‘Perfect storm’ causes havoc in supply chain

There is any number of challenges that businesses importing goods have to face at different times. But what happens when a number of those challenges hit at the same time? Anna Hayes explores issues of rising demand, supply chain struggles and logistics woes.

As the year draws to a close, experts and industry members have been reflecting on what has been a difficult year for businesses, particularly those relying on imports or exports.

On the home front, many parts of Australia were hit with lockdowns, stay at home and work from home orders – NSW and VIC in particular – which played their own part in hiking up demand for technology and entertainment components.

Internationally, lockdowns were ongoing as well and, in recent times, several Asian countries have been hit again with strict lockdown orders.

Why does that matter?

Because Asia is still the assembly workshop of the world and, over the course of 2021, a number of issues have arisen to create a ‘perfect storm’ of disruption in Australia, and the world’s, AV industry.

The global perspective

The pandemic has been one of the most disruptive times in recent history and there is no clear indication that it’s stopping just yet.

Dr. Mehrdokht (Medo) Pournader is a senior lecturer and senior academic adviser at University of Melbourne’s department of management and marketing, and faculty of business and economics, and she has been watching the situation play out over the past number of months.

She says that when there are shortages, they are usually down to one of three reasons: supply issues, demand issues, and logistics.

In this case, she points out, all three reasons are in play, creating a ‘one of a kind’ type of impact that is making the entire world sit up and listen.

One of the big issues for this industry is in the area of computer chips.

“Obviously the pandemic resulted in many people getting to work from home, which resulted in the increase in demand for technology, and all of these items have chips in them,” Medo explains.

“Supply has been impacted by the closure of factories and manufacturing in Asia which, on reopening, began to fill backlog orders. So, the demand has gone up, the supply has got issues and we know that, in our ports, we have logistics issues. Ships sometimes have to wait a week or more to get the green light to unload in the ports and that creates congestion.”

Couple that with some high-profile factory fires in recent times (AKM in Japan around this time last year), and the fact that many major manufacturers are stockpiling chips, and the situation is particularly challenging.

Medo says that this is not just an AV industry problem but is affecting many industries across the world, particularly those conducting lean operations or ‘just in time’ manufacturing, meaning that they would order components with the view to them arriving “just in time” to install into a device before moving onto the next step on the production line.

“Having such a lean operation is good because you save on cost of storage, but the downside is that once there is a shortage, the production line stops.”

Medo believes that it will take some time for the supply chain to get back to normal, particularly given the issues that China is currently facing in terms of its energy crisis. She expects that things will begin to straighten out in supply chains after Christmas and, particularly, after Chinese New Year.

High vaccination rates, she thinks, will be key as a return to normality in developed world countries will change the supply and demand relationship.

“We should see, for consumer goods at least, some sense of things getting back to normal. With vaccination in the developed world, the supply issues will drop. The demand also, with people going back to their normal lives, the surge in demand should subside. Even in the ports, there are reports that the huge backlogs are slowly clearing.”

One of the big problems, before we reach that point however, is the issue of stockpiling and creating a ‘bullwhip effect’ in markets.

Medo remarks: “Companies will hedge against any uncertainties to meet the backup demand. So, currently, most industries have been or are over-ordering but once you have the stock and once things go back to normal, you’re definitely going to order less supply. That means the prices might drop suddenly or result in recession.

“Right now, the global economy is being hit by a one-of-a-kind scarcity of commodities but once there is overabundance of commodities then there is another issue.”

She points to a bullwhip where the movement of the whip close to your hand is limited but towards the end of the whip there is huge movement and impact, and this is what is happening in the supply chain at the moment.

“There is volatility in demand, and this is being oscillated as it goes through different suppliers in a supply chain. If you order an extra 1,000 units/components from a supplier in Taiwan, they might order 3,000 of a component they use to hedge against that demand from their supplier in Japan. Then the supplier in Japan hedges against that demand by ordering 6,000 of something they need. And it can go on and on and on.

“So, this type of effect harms everyone in the supply chain; it increases the cost of storage, it increases the cost of inventory, it causes inflation/deflation.”

For this reason, Medo is hopeful that businesses might be able to hedge their risk across different tiers of supply chains so as not to put pressure on them by ordering too much in the short-term. She also suggests looking to alternative markets for commodities if possible, though she acknowledges that this is easier said than done.

She encourages those involved in importing products or commodities to seek better understanding of the supply chains they are relying on, pointing out that many supply chains have a very longtail from tier one to tier two and beyond.

