This Top 5 comes from David Cohen.
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.
As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.
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.
32 Comments
Great comments. I'd add one arena we will be seeing more and more of; repurposing. There is an energy/entropy reason we don't recycle cellphones and the like (it takes more energy at that level of entropy, than virgin-resource extraction) but we are also running into supply peaks for just about everything. So we're into ' best of two bad options' territory.
But there is much already extracted, smelted and processed, which we will re-purpose. Cuba is the role-model (getting past the shills with their 'Communist' disparagings) for this; triage in an energy-and-resource-constrained world. Worth a lot of study; it's where we are headed. John Michael Greer writes of folk using horses to pull I-beams (from skyscrapers) home to remelt. I suspect it will be lower-scale than that; Ford Rangers (the most common stranded asset, likely) into windmills and horticulture implements, etc.
We will be applying lateral thinking to a degree we have yet to realise (some of us have gone on ahead in this regard, seeing the future need) and will rue every engineering demise of the last era - the era of neoliberal let-them-eat-digital-numbers. It was a temporary crock, even though it sucked so many in.
I've been thinking that diversity of humanity is what will ultimately get us through. Different ideas. Different lived experiences. Different politics. Different ecosystems. Different foods. Different experiments all over the globe - in systems of government, in adaptation, in technologies.
Many experiments will be counterproductive and fail. But many experiments will be surprisingly successful.
We can already look at countries and their response to COVID as a guide: NZ and a few others took a different path from the pack (yes, we were in a fortunate position where we were able to - but we ran with it) and it was successful.
Can also just look at it politically and socially - the United States is clearly a failed state, driven by greed and total disregard for resource use. They will be amongst the first lambs to the slaughter, and the rest of us can learn from that. And they can learn from us.
As global trade really breaks down - and I'm thinking 10-15 years, NZ will be in a fortunate position in that we produce food.
Because we are beyond the global Limits to Growth. That is why we don't build new refineries, ports, ships. There has to be a capex justification, and there increasingly isn't anymore. For instance, with 50% of global fossil fuels already burnt, only a reduction in refinery capacity can be anticipated. Alle same globalisation. How long did you think that container-ship picture could continue to be a growing story on a finite planet? Only the cranially-disabled would be planning for physical growth from here on.
"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.
I worked 45 years in manufacturing supply chain for some NZ SME's & a couple of global multinationals. Since the 1980's it was explicit Govt & Public policy (both Left & Right) to gut out NZ's well paid domestic manufacturing base & all the ancillary support componentry jobs, management, science, engineering & trades training that went with it. Expedited over the last 20 years since globalisation "competitive advantage" & "transfer price" (= tax avoidance) theorists were enabled by the Internet.
Remember Helen Clark stating "it's the way of the world"
Niche work is key to future of manufacturing - Clark - NZ Herald
From my own international experience the NZ divisions of the multinationals I worked for were world class in Teamwork, Training & Innovation (both Product & Process) & competitive in Productivity (always subject to capital investment in technology improvement). Unfortunately this wasn't enough to offset a limited domestic market of 5M when there are global economies of scale available.
Having products being made in the cheapest supplychain isn't much long run help when the consumer demand base is concurrently driven to the lowest possible wages & Govt welfare dependency (40% of NZ households pay no net tax).
The impact of the Covid pandemic on supply chains has caused some reflection; it's a "black swan" event & companies had previously minimised the risk. Many countries are now on/re shoring their key manufacturing sectors.
OCR had just gone up to 7.50 % when she made that comment
https://www.rbnz.govt.nz/hub/news/2007/03/news-release-announcing-mps-f…
Great column!
This, so much:
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....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...
Excellent article
There is very little long term focus by our big companies,it’s all about short term profits and as the author explains CEOs are often very short term with bonuses to reflect that.
I worked for a fairly large company and our Chairman told me that he believed that a CEO shouldn’t be in the role much longer than seven years, then it’s time to bring in someone new.
Of course he was chairman of a few other large companies so would share that view with them also
One of our very successful companies Toyota had a ceo that was in the job for decades.
mind you it seems to sum NZ ,just look at our hospitals and our roads, pretty much third world stuff. No long term investment
This is a great article
I couldn't believe how hard it was to buy 100x50 timber last year for a home project - the most common building industry size was simply unavailable for months... and builders were hoarding supplies, repurposing other timber just to get the most basic framing timber
I think the timber industry should take a leaf out of Fonterra's book, (key note - a BILLION dollar exporter) together they can achieve more and realise the benefits of scale rather than being a fragmented marketplace
Imagine a timber co-op creating a highly efficient timber mill to process the trees we send offshore as finished higher value products!, I see NZ ports cluttered with 1,000's of tree trunks where the real value is added in another part of the world and we lose out
As many supply chains have figured out during COVID, LEAN supply chains do not necessarily mean RESILIENT... Sometimes backstopping the ability to supply is a better solution to protect product availability for sales and front end revenue
There are thousands of unprocessed logs being exported because thats what the Chinese want....if we converted it into formwork or pallets they wouldnt buy it...so if we want to export finished timber products we better start finding markets that want them AT THE PRICE we can supply them.
Problem is, no one wants our "finished product", when they can buy the raw product, manufacture it, and ship it back cheaper than the factory in the next town. That's been the problem with the temporary fossil fuelled transportation subsidy. When that subsidy ends though, apparently sooner rather than later, expect manufacturing to localise again, along with inflation.
