As shipping delays continue, NZ Inc looks for alternatives

Sleepwell is participating in a jobs scheme, but the jobs there are reliant on some crucial parts from overseas.

Chris McKeen/Stuff Sleepwell is participating in a jobs scheme, but the jobs there are reliant on some crucial parts from overseas.

Anybody who doubted the far-reaching effects of the supply chain disruptions on jobs and our economy only had to tag along to an employment subsidy announcement in South Auckland two weeks ago to be convinced otherwise.

Prime Minister Jacinda Ardern was touring the Sleepwell bed factory in Otara when her conversation with one of the company’s managers veered into a chat about a major piece of machinery that had been significantly delayed at the Ports of Auckland (Poal).

Not only is the “massive” machine stranded offshore, but the company’s core product is vulnerable to any disruption to trading routes between Asia and New Zealand.

There’s no bed, after all, without bed springs. And China is the closest producer which manufactures bed springs at scale.

READ MORE:
* A perfect storm at the ports: inside our freight and port delays
* The seafarer crisis – a shipping problem being passed from port to port
* Retail prices will rise due to Covid-19 shipping problems
* Air freight subsidy extended for a month

Sleepwell is stockpiling bed springs to get through any future disruptions, but the extra warehousing comes at a cost.

“I don’t think anyone thinks what’s happening at the port is an acceptable situation.

It is having huge impacts,” Ardern told reporters at the press conference afterwards.

“I spoke to a retailer recently. They knew their stock had arrived, but it was delayed and sitting on a wharf.

“That is a huge amount of strain for that business. There are others who are reliant on what’s needing to be offloaded – including this business – ultimately though the port is not something we control.”

Chris McKeen/Stuff

‘Lumpy’ supply chain – Ports of Auckland faces troubling times

Costs and delays are still mounting for businesses due to international shipping delays.

For starters, there’s an imbalance of containers at different ports, which is causing issues for our exporters.

Then there are disruptions caused by port strikes in Australia, extra shipping surcharges which are adding huge costs to already-negotiated contracts, a sudden ramping up of exports out of China, a half-completed automation project at the Ports of Auckland, maritime safety risks from exhausted crew stranded on ships, soaring container shipping rates and shipping lines cutting back their calls to New Zealand because they can’t afford to keep ships waiting at sea for too long.

The 1 per cent

On the face of it a bed factory in Otara which sources 99 per cent of its inputs domestically looks like an unlikely victim of these disruptions.

The 1 per cent of materials which aren’t sourced locally, however, are crucial.

Sleepwell’s stockpiling strategy is one being deployed by many other businesses. Employer and Manufacturers’ Association head of policy Alan McDonald says the conversation in business circles has moved on from the early talk of “on-shoring” and bringing manufacturing capacity back.

Most of EMA’s members appear to assess it as a global problem rather than the Poal-specific one. An informal survey of EMA members found 83 per cent had been affected by global supply chain disruptions.

There is an imbalance of containers at different ports.

David White/Stuff

There is an imbalance of containers at different ports.

“A couple of manufacturing guys, they were actually considering shutting the plant.

“Fortunately they got the componentry in time and were able to carry on. So, you know, that’s the sort of pressure that’s coming on.”

McDonald says businesses are still exploring a range of options to diversify their suppliers, but some are banking on the idea supply chain disruptions which have upended the global trading system are a temporary phase and shipping will eventually return to normal once vaccines start to roll out across the globe.

‘The bean counters went wild’

Marc Levinson, a US-based economist, historian and author of The Box: How the shipping container made the world smaller and the world economy bigger – a major work looking at the history of containerised shipping – argues the opposite.

He says we may never return to the smooth, lean and predictable supply chains of old and argues companies around the world need to come to terms with the cost of future disruptions.

“My own view is that in globalisation the bean counters went wild. The bean counters said ‘we want this stuff made wherever the cost of production plus the cost of transport to the customer is cheapest.’

One of Sleepwell's machines is stuck offshore thanks to delays at Ports of Auckland.

Chris McKeen/Stuff

One of Sleepwell’s machines is stuck offshore thanks to delays at Ports of Auckland.