“So, it is good for us and suppliers to have clarity of how the suppliers in the different parts of the world are affected and how that might eventually affect their manufacturing capacity of service provision capacity. The biggest weakness of supply chains overall is this lack of transparency.”

She points out that only a small number of ports globally are equipped for the use of basic technologies like RFID tags.

“I think there should be policies, hopefully mandated by governments or courts, proactively looking into having those technologies in place so that suppliers can track inventory as they go from port to port, and be informed about possible delays, etc.”

Not working 9 to 5

For many however, 2021 has been as challenging as 2020, if not more.

Mike Bromley, business development manager for Sony says that 2020 was actually a great year locally for Sony because supply was really good given that the big markets in Europe and the US were locked down.

“We could get whatever we wanted, whenever we wanted. It would just turn up really quickly because Europe didn’t need it so we were getting really good supply of goods up until December last year,” he says.

“But as soon as Europe and America started opening up, the amount of stock coming to us started to decrease because the bigger market started to act again, and that stock became a priority for them.”

Mike says that they are not too badly affected but there are some categories where things are a bit 50-50.

“Part of that is due to chips and part of it is due to country of origin, so a manufacturing issue with that country if there are lockdowns.”

He cites Vietnam as one such country going through lockdown and, hence, reduced productivity. While Sony doesn’t manufacture in Vietnam, it is a good indicator as to where delays are happening. Mike says that Sony makes its panels in Malaysia where lockdowns were less restrictive, and factories were operational to some capacity.

Now, he points out, there is an impasse because though consumer spending is at an all-time high, it’s coming at a time when manufacturing is stifled, and you can’t make more goods.

“You can’t make more than you originally planned for. If I wanted 100 originally but now I need 120, I can’t make more of it. You have to come to a decision about who you supply or where people go if you run out. It isn’t just one issue, it’s completely global.”

For Westan Australia, the component shortage has hit them hard. The company’s signage channel manager for ANZ Michael Carvosso says it has affected their Epson, Philips, and Samsung lines.

“We have had months of delays on projector deliveries, we have seen whole ranges from Philips discontinued because they can no longer source components for them, and a reduced range in production for most of the year.”

He says that supplying for the demand they are facing is difficult and, as it stands, they can offer no real certainty to customers as to when stock will arrive.

“Due to our size, we have been able to put some pressure on the factory to build what we need with substantial orders, and we have increased our stock holding in order to buffer locally rather than rely on timely production from the factory.”

At Sound United Australia, the situation has been slightly different as the team there were hit quite hard during 2020 because of component shortages and disruptions in manufacturing which caused delays to most of the company’s products coming in.

National CI sales manager Joe Salamanca explains: “We managed the process ensuring that integrators were allocated a pool or stock so that rather than all incoming products being stockpiled in retail stores, integrators could order and receive stock with much shorter lead times to complete projects that usually comprise of lining up many other products too.”

He says that since February of this year, they have caught up on stock demands and have been able to supply all orders with only one to two days’ lead time, until recently.

“In the past few months, the chips, component supply and impact of shipping costs together with consistent demand is now causing us lengthy delays in getting stock into Australia,” Joe adds.

Snap One senior director for Asia Pacific, Adam Merlino, says that the supply shortages are a shock to most in the industry as it is rare that they would not have access to stock.

“I think the problem for most people in our industry is that they just don’t know how to deal with it [stock shortage]. If you’re in the building industry and you need a particular product you’ll pay extra or pay for it now so that you’ll have it when the house is built. But partners and dealers aren’t wired that way, they have a hard time even charging for their time, let alone pre-ordering.”

He points out that while some people still see the AV industry as a luxury one, that’s not the case anymore. A lot of what AV professionals do is now part of the core infrastructure of a house but Adam thinks that is still something of a bridge for people to cross – your TV, your lighting, your networks are as commonplace in the home as the bricks and mortar.

He feels that integrators need to be ready to say to clients that in order to secure a product for an upcoming job that they need to order it now and they need money to do that.

“None of us are banks for an end user.”

Rock the boat

One of the biggest winds in this ‘perfect storm’ happens to be that of logistics as both air and sea freight have been heavily impacted in recent times – not just in terms of reduced productivity but also in terms of cost.

Michael Carvosso points out that freight costs out of China have peaked at four times what they paid 12 months ago and getting a price that’s only double last year’s costs is considered a win.

“Availability of shipping is at very reduced capacity and quite often shipping lines change the schedule or route without any notice. They have even offloaded our container in transit at a transhipping port because they no longer wanted to complete the trip and we had to wait for another vessel to pick it up. We’ve waited months for availability of sea freight our of Europe and North America as well.”

