The Underdeveloped Strengths of Australia’s Supply Chain Industry

by Rob O’Byrne on 2012-08-04 03:19:13

Rob O’Byrne, Group Managing Director of Logistics Bureau, reviews data from the research carried out by Logistics Bureau for the Supply Chain Report 2011-12, and discusses opportunities to improve Australia’s worldwide ranking and cut supply chain costs by half.

Relevant information on Australia’s supply chain industry is already valuable; using it to derive knowledge about how to improve supply chain operations is even more so. The Logistics Association of Australia with Logistics Bureau as program partner recently published its Supply Chain Report 2011-12; the data in the report shows how the supply chain sector (the transport and storage sector) has fared over the past year, and how Australian performance currently compares with the rest of the world. This article comments on that information to point out underlying challenges and opportunities, including a counter-intuitive yet key benefit.

Economic Context
In general terms, the Australian economy remained strong compared with many other countries. With a growth of 6% in gross domestic product from 2010 to 2011, Australia remained ahead of the worldwide average of 4.2%. The Australian economy is characterised at the moment by the predominance of the sectors of Finance (10.31%) and Mining (8.98%), with Manufacturing in third place (8.55%). However, the leader for growth over the previous year was the Mining industry, with a staggering increase of 31%.

Australian unemployment went down from an already respectable 5.1% to 4.9%, compared to rates as high as 10% in other advanced economies. This was in sharp contradiction to the forecasts from the OECD (Organisation for Economic Cooperation and Development) and the federal government, whose estimates were of a maximum of 7.7-8.5%. While this is encouraging for the economy and recovery as a whole, the message is somewhat mixed for the transport and storage sector that is already finding it tougher to attract, develop and retain the right personnel.

Outlook for the Australian Supply Chain Sector
Logistics (meaning transport and storage together) grew over the previous year. However, the real growth (18%) was in storage, offsetting negative growth in road transport and in the “rail, pipeline and others” sector. Within the year, results fluctuated, particularly with increases in both rail transport and storage services after the March flooding in different regions of the country. A somewhat darker cloud on the horizon, prime warehouse facilities are projected to be in short supply in the near future.

Freight volume for Australia increased, judging by international trade accounts (total imports and exports), international air and sea freight, container throughput and road freight. The four major ports of Melbourne, Sydney (Port Botany), Brisbane and Fremantle all handled more containers with a growth of between 4.8% (Sydney) and 7.6% (Fremantle). Road freight, measured in billion tonnes per kilometre, is expected to grow 3.7% year on year, to reach a level in 2020 that is 40% higher that today’s.  

International Logistics Performance Index
How does Australia compare with other countries in supply chain performance? Currently, the country is rated by the World Bank as 18th in the world, a little behind the United States and also behind 12 advanced economy European countries, including Germany, UK and France. In the information presented so far, there is not much to explain why Australia trails these other major European nations in supply chain excellence rankings, especially when many of these countries are struggling with comparatively high debt, high unemployment and low economic growth. But even if the temptation is to fast-forward to solutions, it is important to first understand the challenges that the sector is facing in Australia. Supply chain difficulties experienced by companies are compounded by a lack of an overall vision, and a tendency to put conflicting piecemeal solutions in place.

Rising Costs and Price Pressure
The Australian economy in general is strong, but transport and storage face rising costs and price pressure. Cost levels are driven principally by the costs of fuel, wages, depreciation and rent, leaving an average profit of 5%. Fuel prices are of particular concern because they continue to go up with significant volatility, under significant pressure as the economy makes a strong recovery.  Logistics companies are in danger of being caught in a pincer movement of increasing costs and falling revenues. Lowering quality to compensate is unlikely to be the answer; Australia’s position in the worldwide logistics rankings is already on a downward trend to 18th place from 17th the year before.

Overly Mature Workforce
The transport and storage industry in Australia is also facing a challenge in human resources, with an ageing, male dominated workforce. The Department of Employment and Workplace Relations (DEEWR) predicts that in 2014-2015, the industry will have the capacity to employ some 640,000 people, an increase from today’s figure of 583,000. However, with 47% of employees aged 45 years or older (the mature part of the workforce), up from 44% the year before, the challenge will be to attract, develop and retain enough new members of the workforce and to train them in order to maintain overall efficiency. By comparison, the industry average for the mature workforce is only 37%. Without a balanced spread of age ranges, the logistics industry will find itself short of human resources for both labour and expertise, when the current mature workforce moves to retirement.

Return to Supply Chain Strategy
Quick fixes or “enabling” projects that do not address the root of the problem are not the answer. What is all too common today is a fundamental neglect of strategy, because of ignorance of the true supply needs of different customers. Businesses get bogged down in tactical details of transport and storage, mistakenly identifying them as the first steps to success. In reality these projects follow no clear strategy, are possibly unaligned with business requirements and with each other, and lead to more complexity and costs. The real step change in supply chain performance comes from a review of supply chain strategy, and then, afterwards, the tactical and operation decisions to make sense of enabling projects.