Inflation is actually just capitalism's way of lowering living standards in response to resource scarcity. Those who already have low living standards are harmed the most, and the rest of society just mouthe platitudes or complain, depending on their political world view.
It's conveniently "market forces" so neoliberal politicians can shield themselves from a lot of the abuse and demands they fix the problem they do not have the tools to actually fix the root cause of - resource scarcity driven by depletion. Although I'm not sure that (m)any of them understand the root cause.
Of course talentless political opportunists like Luxon still try to blame the government anyway.
If you care about the future of this country, don't vote National.
My company helped build a factory in Mosgiel in the early '90s which processed logs into fingerjointed timber for a US hardware chain. From memory it was flicked on to a foreign owned outfit, who ran it in to the ground and shut it down, probably sourcing their timber from a Chinese coalfired factory, using Kiwi logs.
My company, which makes stuff out of steel, had 38 employees. Now it has 6 engineering employees, and 6 scaffolding employees, a product of the massive H and S growth industry. That bit is still booming.
Michael Haggitt was behind that - it came from the Port Otago shemozzle which was Back Beach. He had an American friend...
But ultimately, it ran foul of what everyone runs foul of - offshore competition at slave-labour levels, sans environmental regulation. Always driven by cost, demands for the least by consumers. Who don't factor in the ramifications. We shot ourselves in the foot, by shopping at the Warehouse. Kunstler wrote about it re the US/Walmart. Same stupidity.
Great article
Reminds me we have a lot of opportunity ahead of us.
Traditional thinking is to work to our competitive advantages.
but what is New Zealand good at…..freight companies, rockets, medical breathing devices, twelve foot clear boards,Sav and Pinot, racing yachts, rugby, electric fences…accounting software,films
Whats the common denominator?
‘He aha te mea nui o te ao
He tangata he tangata he tangata’
it is people,people people
we have to respect the people who dream and create, produce and export….and back them
we have to get better at identifying them earlier and make sure they succeed….and that needs capital and a better ecosystem than what we have… a change in mindset and vision
then we will grow
gnx - bollocks. It is the fossil fuels, it is the fossil fuels, it is the fossil fuels.
People, in proportion, count for naff-all.
You economics trained, perchance?
Energy is the all of it. People (and that other great belief: technology) are so minor as to be statistically irrelevant. Well, I call 1:4,000 statistically irrelevant. We define work incorrectly. It will bite us on the bum.
Agree there are major problems with delivery on NZs SC needs.
The main issue I believe is we need clear and agreed long term supply chain strategies, and the consistent processes, support, and focus to deliver them.
There is a missing function in all this too, what would call 'supply chain clusters'. These are the independent SC bits that connect the strategies, in to operations and make it happen in whole and in detail.
The NZ Council of Cargo Owners sort of does this for our biggest importers and exporters, our 'shippers'. There are only about 20 major shippers here in NZ in total by the way (freight tonnes 100,000 or more pa each)
I also continue to see that as hard as many people such as our leaders try, few if any understand the whole SC picture, or how things actually work. This may be because we have had so little supply chain systems design and manufacturing process design going on for quite a while, so the skills largely forgotten or lost, or our leaders are not quite sure who to ask or who to believe. Experienced large scale SC practitioners in NZ are few and far between, too. That is the holistic supply chain, rather than the aligned, logistics.
There a re quite a few SC strategy reports and analysis going on at the moment, but at the end of the day, it is the positive and co-ordinated results and outcomes that count.
We are also a country of independent type operators, to make SC work, is about SC partnerships and being able to work together. World SC interruptions also may have led to compromised co-operation and trust.
Fantastic article!
Refreshing to hear such common sense in relation to long-term strategic planning.
I'm sceptical about any centralized government led approach to solutions as history and the present ideological zealots are political, rather than competence based, appointees. If we are going to see smart long term outcomes it will almost be despite central fly dipping.
A genius example in action is Simplicity KiwiSaver, it's non-for-profit and appears to have serious smarts. And more importantly access to finance and long term objectives.
Many young aplotitical hard grafters will shortly leave NZ thanks to appealing economic and societal mismanagement - that's just my opinion, hope I'm wrong - but if a few Simplicities can listen to the smart experienced folk (and not left wing nappy wearing journalism), we may yet avoid Banana Republic status.
And PDK - you may be right, we may have reached peak oil, if so all bets are off! But I refuse to live in fear, it creates negativity. Let's hope for a sustainable, earth friendly source of energy and human enlightenment (if that's even possible??)
Made my day this article and the comments.
Great weekend patrons.
You are wrong - living in optimism leads to overshoot and chaos. Try this:
https://www.resilience.org/stories/2022-07-14/deadly-optimism-useful-pe…
Might put it in perspective. That's how I've approached it for years. Good luck with the outdoor BBQ's - natural cooking, eh?
The article is based on a category error. It's not about 'supply chains', it is primarily about freight modes.
Not that there's anything wrong with the arguments, especially if we wind up with a nice State owned zero carbon nuclear coastal shipping service.
But given our geography, small market size, extending rail to places it has never been like Nelson, Taupo, Karamea or Queenstown, or rationalizing highly specialized components like the salmon fingerling transport run from the Twizel hatcheries to the Marlborough Sounds, or, alas, getting that zero carbon shipping service, most of the article can be summed up as Fuggedaboudit.
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