Joe says that while they’ve done their best to counteract issues and challenges in the supply chain, logistics is something that has impacted and will, he thinks, be a long-term issue.

“The genie is out of the bottle now and with demand increasing via the world’s newfound affair with online purchasing, I struggle to see if shipping costs will ever return to what we had previously considered normal. It’s our hope that with lockdowns and restrictions easing in many countries, shipping constraints and delays will start to ease.”

Mike Bromley has been paying close attention to this issue on a worldwide stage, pointing out that the White House had recently appealed to Los Angeles port to move to a 24/7 working day to break through its backlog of arrivals.

“Logistics in general has been tricky for the whole of the pandemic. Once something is on a boat, we know it’s coming but even then, when it gets to Sydney Harbour, which has been at capacity for a really long time, it might be sitting there for a few days before it gets through. In Auckland, it could be there for two weeks.”

With air freight, Mike says there have been times when they have been on flight manifests, but the products have never arrived in Australia which is obviously a big problem.

Adam says they are seeing huge delays in shipping, with containers from North America taking up to 14 weeks where once they took three to four.

“In our world, most people are fortunate that they order something and it’s there the next day. The circumstance now is that it’s still coming but you don’t have definitive dates. We recently placed an order from a vendor, it was in the UK, and it ended up somehow getting to and sitting in Sri Lanka for three weeks. It’s a case that stuff just disappears and you don’t know where it is, but it could turn up tomorrow and we wouldn’t be expecting it.”

Taking care of business

As the world continues to return to normal, there are still elements of uncertainty for those working in this industry – travel disruptions will impact on freight; chips, often made from finite materials, are also in short supply; and supply and demand chains will continue to fluctuate for some time yet.

Will people continue to enhance their homes with technology or will they, as borders reopen, catch the first plane they can to some far-flung destination?

This is a particular concern for Joe, who says that their overall business in 2020 and much of 2021 has been great, with consumer demand for smart integrated solutions being very strong.

“In the medium to long term, the concern is more about where discretionary spending will go. Once borders nationally and internationally open up, we anticipate the demand to taper off as consumers rediscover travel and much deserved holidays.”

In terms of alleviating the issues, Joe says they regularly review orders and demand trends to ensure they are planning for the right stock.

“We’ve taken a close look at all brands we represent and reduced prices on many lines in previous months. In many cases, we’ve absorbed price increases, adverse exchange rates and a massive increase in shipping costs. We’re yet to pass on all these increases but, like every other supplier, will increase pricing on some models soon.”

For Michael in Westan, they are hopeful of an improvement after Chinese New Year though he admits that that is the most optimistic scenario based on feedback from suppliers and freighters. The more pessimistic outlook is that these issues will continue through 2022 as it takes a long time to restore balance to the global freight network.

“Sadly, the only step we can take is to warn our customers to build in as much lead time as possible to give us as much time as possible to secure stock and get it freighted here.”

Adam thinks that with every negative, there is an underlying positive and this situation is no different. He is hopeful that this whole episode will change business practices to be more efficient and pre-emptive, to plan better in production.

“Nine times out of ten, integrators don’t ever collect the last payment and I think one advantage here would be to promote better insight, and planning from dealers and partners. You’d hope they’ll learn to schedule their work, have better practices in debt collection and order deposits and things like that. If things change on that front, I think it’s a positive that could come from this.”

Mike says that, for the foreseeable future, the important thing will be to share information with distributors and clients.

“Normally you might say ‘it’s been delayed a week or a few weeks’, but in the case of some products, they’ll be delayed for six to seven months. So how do people finish jobs? If you’re a small integrator, you’re getting paid on completion and you’re waiting for one part so there’s quite a few elements to this that make it tricky for everyone.”

Mike says that the key takeout is to be as transparent with partners as possible so that they can plan accordingly, whether that is to order well in advance or go a different route.

“As much as we want Sony to always win when it’s the right fit for a project, if someone has to complete a project and it means they have to swap something out to finish and get paid or to keep the customer happy then as long as I put all the information in front of them, they can make that decision. Ideally that would be a Sony decision, but it needs to be a mutual one with the client, integrator and distributor.”

He adds that they do not get all the information they would like because often factories don’t have that information either.

“We are in a trying time and it’s not going to go anywhere soon. We will be talking about this in, I think, up to July next. I don’t think it automatically fixes because our COVID position changes.”

There will certainly be a lot of keen eyes on the proceedings as this current situation plays out.

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