Improved efficiency and lower costs
In response to a business objective of lowest total cost, for example, a strategy has to define the efficient use of key assets, such as warehouses, transport and inventory. This is true, whether an organisation chooses to handle this in-house or outsource. However, customer satisfaction is also critical. A tool for optimising a strategy to serve both objectives is a “Cost To Serve” analysis. As a blanket “one size fits all” approach is unlikely to work nowadays, Cost To Serve recognises that different customers require different levels of service; when correctly applied, this technique allows enterprises to improve EBIT performance by up to 20%.

Similarly, companies can achieve greater efficiency and lower costs by defining a strategy that spans different functional domains. This approach can work well for sales and operational planning (S&OP). The process is what counts; the choice of the tool, for example the type of software application, only comes after the process has been correctly defined.

Correct Use of KPIs
Results also have to be measured; it is essential to verify that the strategy is performing as the business objectives require. For this reason, key performance indicators (KPIs) need to be defined that link back directly to supply chain imperatives. Further downstream in the tactical and operational planning, additional KPIs will appear. However, they also must be aligned and consistent with strategic imperatives.

KPIs are equally valid when supply chain functions are outsourced. Outsourcing does not typically lead to cost-savings by itself. Its importance is in creating strategic advantage for companies, avoiding costly mistakes, and having transport and storage become an operating expense, instead of a capital expense. Outsourcing agreements need to be reviewed, not necessarily with a view to cost-savings, but to make sure that the right services are being purchased and that good KPIs have been defined, shared and adopted by service providers.

Education and Training
Understanding business goals and defining strategies also means suitable training and education, both for existing employees and for new entrants. There is a lack of appropriate training and mentoring programs in the industry, especially when considering the different audiences and training requirements. The LAA (Logistics Association of Australia) is working to fill the gap in mentoring and short courses, while universities, colleges and TAFE (Technical and Further Education) institutions provide a variety of certificated or diploma courses, up to degree or doctorate level depending on the institution. In some cases, the payback is immediate; the Eco-Drive program from the Australian Logistics Council provides an e-learning-based program in fuel efficiency generating cost efficiencies for businesses of up to 20% internationally.

Concentrate on Excellence to Halve Costs
Does excellent supply chain service cost more? No – in fact, however counter-intuitive it may seem, a focus on excellent “best-in-class” service means that total supply chain costs can be typically halved compared to industry averages. The reasons are in the sections above. Properly aligning strategy with business objectives increases profitability and avoids wasteful projects at odds with the true needs of an enterprise. Levels of service are cost-effectively adapted to different segments of customers, through Cost To Serve techniques, while efficiency is brought simultaneously to departments across the business through integrated processes and tools. By getting it right the first time, not only do costs decrease, but sales increase thanks to increased customer loyalty.


Changes in Infrastructure
So far, the discussion has been about factors over which a company has some control: its strategy, its workforce and its costs, for instance. Besides these internal strengths and weaknesses, there are also external factors over which they have little or no control. Representing one such external factor, “Infrastructure Australia” is the Australian Government body defining how changes in the national infrastructure should be pursued to meet vital national needs. International gateways and the development of the national freight network were in the list of top priorities in the last report that the body issued. Planned rail infrastructure upgrades include new intermodal terminals in several regions, with container servicing, direct linkages to freight forwarders and international gateway entities. Road infrastructure projects encompass new freight access points and gateways, and each of the four major ports of Melbourne, Port Botany (Sydney), Brisbane and Fremantle will also be expanded.

NBN – Was it such a Good Idea?
Bigger than any previous infrastructure project and relating this time to information highways, the National Broadband Network (NBN) aims to provide 100 Mbps Internet connection speeds to over 90% of business and residential customers. The total investment in this project is $47 billion. However, only around 11% of the network connections originally projected for 2011 have been accomplished (4,000 residential connections, compared to forecasts of 35,000). While efficient information networks are important, the disappointing take-up on the new services begs the question as to whether overall needs have been best served by the investment made at this stage in NBN; or if an increase in improved rail services or other much needed infrastructure would have been a better decision.

Climate Change Initiatives
At both a federal and a state level, the Australian Government has also been working on policy and legislation to decrease greenhouse gas emission. The growth of emissions over the last five years is strongly correlated with an increase in the use of diesel fuel over the same period. While major legislation has yet to be promulgated, targets such as a 25% reduction in emissions are being planned. A number of companies have already taken the initiative in reducing their carbon footprint and reducing their rate of greenhouse gas emissions – for instance, the goal of Linfox to reduce its rate of emissions by 50% by 2015, compared to 2006-2007 figures. Greening operations can also mean improvements in efficiency, as in the 41% reduction of waste to landfill by Fuji Xerox Australia, thanks to effective warehouse management initiatives.

Conclusion
With a buoyant economy and strong demand for supply chain services, the logistics sector in Australia has natural advantages. In addition to this, the opportunity exists to reduce supply chain costs by 50% or more by making performance “best in class”. That means a considered, unified approach that avoids the temptation to plaster an organisation with conflicting “enabling projects”. Reviewing strategy, setting relevant KPIs and pursuing the right training to help rebalance the workforce are the ways to do that.

Rob O'Byrne
Group Managing Director - Logistics Bureau