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The global pandemic and trade tensions have placed immense pressure on supply chains over the past two years. Confronted with rising shipping costs, production and logistical disruptions, businesses with extended supply chains, connected by just-in-time logistics, have been forced to implement new approaches to inventory and consider near-shoring or even re-shoring production.
In Asialink Business’ recent report Disruption and Innovation: Reshaping Regional Supply Chains, supported by Toll Group, we examine how businesses have adjusted to this new normal. We also consider what role government can play in supporting supply chain resilience.
The research found that businesses are best placed to make decisions about their supply chain arrangements. But it also found that government has an important role to play in buttressing supply chain resilience. Supporting SMEs and fostering international cooperation are two areas where strong policy settings are needed to make an impact.
Government can target support to SMEs
The Productivity Commission recently examined where vulnerabilities exist in supply chains, where they impact the supply of essential goods, and what steps government can take to address them. It found that the supply chain challenges facing Australia in essential goods are not serious enough or would not be improved by major government-directed stockpiling or directly subsidising domestic production.
Instead, government should focus its efforts on strengthening the resilience of essential supply chains by supporting industries and firms with the agility to shift to production in a crisis. Crucially, resilience needs to go beyond measures such as diversifying suppliers or near-shoring – which often dominate the public discussion – and extend to transforming supply chains through new technologies, ways of working and attracting greater talent in supply chain management.
Supporting SMEs is a big part of this push and is already happening through Federal Government initiatives such as the $1.3 billion Modern Manufacturing Strategy. These programs seek to develop Australia’s manufacturing base in sectors where it is globally competitive.
Other countries in the region are taking the same approach to bolstering supply chain resilience, through targeted support of SMEs. Singapore has an extensive scheme to encourage reshoring of SMEs in key manufacturing sectors. South Korea’s small-scale but targeted support of SMEs to automate operations has also boosted resilience by reducing dependence on China for key inputs in the electronics sector. Both these countries have weathered recent disruptions relatively well.
Government can build regional partnerships
Governments can also help improve supply chain resilience through diplomatic initiatives. Tensions in the region amid the shocks caused by COVID-19 brought Australia, the United States, India and Japan together in the Supply Chain Resilience Initiative, with a focus on reducing exposure to supply chains originating in China.
Established in September 2020, the initiative focuses on reducing reliance on China in pharmaceuticals, semi-conductors, automobiles and telecommunications. Cooperation will involve efforts to improve trade in these sectors, including reducing protection and harmonising regulation.
The initiative recognises that market forces have driven reliance on China in certain sectors. Incentives to reorient supply chains will require targeted interventions to reduce dependence. Businesses, including lead firms, vendors, and distributors across various supply chains need to be compensated for migrating to locations less efficient than China.
Australia can also work with a broader range of regional governments to share experiences and best practice. Supply chain sustainability – both environmental and ethical - is increasingly important for customers and regulators.
A key sustainability issue for consumers is modern slavery. An estimated 25 million people across the Asia Pacific region are subject to labour conditions that render them effectively enslaved. In 2019, Australia passed the Modern Slavery Act, which requires businesses with revenue over $100 million to report against risk criteria for slavery across their supply chains.
This law pushes businesses to be more transparent and provide consumers with benchmarks to inform purchasing decisions. Even though modern slavery legislation is a recent development, 71 per cent of businesses with supply chains across Australia and Asia surveyed believe it is an important concern for their customers.
Australia has a strong record of providing technical assistance for the development of law and regulation with partners in the Asian region. We can leverage existing relationships to help build the capacity of regulators in markets that Australian business rely on for products and inputs. Australia is in a good position to establish a regional partnership, including key trading partners, to share knowledge about legal and regulatory frameworks that enhance supply chain sustainability.
Government can support a business environment that fosters resilience
As disruptions in supply chains over the past few years have forced businesses to adjust their approach to designing supply chains, government has also pivoted to playing a supportive background role. Businesses remain best placed to source the best solutions as problems arise. But they are better able to adjust and survive in an increasingly challenging environment when government is providing targeted support for competitive industries and pursuing diplomatic initiatives with partner countries that reduce reliance and bolster resilience.