“They didn’t really pay much attention to the risk that, well, maybe the components don’t get to the assembly plant or maybe the assembly plant has a fire.

“These sort of contingencies, there was nothing that was pencilled in as a cost. And so, of course, if it’s not pencilled in as a cost then nobody thinks about it. This sort of globalisation, I think, was short-sighted.”

And we might have to plan for future supply chain disruption because of the major investment shipping lines have made in larger ships.

Levinson says supply chains function best when everything flows smoothly with a steady, but predictable, supply of goods.

Companies around the globe are connected by large supply chains fuelled by efficient shipping lines which allow goods to be transported relatively quickly between countries.

Automated cranes at Poal have shouldered some of the blame for supply chain delays.

Chris McKeen/Stuff

Automated cranes at Poal have shouldered some of the blame for supply chain delays.

However, over the years shipping lines have also made huge investments in larger ships.

This was great for the shipping companies who were able to deliver goods more efficiently and quicker, but it caused problems for other players in the supply chain like trucking firms and railway-operators who suddenly had to adapt to larger amounts of goods arriving all at once.

“As ships have gotten much larger than they used to be many ports have seen fewer ship calls and a much more volatile flow of cargo.

“And this is a huge headache. You’ve got this pattern of very intensive usage for a day or two [at the port]…rather than having a more even pattern of use over the course of the week.”

Marc Levinson says the supply chain was 'lumpy' even before Covid-19.

Getty Images Marc Levinson says the supply chain was ‘lumpy’ even before Covid-19.

Shipping lines also gradually started moving out of parts of the freight industry they weren’t making money on.

Containers became the responsibility of others, as did the chassis these containers needed to be mounted on.

“So we’ve had situations in which there were these containers arriving in port and then the truckers couldn’t find the chassis to take the containers away.

“The ocean part of the system was operating more efficiently, but the entire system was not operating more efficiently.”

The need for shipping lines to keep operating these larger vessels is one reason Levinson says he expects the supply chain volatility to continue even after the pandemic.

A trend towards these larger ships also has some implications for smaller markets like New Zealand.

Levinson says there are two theories of how this might play out for us. One is the end of long-distance shipping to smaller markets like our own.

Businesses are looking at ways of building 'redundancy' into their supply chains.

Chris McKeen/Stuff Businesses are looking at ways of building ‘redundancy’ into their supply chains.

In this scenario big ships would stop at a larger port like Melbourne to transfer cargo to smaller ships headed for New Zealand.

Such “cargo-hubbing” already happens in the Pacific Islands with many larger ships offloading their cargo in New Zealand ports to be put on to smaller vessels for further travel.

The other theory is larger shipping lines will simply stop servicing countries like New Zealand, leaving a gap for smaller players who might be able to provide a cheaper long-distance service of lower quality.

We’ve had a taste of both scenarios already.

Customs Brokers and Freight Forwarders Federation chief executive Rosemarie Dawson says Maersk, who are part of the 2M alliance (one of three big shipping alliances who collectively dominate over 80 per cent of the global sea trade), have been reducing the frequency of their calls at ports of Auckland since October. 

Larger ships make ocean transport more efficient, but cause headaches at other parts of the supply chain.

Ricky Wilson/Stuff

Larger ships make ocean transport more efficient, but cause headaches at other parts of the supply chain.

A northbound call has omitted Auckland for several months as has another service from the US which was reduced to a fortnightly call.

A “significant” number of shipping calls from other lines have been cut back, too.

“We’ve lost about 20 vessel calls in the last few months,” Dawson says.

“That’s impacting on the shipping companies’ ability to reposition its container stock.

“Its impacting on the ability of import cargo to come in and export cargo to go out, and it’s not expected to be sorted out until June.”

Building redundancy into supply chains is a type of insurance policy, an economist says.

Chris McKeen/Stuff Building redundancy into supply chains is a type of insurance policy, an economist says.

Then Dawson pauses and adds one word to the end of her last sentence: “Maybe.”

A ‘strategic’ backup

Levinson says corporate boards around the globe will need to change their thinking on some of these issues and look at building extra redundancy into their supply chains for when these disruptions occur.

“You can always make more money if you just think about today and don’t worry about tomorrow.

