Time for a logistics rethink after Suez Canal grounding – academic

A year of supply chain disruption and a blocked Suez Canal has highlighted the need for New Zealand to build up buffer supplies of some products, and to look at local manufacturing to make the country less reliant on key imports, a logistics academic says.

The grounding of the giant Ever Given has created a huge backlog of shipping at both ends of the canal, costing billions of dollars a day.

The incident came as ports all around the world struggle with congestion arising from the Covid-19 pandemic.

David Robb, professor of operations and supply chain management at the University of Auckland Business School, said recent events may prompt a rethink of the “just in time” or “lean” theory that has dominated manufacturing for the last two or three decades.

“Lean” methods aim to reduce the times within the production system as well as response times from suppliers to customers.

Robb said the blockage has served to highlight the need for more supply buffers for key materials and a greater domestic manufacturing base.

“From a New Zealand perspective, and globally, we have been learning over the last year about how to deal with the uncertainty,” Robb said.

“This is just another piece of that,” Robb said.

“It makes it even more complicated because we have port congestion everywhere – long lead times and low inventories in parts of our economy – including retail – so we are very fragile.”

The incident has already put upward pressure on oil prices but Robb said the indirect impacts of the Suez incident are going to be more difficult to work out.

“I don’t know how long it’s going to take us to learn that we need greater buffers here and possibly more manufacturers,” he said.

Robb said he expected the grounding to mean a delay of at least two weeks for New Zealand-bound goods.

“If you look back over the last 20 or 30 years these kinds of things do happen – whether they are natural disasters or caused by humans.

The “lean” just-in-time environment is useful for some places and for some products, where you have other possibilities for supply.

“But I think in New Zealand we are going to have to look at expanding our strategic reserves, such as personal protective equipment.

“Maybe we need reserves for, say, food ingredients, equipment and so on,” he said.

“There may be something we can do nationally because we are more vulnerable – we are a lot further away. We are a small economy and we don’t have everything here.

“These events are hopefully helping us to learn that,” he said.

Robb said governments might row back somewhat on the concept of globalisation.

“I think things might come back a bit from where we were, but I don’t think we need to throw the baby out with the bathwater ,” he said.

Robb, who has advised the Auckland District Health Board on logistical matters, said: “There are some things that you need with 99.99 per cent confidence, whereas if it’s imported consumer good, nobody is going to be that bothered if they are delayed by aweek or two.”

Robb said the case for “just-in-time” systems was still strong.

“It reduces the need for inventory and can have a big impact on quality, because problems are discovered quicker.

“It fixes just about everything but it certainly makes you more vulnerable,” he said.

“There is a sweet spot and we may have gone too far with some products and have become too lean.

“We need to strike a balance.

“One way to do that is to hold higher inventory,” he said.

“Another is to have more manufacturing capacity that can turn on a dime and ramp up production of, say, ventilators or milled timber.”

“We would like to see greater proportion ofGDP in manufacturing.

“There are strategic reasons for having more manufacturing in New Zealand,” he said.

Moody’s Analytics, a subsidiary of Moody’s Corporation, said the impact of the canal’s closing had highlighted risks in the supply chain.

“Covid-19 added another dimension as it illustrated different approaches, and effectiveness, of policy and disaster preparedness across countries and regions,” it said.

The canal incident highlighted the risks to supply chains relative to “choke points” in transportation.

“The immediate impact of the closing of the Suez Canal may be minimal but may lead many industries to look deeper at their supply chains to diversify risk and to monitor those risks closely,” Moody’s said.

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