Lifting New Zealand supply chain resilience: risk reduction, reserves and learning from the Swiss

The fragility of our domestic supply networks has been exposed in recent events relating to infrastructure, for example, the temporary closures of the Main North Line Railway and State Highway 1 around Kaikoura, the Marsden Point fuel pipeline, the Auckland Harbour Bridge, the Ashburton bridge, and the Cook Strait Cable. Our infrastructure lacks redundancy and is often congested.

Adding to this, Covid-led global supply chain disruptions continue to impact our businesses and economy significantly. War continues, the Marsden Point Oil refinery is closing, and strike action has been threatened in various sectors.

So, how should our supply chains respond to these potential threats? Consider this from a different vantage point. In New Zealand, our building and engineering structures are required to meet design standards based on extreme events related to our country. Our restaurants are certified according to their food safety, our hotels are graded, and our financial institutions stress tested. So why don’t we require, or at least recognise, appropriate levels of resilience in supply chain entities? Of course, the complexity of supply chain networks and commercial sensitivity is high, but there is more that can and should be done.

Here I present some ideas for improving supply chain resilience in ways that should be affordable. The list, covering metrics, inventories, capacity, facilities, systems and technology, and people, is indicative rather than comprehensive.

While my focus is on enterprise, Government does have a role. We could learn from the US Government’s June 2021 publication “Building Resilient Supply Chains, Revitalising American Manufacturing, and Fostering Broad-based Growth”. The Australian Government has been funding investment in capabilities to address supply chain vulnerabilities since 2020, with their “Supply Chain Resilience Initiative” now in its second round and, since April 2021, part of a trilateral Indo-Pacific initiative with Japan and India.

New Zealand has an interagency government group that is yet to present recommendations, but on 20 April the Ministry of Transport released a consultation document, New Zealand Freight and Supply Chain Issues. 

Arguably, there is also much the private sector can learn about resilience from our Defence Force logistics capability and our National Emergency Management Agency.

Firstly, performance needs to be measured. We should become more familiar with and employ resilience-related metrics, such as those developed by Professor David Simchi-Levi (MIT) and others in 2014. Consider an entity in a supply chain (e.g. a supplier or a DC) experiencing a disruption. The node’s Time to Recovery (TTR) is how long it would take to be fully restored. This figure may be determined by considering historical data, observations from buyers, or even self-reports from the managers of the node. Now consider how long, with the node down, you could continue to meet your demand, e.g. from inventory on hand, in transit, and elsewhere. If this Time to Survive (TTS) is less than the TTR, you’re exposed to risk from that node. One should also estimate the likelihood and seriousness of potential disruptions.

These supply chain metrics can assist a firm in determining a more efficient and effective allocation of resources discussed in the remainder of this article. In addition, while they may be commercially sensitive, they also carry market value — akin to a Star Rating or a QualMark Award in tourism. There is a business opportunity for third parties to audit, assess, or certify (e.g., similar to organisations like Telarc and AsureQuality). They could stress test, verify metrics and undertake supply chain operations forensics (Dr. Richard Lai’s 2013 book Operations Forensics describes this as comprising operational indicators, due diligence and turnarounds). As an aside, investigations might be coupled with valuating traceability options or auditing for modern slavery, which is near on our legislative horizon.

During turbulent periods the first port of call often involves increasing inventories. Clearly, one needs to consider item perishability, obsolescence, and holding costs, but at a firm level, this can be achieved by changing safety stock parameters. We should also consider extending national reserves beyond products like PPE and Tamiflu to imported items, including food ingredients, lubricants, and petroleum. This would be to safeguard both local supply and exports. With some appropriate analytics, we could rotate this inventory to ensure limited waste.

In this, we could learn from Switzerland, where a public-private partnership has maintained a system of compulsory stocks for decades. The Federal Office for National Economic Supply (FONES) mandates stocks of two to six months’ supply (TTS) of products like soap, screws, lubricants, sugar, oils, cereals and fuel (Seeds were reintroduced to the list earlier this year. Coffee has been taken off, but chocolate remains!). In involving about 300 private sector firms (which own the stock), efficiency is improved and risk reduced. Holding costs are recovered by higher prices, estimated to be less than NZ$25 per capita per year. These strategic reserves have allowed Switzerland to navigate pandemic supply chain disruptions well. These would be supplemented by household emergency supplies - FONES recommends that each household maintain a one-week supply of a basket of goods, including food and drink.

Naturally, the ideal basket of goods for us would differ, as we have quite different import/export dependence, and while not landlocked, we have very long lead times, lower population density, and are more prone to natural disasters. We might consider prioritising imported goods and materials, including common intermediate goods, that would protect our export sector’s ability to operate. And if we do this well, the management systems could perhaps become part of our G2G offering.

Another approach to improving resilience, which can be used in conjunction with, or substituting for, inventory, is to add (surge) processing capacity, particularly flexible equipment. The ideal mix will depend on costs, how critical responsiveness is, the viability of producing or storing items in an intermediate form, and item perishability. Capacity can also entail additional, potentially multi-use, facilities purposefully run at lower levels of utilisation during “normal” times. ICU/HDU or negative-pressure rooms in our hospitals come to mind here.

Facilities decisions at a higher level might mean more on-/re-/near-shoring for particular products. It could also entail NZ Inc’s use of distribution hubs in or near our key markets and supply sources. Perhaps a DC operation in or near Singapore or Savannah following the example of PCNZ in Shanghai, and maybe coupled with dedicated shipping?

Systems and technology can also facilitate higher resilience. That could involve software and platforms for information sharing and product/material/component/equipment pooling or sharing, control towers for improved visibility, digital twins to simulate performance or blockchain for enhanced traceability and provenance. Or it could mean investing in demand planning – just in the last year, I’ve observed several organisations, each with tens of millions of dollars in inventory, with no item-level demand forecasting and often only rudimentary (and often “one-size-fits-all”) supply planning.

Finally, and perhaps most importantly, our people are key to our ability to respond to shocks. Investing in health and well-being, training for crises, and business continuity planning would provide additional resilience capacity. Param Iyer (a PhD student at the University of Auckland) suggests we might consider following the Defence Force in creating reservists in other fields such as healthcare.

Improved resilience is achievable. It will take creative thinking, an analytical approach, and people with insight and foresight. It would be aided by public sector acknowledgement of the strategic nature of the problem for NZ Inc, and appropriate resource allocation - following the likes of Australia, Switzerland, and the US. But it will also require perseverance after the current challenges fade.