The “supply chain” is something our modern world has perhaps taken for granted, until recently. Entire manufacturing systems and processes have been developed around supply chains – for example, the ‘Just-in-Time’ inventory management and delivery system. Historically these have run smoothly across the globe, minimising investment in inventory.
However, the reality now is that this smooth-running network of organisations, people, activities, and resources, is not what it used to be.
In 2020 and 2021, supply shortages due to manufacturing not being able to keep up with the demand became common, in part due to supply issues as well as businesses’ own capacity. However, we are seeing supply shortages continuing well into 2022 and expect them into the future.
This is not a phenomenon isolated to Australia with supply shortages all around the world. Our Nexia International counterparts in the United States, CohnReznick, recently published an article on the supply chain issues the country is facing and the impacts on the retail sector across North America.
Closer to home we have had AdBlue shortages threatening to reduce trucks on the road; KFC running low on chicken; supermarkets with limited stock on their shelves; and reduced supply of building materials. Unusually this is not from people panic buying as it might have been at the start of the pandemic, but due to the logistics of moving supplies around the country. All of the above issues are crippling for each of these industries.
We’ve seen first-hand how supply chains can seriously impact otherwise strong businesses. In a recent case in point, our local client, the developer of vehicle accessory products, sold variations of their products for a number of years. Their development technology and testing equipment is in Australia, whilst the product was manufactured in China and imported to Australia. They are currently unable to source their product. As a result, sales have dried up overnight as they have no product to sell, despite a strong market to sell into. This has impacted their cashflow significantly, to a point where key decisions are needing to be made regarding the viability of the business, with closure looking likely.
As well as business supply chains being impacted in various ways by COVID-19, many businesses are also facing staffing shortages with businesses finding it difficult to adequately hire, train and maintain employee numbers. The scarcity of quality personnel has led to some industries offering large incentives to employees not seen before, and temporary and permanent business closures have been becoming more frequent. Business owners are wondering, where have the available workers gone?
It is unknown what long term impact these issues will have on businesses in Australia and globally. In the short term, it’s likely to continue to put price pressure on inputs, squeeze margins and drive inflation. Many industries are likely to see revenue rise while margins decrease, leading to a ‘Profitless boom’ especially in building and construction, with greater risk having to be taken to trade on as a business.
Current economic conditions highlight the need for understanding pricing structures and implementing scenario planning. Having contingency plans in place to avoid obstacles to future business performance would also be wise. For many businesses, taking these steps will be needed in order to survive.