Cohen describes himself as a refugee from 25 years of supply chain management and product development in the manufacturing industry, who these days spends his time working with small and startup companies who make physical objects.
The confessions of a supply chain nerd
The war in Ukraine is likely to make New Zealand bread more expensive, and is an object lesson in the interconnected global web that now constitutes our supply chain. These are my top five things that affect that web.
1) The character of the New Zealand market: tiny and fragmented.
Complex devices like motor vehicles, semiconductors, and consumer appliances rely upon high volumes and capital intensive technologies for profitability, and we can’t justify the expense to meet the needs of our miniscule home market. So: we import pretty well everything complicated. That makes us vulnerable to not only problems with shipping via systems for whom our volumes are of marginal interest, but also increases in demand from larger markets that hoover up things we want, and disrupted supply from producers who might be having problems unrelated to New Zealand’s situation.
Unfortunately, the few areas we could exploit the ability to add value in production for export to big markets have not been fully developed. We grow trees quite well, but we continue to ship raw logs overseas rather than build a wood-processing industry to feed finished timber products to the domestic and world markets. Given automation has greatly reduced any low-wage economy advantage, why are we not adding value to those things we can produce in volume?
Part of the answer likely lies in having too many competing small producers in a fragmented market. Unfortunately, strategies like collaboration or demand aggregation are paths to monopoly, and how well served are we by the ones that are here already?
I would therefore argue that some elements of our supply chain – like logistic network infrastructure – are natural monopolies like the electricity supply, and need to be managed as a coordinated, collaborative public good to both make us competitive and prevent the monopolies that poorly regulated privatization can create.
Our ports are perfect candidates: they are in competition both with each other and other modes of transport, but as they are separately owned by local bodies with their own agendas and limited resources, so the port companies lack both incentives to collaborate with anyone and the resources to improve productivity.
2) Distance is a factor, but not as much as it once was.
The world-wide supply crunch will, in the long term, create more efficient and resilient supply chains. New Zealand’s particular problem is that our freight is such a tiny part of global trade, and we are so far off the profitable beaten track, that getting carriers to call has become a problem. Several of the large shipping lines simply stopped calling here over the pandemic, and if that isn’t a call to arms to rebuild a New Zealand shipping line that puts our national interests first, what’s it going to take?
There is the occasional bright spot. Government has made announcements about the redevelopment of coastal shipping, and some detail on the blue highway initiative is emerging.
3) Infrastructure: decades of neglect is catching up with us.
The obvious productivity and development killers are in transport. We have a degraded rail network that should be a straightforward, if expensive, way to decarbonise our transport of goods and people with electrification. However, there seems little urgency or real investment in things like new freight handling equipment for rail. Roads are inadequate in key places: the constricted access around Auckland is a good example. Our coastal shipping has withered from lack of funding – there is now only one New Zealand flagged coastal container vessel – and, perversely, port facilities can’t keep up with the international traffic. Inadequate processing ability means some ports are so heavily congested that ships are being diverted to other destinations, adding hugely to cost and time, and premiums are being charged by shippers to drop containers at ports like Auckland.
We have also given away much of our capacity to produce strategic items on-shore. Shuttering our only oil-refining plant is a premier example. While we do need to get away from the oily stuff, and closing Marsden Point improves our future carbon outlook, it leaves us reliant upon very long supply lines for finished fuel for everything from mopeds to jet liners, as well all the lubricants and other petrochemical products that makes so much of our important technology function.
Given events in Ukraine and Russia, and the way the war is polarizing not only who can supply energy, but who will supply it, it seems risky to hand off that strategic capacity, given Europe appears to be readying itself for Russia to turn off the gas supply and gas energy shortfalls just might be bridged with diesel and other refined fuels we are already competing for.
A basic rule of supply chain management is to have alternatives available: removing the capacity to refine our own petroleum – even if we don’t use it – removes an extremely important option.
4) The need for creative solutions.
The need to eat and clothe ourselves and buy useful things is never going away, and we need to be a lot more creative in the way we do that to meet challenges like climate change and affordability. Unfortunately, very few people in leadership roles now have experience in the making of physical objects, and there is a general lack of the cognitive diversity needed to drive the innovation we need.
Making things is complicated, and a lot of our big businesses seem to shy away from the difficult – I’d refer you to the previous example of timber processing. The “too hard” pile just seems to keep growing and is likely tied to shareholder and board pressure for maximum short-term profit on managers, who see their career as successive assignments, which disincentivises the long view in planning.
There is also an apparent lack of government understanding of, and action on, the need to organise New Zealand supply chains as a cohesive whole. There are several things militating against that idea. We have three year electoral cycles ruled by partisanship and doctrine, and cross party consensus in central government, to make durable changes, seems nearly impossible. Local governments and entrenched groups want to protect their assets and turf, but lack adequate resources to develop them.
The fruitless attempt to automate the Port of Auckland’s container handling is emblematic of those shortcomings. That there has been so little intervention or even comment from central government on a failed project of national importance, run by a local council-dominated company, is astonishing.
5) High risk tolerance and short planning timeframes.
Material and capacity stockpiles smooth out mismatches between supply and demand if properly planned, but require a realistic risk appraisal and long term planning.
Switzerland has the Federal Office for National Economic Supply to manage mandated stockpiles of foodstuffs, energy, therapeutic products and industrial goods that includes essentials that range from fuel (4.5 months supply) to antibiotics (three months).
We hear much about the United States strategic oil reserve, but it also keeps things like the National Defense Reserve Fleet of predominantly merchant ships stored in mothballs – just in case.
Solutions of this type need careful organization to avoid costs becoming prohibitive, but what price shortages of essential items, or the means to move them?
Closing remarks
Supply chains have to be actively managed because the world keeps evolving, requiring planning for, and responding to, change. The decisions involved need to be made on the basis of what is politically, physically, and financially possible, and in awareness of the cognitive biases that affect us as individuals and in groups.
It is beyond time to change the way we manage our supply chains, and we need to tap in to the creativity of real cognitive diversity, for it is using differences in approach that will make us strong and resilient.
