With the federal election out of the way, COVID-19 disappearing from the headlines, and the war in Ukraine losing its shock value, the global supply chain crunch is the new hot topic.
It’s hardly surprising. The cost of freight and logistics skyrocketed by an eye-watering 700% in 2020 and 2021. It was driven by a combination of COVID-related delays and surging global demand for goods created by lockdowns; let’s face it: we all did a little bit of online shopping for lamps, rugs and athleisure-wear while we were stuck at home. While freight prices have begun to decrease this year, transport delays are rife and space on vessels and in aircraft holds is still in short supply.
There’s no indication that supply chains are going to look like they did pre-pandemic any time soon, and the impact on Australian companies is real — just ask any CEO selling products offshore or waiting for components coming from overseas.
The effects are being felt across the board, from the big end of town — where major infrastructure projects are facing potential delays because tunnel boring equipment is stuck at the Port of Shanghai — to smaller companies manufacturing everyday items. I know of companies who can’t ship their $7000 product to clients because they’re missing a plastic widget that costs 20 cents.
The effects of the supply chain crunch are particularly noticeable in the space in which I work — companies turning over $2 million to $20 million. One of my clients had so many challenges with the supply of product from China during the pandemic that her company nearly “hit the wall” in 2021. She is now looking to relocate the company’s manufacturing elsewhere.
Another CEO told me this week that the spike in transport costs has meant his company has had to subsidise the cost of international sales — hardly a viable long-term proposition. I also spoke to the CEO of a lighting company which sells to 109 countries and asked him what the impact of the supply chain crunch on his business has been. “Pretty bad” came the reply.
And yet, despite the doom and gloom, the supply chain crunch is actually a godsend. A win disguised as a loss. The silver lining to a very big cloud. Australian businesses are being forced to question the status quo, to re-evaluate how they deal with international suppliers and clients, and to find better, more innovative ways of doing things. It’s painful, but the potential to perform better is huge. Sloppy businesses are going to fold, sharp operators will accelerate.
In other words, you can see the current supply chain landscape as a crisis, or an opportunity. The smart money is already doing the latter.
One of the companies I work with was a $3 million business pre-COVID, selling to 35 countries and operating on slim margins. The supply chain crunch forced the leadership team to take a good hard look at what their international sales teams were doing and how they were handling inventory. To reduce pressure on cashflow, they decided to ship six weeks of product at a time via sea on a rolling schedule, rather than holding 12 months of inventory offshore. Over a period of months the hole in the company balance sheet disappeared. Fast forward two years and the business is fully focused on the US market and turning over $6 million. Profits are up.
The company that was subsidising international sales has realised that it was thinking too small and being too conservative. It is exploring moving its manufacturing closer to its very substantial international client base, either via contract manufacturing or a greenfield investment.
The company that nearly “hit the wall” during the pandemic is considering an international joint venture that would give it access to India — the world’s largest market in its space.
And the lighting company is contemplating bringing its manufacturing home and using robotics to reduce the cost to a level comparable to what they are currently paying to manufacture offshore and transport internationally.
The supply chain crunch has thrown up enormous challenges for each of the companies I’ve mentioned. However, solving those challenges has also highlighted enormous opportunities and the founders and CEOs are rising to the challenge. In my opinion, this is a seminal moment for Australian business. We can do what we’ve always done (focus on the domestic market) or step up and embrace global markets, and the challenges and opportunities that they pose.
If you’re part of an Australian business that is tapped into global supply chains, this could be your once-in-a-lifetime opportunity to do something really big, or absolutely unique.
Cynthia Dearin is the managing director of Dearin & Associates, an international business consultancy that helps clients to access opportunities in fast-growing international markets, and the International Business Accelerator. She is the author of Business Beyond Borders: Take Your Company Global and Camels, Sheikhs Billionaires: Your Guide to Business Culture in the Middle East and North Africa.
