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“Mindset shift” needed away from cost reductions – Melbourne Business School and Accenture

Melbourne Business School and Accenture have boldly urged organisations to radically rethink the way they approach supply chains and learn from the pandemic to embrace a better understanding.

In a co-authored whitepaper, ‘Building resilient Australian supply chains’, it provides guidance on how organisations can build a resilient supply chain in Australia.

It says organisations need a “mindset shift” away from going back to the future with “the cost reductions supply chain managers prioritised before the pandemic.”

“In the current trading environment, an optimised, resilient supply chain is not necessarily the most cost efficient, but the one configured to achieve the right level of reliability at the minimum possible cost,” it said.

Co-lead author, Professor Yalçın Akçay, Director of the Centre of Business and Analytics, said there’s dangers in running lean.   

“Effective supply chain management requires firms to strike the right balance between reliability and costs,” Prof Akçay said. 

“Traditionally, most firms have opted to focus on the monetary side of the equation and created incredibly lean, cost-efficient operations,” Professor Akçay says.   

“This is because before 2020, capacity problems were rare and consumer demand was generally predictable, so these lean supply chains were able to withstand isolated incidents – the need to develop a more reliable and resilient supply chain was not a priority.”

Crisis management approach still lurks

The paper says, during the pandemic however, businesses reported increasing ‘unknowns’ in their supply chains, including long and unreliable lead times from suppliers, uncommon material and labour shortages, infrastructure failures, unprecedented demand and forecasts that didn’t reflect reality.  

“Many firms resorted to crisis management approaches, however we saw that this is just not sustainable,”  Prof Akçay added.  

Dramatic increases to supply chain costs, such as material and transportation costs rising by up to 50 per cent,  were experienced and an over reliance on ‘Plan B’ options.  

Major projects were delayed and many firms saw lost sales or poor customer outcomes from outbound delays. 

Moving beyond crisis management

The paper says businesses are rugged to resist the temptation to return to business-as-usual supply chain management that over-emphasises cost efficiency after the shock of COVID-19. 

“This would be repeating the mistakes of the past all over again,” Professor Akçay .  

“Academics had laid down the blueprint of supply chain resiliency immediately after the terror attacks in the United States on 11 September, 2001 and very little has changed from what they suggested over 20 years ago.

“However, we see that businesses conveniently chose to ‘forget’ about that disruption and go back to their old ways very quickly. We should not let that happen again.”

Vivek Luthra, Managing Director of Supply Chain and Operations Growth Markets Lead at Accenture and co-lead author states that the fragilities that have been recently exposed are not due to the pandemic – only highlighted by it. 

“They will not simply be resolved as the world opens up again,” Mr Luthra says.  

“Climate change, for one, is unfortunately not going anywhere. In addition, the disruptions to transport capacity caused by the war in Ukraine and the ongoing labour shortages are likely to be ongoing for some time.”

The threat of labour shortages is noted, in April this year, SEEK was reporting more than 20,900 vacant positions for truck drivers in Australia. 

Take proactive steps 

While recommending organisations move beyond a crisis management approach, the authors argue they should build resilience into their supply chains to anticipate and get ahead of future disruptions. 

“Firms need to take proactive steps to protect their supply chains now or face significant disruptions and potential economic losses,” Mr Luthra says.  

Identify risks 

Mr Luthra says several factors should be considered by firms when evaluating their current supply chains.  

One of the main issues is lack of visibility over their networks and an increasing rise in ‘unknowns’.

“Organisations need to be able to map their entire supply chain networks to understand where the potential faults might lie,” he said. 

“This extends beyond knowing just your own suppliers, but also the networks your suppliers rely on – which can be difficult, with some smaller firms reluctant to share details for fear they might be squeezed out of the market.”

Changes needed to company culture

Mr Luthra says an optimised, resilient supply chain is not necessarily the most cost efficient one but one the right level of reliability at the minimum possible cost can be achieved.   

“This is a big shift in mindset from the pre-pandemic outlook of running extremely lean, cost-efficient operations,” he says.  

“Adding safety stock, building warehouses, working with alternative suppliers and adopting new digital technologies will increase operating costs – but what really matters is finding the right balance between the burden of additional costs and the enhanced risk management capabilities they enable in the face of disruption.”

The Australian challenge

Prof Akçay said Australia conducts 98 per cent of its trade through ports compared to the global average of 90 per cent.

He said: “Add to that our overreliance on imports, which make up 21.60 per cent of GDP, and there is so much pressure on Australian ports that any disruptions to sea freight and shipping container costs can have detrimental effects.”

Australia’s vast landmass, internal freight costs and recent extreme weather events exposed how vulnerable its supply chains are, he said.

“To reduce unpredictability in long supply chains, many countries have started onshoring and near-shoring strategies. Unfortunately, Australia’s cost of labour is significantly higher than that in the US, and our island nation has no ‘neighbouring’ countries offering cheaper alternatives,” he said. 

Digital supply chain modelling

The whitepaper proposes some solutions for firms looking to alleviate the multitude of risks.

“We recommend organisations use a Supply Chain Digital Twin to create visibility of their end-to-end supply chain, test for weaknesses and understand related revenue at risk,” says Mr Luthra.  

A digital twin is a virtual rendition of an organisation’s physical supply chain, created by integrating information from multiple sources into a data lake.  

“We recommend firms identify immediate areas for improvement that will make real financial impact, as well as future mitigation strategies which could range from policy or process changes, to diversifying your supplier base or identifying back up distributors,” Mr Luthra added. 

Download a copy of the whitepaper. 

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