Offshore problems are being replaced by local challenges
While 2022 was marred by manufacturing shutdowns, freight congestion and capacity constraints, and increased costs, these issues are normalising as supply and demand dynamics adjust. In 2023, we are already experiencing an improvement in shipping confidence and reliability.
Offshore problems are now being replaced with local challenges – lack of equipment, detention and demurrage charges, record low warehouse vacancy rates, and domestic transport constraints – all of which continue to impact costs and lead time.
The inventory “whiplash effect” is well documented and often a result of supply shortages resulting in companies overordering to mitigate customer service outcomes. In the McGrathNicol Working Capital Report 2020, we noted that “critical and regular assessment of demand patterns will be vital post COVID-19 to avoid over-stocking and unnecessarily locking up cash in working capital”. Australia’s historically inflexible supply chains have struggled to adapt fast enough resulting in increased inventory holding and working capital. The most recent Working Capital Report 2022 identified that Australian companies had increased their average inventory outstanding from 88.9 days (FY21) to 100.8 days (FY22). This is nearly three times the international average increase over the same period.
Looking forward, excess discounting, where necessary, will likely impact earnings in 2023. Resulting cash burn may also increase this year due to the end of historical repayment holidays, higher costs of borrowing, and increased inventory holding.
The changing supply chain landscape warrants an increased focus on network redesign and a need for improved transparency to identify the true cost of operations. Numerous other events including trade route blockages, geopolitical and military activities, natural disasters, consumer channel shifts, and a trend back to insourcing of critical activities, has necessitated further refinement as firms seek increased resilience, heightened customer service, and greater flexibility.
Continued investment in technology and automation, while highly beneficial when executed correctly, increases exposure to cyber threats and security infiltration points for the unprepared. Legislation linked to cybersecurity and critical infrastructure is being introduced to strongly encourage and/or mandate sector proactivity in response. The convergence of supply chain operations and risk will continue to grow in importance throughout 2023, with greater attention from the boardroom. Supply chain risk has become a key priority area for many firms.