Vulnerable supply chains

Few vulnerabilities in Australian supply chains

Australia’s supply chains have been disrupted by COVID and trade tensions, but most essential supply chains have proven resilient, according to a report released today by the Productivity Commission.

“While people have been understandably feeling apprehensive about supply chains, only a few traded products are vulnerable,” said the Productivity Commission’s Jonathan Coppel.

“Businesses can usually manage these risks through stockpiling, contracts and diversification,” he added.

The report developed a new, data-driven approach to identifying imports which are vulnerable to disruption, and which form a critical input into an essential industry. It found that few imports were used in the supply of essential goods and services, such as healthcare. Most vulnerable imports identified included non‑essentials such as Christmas decorations, luxury watches and sparkling wine.

“The main import vulnerabilities appear to be in certain chemicals, and in personal protective equipment,” Commissioner Catherine de Fontenay said.

Likewise, on the export side, few exports are primarily directed to one country; and most have alternative markets to which they could pivot.

Aside from iron ore — where our export concentration is well known —only 1.5 per cent of the value of all goods exports were found to fit the definition of vulnerability to disruption.

“Many exports such as coal have been successful in finding alternative markets,” Commissioner de Fontenay said.

The report also considers how best to respond to vulnerabilities from geopolitical, environmental and social risks.

Firms and government agencies are generally best placed to manage their own supply chain risks.

“Except in rare circumstances, the best response does not involve using policy levers to encourage more Australian production. Other available risk management tools include stockpiling, alternative contract design and diversification,” said Commissioner Catherine de Fontenay.

Governments also have the responsibility to provide an environment that facilitates firms’ risk management. This includes providing an open trading environment, ensuring regulation doesn’t impede risk management and providing information to help firms manage their risks,” said Jonathan Coppel.

“The main case for government intervention is in those few instances where the community as a whole is more sensitive to risk than an individual business,” said Jonathan Coppel.

The Vulnerable Supply Chains report can be found at: www.pc.gov.au

• Preliminaries: Cover, Copyright and publication detail, Foreword, Terms of reference, Acknowledgments and Abbreviations
• Executive summary
• Findings
• 1 About this study
  • 1.1 Background to the study
  • 1.2 What was the Commission asked to do?
  • 1.3 How this study relates to other reviews and government initiatives
• 2 Supply chains and risks
  • 2.1 Supply chains are complex, and becoming more so
  • 2.2 Firm level supply chain risks and vulnerabilities
  • 2.3 From firm level risk to market level risk
• 3 A framework to identify vulnerable supply chains
  • 3.1 The links between wellbeing and supply chains
  • 3.2 The approach to identifying goods and services that are vulnerable, essential and critical
• 4 Applying the framework to Australian imports
  • 4.1 How important are imports to economic activity?
  • 4.2 How vulnerable are Australian imports to disruption?
  • 4.3 How reliant is the production of essential goods and services on vulnerable imports?
  • 4.4 Direct and indirect contribution of vulnerable imports to the consumption of essential goods and services
  • 4.5 Possible extensions to this work
• 5 Applying the framework to Australian exports
  • 5.1 Australia’s exports — where and what
  • 5.2 Demand side vulnerability
  • 5.3 Vulnerable imports used to produce exports
• 6 Supply chain risk management
  • 6.1 A framework for managing risks
  • 6.2 Understanding risk
  • 6.3 Risk management strategies
• 7 The role of government in risk management
  • 7.1 Responsibility for managing supply chain risks
  • 7.2 Role of government in managing supply chain risks
  • 7.3 A framework for determining whether government intervention is justified
• A Consultation
• B Case studies in vulnerability
• C Technical application of the analytical framework to imports
• D Price elasticities of demand for imports
• E Downstream vulnerability of exports
• F Maritime shipping and ports capacity
• References