Many in Australia’s resources, energy, and other heavy industries are already facing challenges across their supply chain and responses are most valuable if taken rapidly. Aurecon and Quartile One Asset Performance are not coronavirus experts, but we do know how to manage assets through a crisis.
In this article we share our knowledge of the current supply chain situation, how business analytics can be used for predictive modelling and steps to take for evaluating and mitigating supply chain risk.
Through our deep understanding of the supply chain, expertise in business analytics and an ability to aggregate industry wide data points, we are helping many in the sector to rapidly identify areas of the supply chain where response plans are warranted. By acting early, generating forecasts quickly and accurately, and bridging gaps in data, we can navigate this crisis through forecasting, and stay ahead of the curve.
For those who take this approach, the cost of regret will be minimal, and their response can be actively managed as new information becomes available.
Aurecon has been in close discussions with our supplier and customer networks in Australia and globally to establish a view of the current, and evolving, state of play. Combining this up-to-the-minute knowledge with publicly available information, we have identified two key areas of disruption facing Australia’s heavy industry operators – reduced supply chain capacity and interrupted logistics – which, if remain ignored, will have devastating impacts moving forward.
A significant proportion of Australia’s heavy industry supply chain depends on capacity from China. Restrictions on labour movements after Lunar New Year 2020 hindered the ability for factories to resume full capacity throughout the country, however the severity of this varies by region, resulting in different impacts to suppliers and part categories depending on factory location.
While latest reports from China indicate activity resumption (over 80 per cent of factories returning to operation as at time of writing), due to continued labour and logistics challenges, factories are continuing to operate below actual capacity. As the effects of coronavirus have spread globally, there has been further supply interruption from production centers in Europe and North America which are likely to continue the impacts from disruptions for the rest of 2020.
The primary public health response to coronavirus to date has been quarantine, impacting the ability of road, rail and seaborne logistics networks to transfer work in progress between production centres. As this continues to be interrupted, finished goods with significant precision steel components have already started to signal delays, and it will take time to restart the production chain once logistics recommences.
Supplies of alloyed steel previously delayed from China have been alternatively sourced from Europe, however these production centres have now been equally disrupted continuing the downstream impact. There are emerging reports that smaller suppliers are struggling to stay in business due to the scale of disruption. Despite closing production, some of these suppliers continue to accept orders which further confuses the understanding of true industry capacity.
The total combined effects of quarantine and shutdowns in 2020 across China have reduced total production by an estimated 32 days (excluding the typical seasonal effects of Lunar New Year). With impacts spreading to production centers in Europe and North America, we can expect production delays for at least the remainder of this year.
The full extent of the impact of coronavirus is unknown and changing rapidly. However, what is certain is that now is the time to prepare for the potential economic disruption through the supply chain. How? There are five critical elements to consider in preparing for and mitigating potential impacts:
Despite ongoing reassurance from parts suppliers and original equipment manufacturers, we must not ignore the emerging signals which illustrate significant supply chain disruptions. It is critical that all large asset owners take measured responses now and consider how these five critical elements can help them successfully navigate this challenging time.
To develop a supply chain disruption response plan, a clear forecast of the parts and materials required for the business must be developed. Some challenges faced and suggested approaches include:
Based on work done to date, risk to the supply chain can best be assessed using two primary criteria: 1) production location and 2) supplier/customer match.
The location of production has a strong correlation with availability of labour (and quantification of the cumulative effect year to date), and the impact of logistics disruption. The production location can be used to accurately define the expected disruption and does not vary based on the downstream user.
Where the supply chain has been disrupted (criterion #1), the actual impact will depend on the practices and policies of the supplier, including stock holdings, number of parallel production center options and the relative importance of each customer. For example, where production has been disrupted, the impact may still be minimal if the supplier maintains high local inventory, has several available production centres to source future requirements, and where the customer has a large and preferential supply agreement to gain first access to what supply does exist. Where these elements are not present, the disruption level will be high.
The complexity of the modern supply chain dictates that a bottom up analysis is not possible in the timeframe required to respond to this risk. For example, a single component (e.g. air filter) may state it is manufactured in Taiwan where the impact from coronavirus has been minimal, however the reality is that each sub component of the filter (filter media, casing, mounts) may have been manufactured from production centres across the globe including areas heavily impacted.
