Covid-19's supply chain disruption may trigger onshoring trend

11 May 2020 3 min. read

Supply chain disruptions stemming from Covid-19 should prompt Australian manufacturers to re-evaluate their production footprint in the long term. This applies particularly to businesses that source their raw materials from far and wide.

In today’s globalised economy, crucial components in the production process, such as palm oil for food or rare earths for mobile devices are sourced from abroad, which leaves Australia’s economy particularly vulnerable in a time of crisis. As the covid-19-induced downturn unfolds, different parts of the supply chain are being heavily impacted or even completely blocked.

Nev Power, Head of Australia’s National Covid-19 Coordination Commission, recently pointed out how manufacturing in Australia is obsolete in a way, and should be better streamlined for the country’s needs. This merits substantial investment, both in terms of time and money, but EY asserts that it’s a change worth considering.

According to Nathan Roost, a partner in EY’s supply chain practice, such an overhaul should involve clear prioritisation. “As a small and relatively expensive market globally, we will need to think carefully about what we bring back. There might be nation-critical parts in defence, some chemicals or critical spares for power and utility companies that we start to manufacture ourselves.”

Covid-19 may trigger a reshoring trend

Some have questioned whether the current circumstances will persist for long enough to divert business’ minds to such a comprehensive structural change, but Roost anticipates that such a change is imminent, and that it will draw significant investment from parties concerned. Alongside reshoring (also known as onshoring) previously outsourced operations, near-shoring is another option on the table.

“There will be a structural change in the next few years to develop local production capability,” he said, recommending that businesses use data analysis to determine problematic areas in their supply chain, and subsequently use algorithms to identify the best adjustments to make.

“To get a clear read on inventory, companies need to, as quickly as possible, look at transaction data within their business, customs data to understand where materials have slowed from, the list of critical supplies, what you’ve got in system and potential disruptions. And model that as soon as you can,” said Roost.

This is a short term strategy for companies to implement over the next four to eight weeks, according to Roost, who adds that most companies can currently assume that 1% of the products that they were expecting will be “out of stock in the next four to 12 weeks.” Building supply chain resilience is crucial in this scenario.

But on the longer term, companies are advised to “retest opaque relationships, network interdependencies and global sourcing in supply chains” using the lessons learned from the current Covid-19 crisis.