“And part of the job of a board of directors and of a CEO is to look beyond today and to think about the future of your organisation.

“Yes, for this year’s profits it’s probably going to be worse, on average, to invest in risk reduction, but if you take a look at the future of the company over the next 10 years risk reduction is probably going to make a fair amount of sense.”

New Zealand has seen 20 fewer shipping calls thanks to the disruption.

Chris McKeen/Stuff New Zealand has seen 20 fewer shipping calls thanks to the disruption.

Building backup capacity into the system might not involve bringing things like manufacturing ability onshore.

If you earlier relied on one factory overseas you arguably haven’t diversified your risk much by simply relying on a single domestic factory instead, Levinson argues.

Having backup manufacturing capability for everything in a small market like New Zealand might also be too costly.

Along with carrying more inventory we could look to diversify our risk by not relying on a single-supplier for any product.

In other words, source most of our products from a preferred supplier in one country and the rest from another region – so one can take over from the other if there’s ever a failure in the chain.

Which is why Sleepwell is hunting around Europe for somebody else who produces bed springs.

So far director David Kyle thinks they might have found one in Turkey, but nothing has been signed yet.

Sounds good in theory, but when the chaos brought on by Covid-19 settles it might be difficult to convince boards they should be maintaining a costly backup just in case.

One way of building in redundancy is by securing things from a wide range of suppliers.

Chris McKeen/Stuff One way of building in redundancy is by securing things from a wide range of suppliers.

And even if you do source materials from different companies in different countries you might find they’re still connected to a small group of suppliers in one geographic area.

Car manufacturers reliant on semiconductor chips found this out recently when they were confronted with a global shortage brought on by shipping and production delays out of a handful of factories in Asia.

On paper a wide range semiconductor manufacturers existed, but they all designed chips rather than manufactured them.

A small number of foundries in Asia were actually contracted to make these chips – which is what left the global supply unexpectedly vulnerable to shipping delays and meant cars worth tens of thousands of dollars couldn’t be sold because they were missing chips worth less than £1.

‘Do we care if our socks come from China?’

To mitigate future disruptions governments might need to play a part helping companies shoulder some the costs of maintaining these backups, but if they do Levinson argues it should only be for items of “strategic” importance.

“As a matter of national policy do we really care that almost all of the world’s socks come from China? Probably not,” he says.

“If we’re talking about critical types of semi-conductors or certain types of pharmaceuticals I might have a different opinion.”

Strategic importance can be hard to judge.

Personal protective equipment, for instance, would be considered a strategic good now, but little attention was paid to the risks of being reliant on China for stocks of it before the pandemic.

However, we have made these sorts of judgment calls in the past. The Climate Commission’s draft advice to Government mentions steel as one potentially strategic industry for the country due its importance in construction and infrastructure.

Manufacturing Alliance spokesman and Metals NZ chief executive Nick Collins says Government procurement policy could better recognise steel’s importance by supporting the industry to keep this on-shore backup capacity going with government contracts.

In the event of a disruption this would pay off for NZ Inc, because the steel industry is critical for the equipment needed to keep our primary industries going.

“That whole resilience that comes from maintaining a competitive manufacturing base in New Zealand. It’s important for two reasons: what we’ve been discussing in terms of construction and infrastructure, but actually our export earnings are so much dependent upon us being able to produce [steel] here,” Collins says.

Nick Collins says government procurement policy could help maintain domestic manufacturing of strategic supplies like steel.

Supplied Nick Collins says government procurement policy could help maintain domestic manufacturing of strategic supplies like steel.

So how much will of this redundancy – strategic or otherwise – cost?

Levinson says he doesn’t know, and it will differ by industry, but he encourages us to think about supply chain redundancy the same way we think about insurance.

“After the fact your insurance policy is always a waste of money, right?

Because you didn’t have a claim and so you say ‘I could have gotten by without it’.

“If it turns out there was no interruption to business anywhere in the last year then having redundant production cost your company money, but I think boards of directors are increasingly understanding business interruption is a risk,” he says.

“It [supply chain redundancy] doesn’t come free, but then again I think we’ve seen that the cost can be really heavy if your stuff doesn’t get delivered on time.”

Stuff

You may also like...