Bushfires

The country’s 2019–2020 bushfire season was unprecedented, with economic losses estimated to exceed $110 billion. Key infrastructure was closed, including some highways and ports. Production lines were damaged, and consumer spending took a major hit. Several key freight routes were closed, which impacted the supply of goods and forced companies to find alternate routes. For example, during the 12-day closure of Western Australia’s 1,600-kilometre Eyre Highway in early January, which left more than 400 trucks and cars stuck on either side of the border, grocers such as Woolworths and Coles faced delayed or lost revenues of up to $10 million a day.¹

The bushfires also damaged the upstream food production and farming supply, and milk production dropped by about 5.5 per cent in the first part of the bushfire season. Because of road restrictions and infrastructure problems, Bega Cheese was forced to write off 0.9 million litres of output at its dairy processing facilities.² And amid a lack of consumer confidence and low demand, major retailers have reported that their earnings had dropped. For example, Super Retail Group reported a drop in sales of up to 9 per cent in December 2019 compared with the previous year. Regional stores—where access was limited—took the biggest hit on sales.³

Ransomware attacks

Australian transportation and logistics company Toll Group weathered a crippling cyber attack in January that debilitated its operations and dealt a major blow in terms of lost revenue and delays. In addition, some small to medium-size customers such as Accent Group reported delays of two to three weeks in delivering stock to customers as order fulfilment, usually done digitally, had to be handled manually.⁴And in February, a ransomware attack on Talman, a provider of IT solutions such as delivery, order and auction systems to the wool industry, forced the cancellation of all wool auctions and prevented $70 million worth of wool from entering the market.⁵

In May, Toll suffered a second attack that used a new form of ransomware to infiltrate the system by exploiting remote desktop connections.⁶ Staff members’ personal details were stolen, and, importantly for its customers’ supply chains, IT systems and the MyToll service were shutdown.⁷

The COVID-19 pandemic

The coronavirus pandemic triggered severe challenges to manufacturing output and freight capacity as well as irregular consumer behaviours. Many global supply chains rely on materials from China’s factories, which contribute about 28 per cent of the world’s manufacturing output. As early as mid-February, 938 of the Fortune 1000 companies had tier 1 and tier 2 suppliers in China that had been affected by the virus.⁸

In addition to the impact on inputs to production, supply chains were affected by peripheral issues such as a lack of personal protective equipment, border closures and requirements to work from home.

Then, the impact of COVID-19 went far beyond manufacturing. In March, airlines reduced their international and domestic passenger flight capacities between 5 and 20 per cent depending on the region, resulting in a drop of air freight capacity and a dramatic spike in demand for cargo freighters. Some routes reported dramatic rate fluctuations. For example, amid a plethora of suspended passenger flights, rates to ship cargo from Frankfurt to Shanghai rose 193 per cent from 80¢ per kg in the middle of February to $2.78 per kg just one week later.⁹ Unless freight was contracted, companies had to pay a premium on spot markets to get time-sensitive goods in and out of China. Fast forward to June: Qantas announced that it would halt international flights until October—further decreasing air freight capacity.¹⁰ Prior to this, the Australian government established the International Freight Assistance Mechanism and partially funded flights out of and into Australia to help suppliers of specific product classes reach international markets.

In Australia, consumer panic resulted in frequent stockouts for what people deem to be essential goods, such as toilet paper and flour. Grocery stores in Australia hired security guards, and in early March, The Northern Territory News printed blank pages of its newspaper for people to use as emergency toilet paper. Because of the spike in demand and despite efforts to curb panic buying, ABC Tissue and Kimberly Clark were forced to pull in more resources to run factories 24 hours to meet demand.¹¹

In search of an answer

At the heart of these crises is one common theme: most supply chains are not designed to deal with these major unexpected events. Leading companies are identifying and understanding the risks they are exposed to and putting in place structured processes to mitigate these risks. However, as recent events have revealed, this is insufficient to build resilience for unforeseen events. Companies are not always able to rapidly respond to an unpredictable and changing environment—business as usual requires the supply chain to be cost-efficient, which may in turn challenge resilience. Investors may fail to reward supply chain resilience and in turn penalise it for perceived inefficiencies.

In light of the recent “black-swan” events and associated volatility, companies will increasingly need to strike a balance between supply chain cost efficiency and resilience, which Kearney benchmarks along eight dimensions:

Geographic makeup. How close is supply to demand? How diverse are the sources of supply and demand? Can multiple locations provide key inputs?
Planning capabilities. How advanced is demand-sensing technology? Can the supply chain react quickly to any changes in demand?
Supplier landscape. Is there visibility into suppliers? Is the supply base diversified? Are suppliers overly reliant on a few customers?
Inbound transportation. How much control and visibility is there? Is more than one mode of transport possible?
Manufacturing footprint. Is spare capacity required? Is it possible to repurpose to increase core product manufacturing? How vertically integrated are core products or inputs?
Product platform. Is there a high level of interchangeability among product inputs? Is there enough capability to substitute custom inputs for generic ones on an as-needed basis?
Outbound logistics. Is there diversity among carriers? Are alternate modes or suppliers easily substituted?
Financial health. Is there a healthy volume of safety stock inventory for core products? Is there rapid access to capital if needed to ramp up incremental production?

Building flexibility and agility into the supply chain creates resilience and can put companies in an ideal position to respond to unplanned disruptions. The most effective way to create resilience and prepare for shocks is to build pivoting supply chains.

Building a pivoting supply chain

In the face of uncertainty, Kearney proposes that supply chains need to quickly react and adapt to any changes and disruptions—they need to be pivoting supply chains. Two powerful elements—an ability to sense a changing operating environment and then pivot by using digitalisation and technology to improve the organisation’s capacity to respond—are at the heart of Kearney’s pivoting supply chain framework (see figure 2). This framework reveals some of the possible scenarios when it comes to investing in technology and being able to respond to the external environment. The leaders are investing in digitalisation and automation to improve their ability to sense and pivot.