other nations are out of our control, so let’s stop using them as an excuse for our broken supply chains and stop allowing them to shape our national positioning. We need a new definition of supply-chain vulnerability, one that emphasises the things we value as a nation so we can make the right policy decisions and achieve the best investment outcomes.

For too long, our approach to supply chains has prioritised low cost over other factors. But cheaper is not always better if it comes with an unacceptable risk. Of course, we should improve the supply chains we have, but what’s more critical is that we redesign our supply chains to meet future needs.

Gill Savage is a senior fellow with ASPI’s Northern Australia Strategic Policy Centre and deputy director of ASPI’s Professional Development Centre.

This article was published by ASPI on April 22, 2022.

Featured Photo: Credit: Australian Department of Defence