Another example is the progressive engagement of third, fourth and fifth tier suppliers within OEM supply chains, which means a single component may be sourced from up to a dozen small contract manufacturers who are disproportionately impacted compared to larger scale enterprises.
To respond to this challenge (i.e. ‘the complexity of the integrated supply chain which cannot be evaluated using bottom up analysis in a reasonable timeframe’), four approaches should be adopted:
As an example, recent analysis identified certain size bearings as a high-risk item. By interviewing through the supply chain and evaluating the response to placing orders from multiple users, we have established an aggregated picture of the disruption based on location (high), and the relative positions of each supplier/customer match in the local market. In this case, forecast demand is estimated to be above historical requirements. This information then enables each customer to develop the appropriate response plan according to their position.
Organisations will need to determine the level of risk mitigation appropriate for them, which depends on multiple factors, overlaid with the common denominator of ‘time’. Each organisation must look critically at their operation and evaluate the length of time they can financially afford to protect against. Although we are in an uncertain environment, tangible points of reference should exist to commence breaking this down.
We seek input where possible from: contractual or reputation consequences from failing to meet production requirements; financial ability of the business to mitigate supply risk; and policies such as a defined risk matrix and ‘delegation of authority’. When choosing a level of disruption to mitigate, assumptions must be clearly understood so to pivot quickly where external factors change.
Challenges faced and suggested approaches to tackle those challenges effectively are:
The major difficulties and suggested approaches to consider when developing a category response are:
|Increasing levels of mitigation||Description|
|1. Order in advance||Review your current coverage of ‘in advance’ orders and increase if deemed necessary to lock in supplier commitment.|
|2. Identify off book stock holdings||Request the supplier to reserve stock off book.|
|3. Consignment stock holdings||Hold stock which is still the property of the supplier but where payment is only made when stock is sold or used.|
|4. Utilise strategic supplier agreements||Put pressure on suppliers to either confirm to an existing long-term contract or commit to a new one.|
|5. Virtual supply chain management||Create a virtual supply chain within your organisation, to digitally share parts and link with supplier stock levels.|
|6. Change the demand profile||Discuss options with your customer of potential alternate equipment usage to change profile of demand.|
|7. Build inventories||Build your own stores over time and increase inventory to mitigate concerns over truth of supply information.|
|8. Alternative supplier||Seek alternate channels for supply to diversify your current supply portfolio.|
|9. Supplier development||Create your own stock through either supporting an entrant to the market or building inhouse.|
We have learnt quickly that the situation is rapidly changing, with unforeseen consequences from second and third order parties in the supply chain. As new information comes to light, assumptions must be iterated to enable the risk response and for recovery to begin.
Informed by the extensive experience of the Quartile One Asset Performance team, our tested methodology for evaluating and mitigating supply chain risk in a data driven and proportionate way is helping build supply chain resilience.
COVID-19 is forcing us to consider how global supply chain behaviors will shift in unexpected ways. We are balancing containing the virus’ impact in addition to seeing the innovations that could stem from this event.
The world’s supply chain is likely changed forever – it will not be temporary. However, these are not unprecedented times in the business world and those who overcome the challenges to succeed long term will be those who reframe the challenge from ‘how do we survive?’ to a mindset of ‘how do we reinvent, within the same company?’.
This thinking paper is part of a collection of insights and expertise from Aurecon as it explores leading through and beyond the COVID-19 disruption. Explore our insights here.
Rob Beckman is Aurecon’s Global Lead for Quartile One Asset Performance. Rob is a senior executive in the resources and heavy mining sector, with over 15 years’ experience in surface and underground mining operations, rail, port and energy. His experience includes asset management and sustainable asset optimisation strategies for a range of commodities and project types.
Elisha Bellchambers has over 20 years of commercial experience in the areas of financial performance, data analysis, risk mitigation, business strategy and leadership and asset management. Elisha’s asset management experience allows her to draw on links between an organisation’s data analytics, business needs, and its high-level business decisions to drive business value and return. She has worked on numerous asset performance projects with decision makers around the world.
This article was originally published by Rob Beckman and Elisha Bellchambers on LinkedIn titled, "Mitigating Heavy Industry Supply Chain Risk - 5 Critical Steps in Responding to the Impacts of COVID-19".
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