Vulnerable supply chains

New analysis identifies vulnerable supply chains

Only a small fraction of Australia’s imports are vulnerable to serious supply disruption, according to a new analysis released by the Productivity Commission.

The Commission’s interim report on Vulnerable Supply Chains identifies where disruptions could occur and looks at targeted policy options to protect local supply chains.

“Modern supply chains are increasingly complex – often relying on inputs from across the globe and sometimes consisting of hundreds of firms”, Commissioner Jonathan Coppel said

“Individual firms have sophisticated and effective ways to manage the risk of disruptions, and Australia’s supply chains were generally very resilient during the COVID‑19 pandemic.

“But some supply chains are more vulnerable – if they rely on a single, concentrated source of supply where few alternatives exist.”

The Commission used data to identify imports which are used in essential industries, and which come overwhelmingly from a single source country, which dominates global supply.

“Our results suggest that around 2% of imports are from a single, concentrated source and are used in essential industries,” Commissioner Catherine de Fontenay said.

“This is likely to be an overestimate, given the possible availability of substitutes. Consultation with industry experts will be an important complement to the data driven approach.”

Most risks are best managed by individual firms. But government could have a role where the whole market for an essential product is at risk. The policy response should be efficient and targeted to the particular circumstances of the case.

Essential products include items such as PPE (personal protective equipment), chemicals used to treat drinking water and pharmaceuticals.

Various policy responses can provide some ‘insurance’ against supply chain risks – but like insurance, they come at a cost, which should be weighed up against the benefits.

Governments can help provide the information firms need to manage the risk in their supply chains. Fostering a rules-based trading environment also supports firms’ abilities to respond to global shocks. Governments can require firms to take additional precautions, such so as keeping larger stockpiles or diversifying their suppliers, if there is evidence that firms are not managing their risks. A policy of replacing imports with domestic production will generally be a very high cost option.

“Subsidising domestic manufacturing could not achieve efficient scale in many of the products we are talking about,” said Commissioner Coppel. “And it could crowd out actions that firms would otherwise take to manage their own risks.

The interim report Vulnerable Supply Chains can be found at www.pc.gov.au/supply-chains

• Preliminaries: Cover, Copyright and publication detail, Terms of reference, Contents, Preface, 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 does this study relate to other reviews and government initiatives?
• 2 Supply chains and risks
  • 2.1 Supply chains are complex, and becoming more so
  • 2.2 Supply chain vulnerabilities
• 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 Supply chain risk management
  • 5.1 A framework for managing risks
  • 5.2 Understanding risk
  • 5.3 Managing supply chain risks
  • 5.4 Risk ownership and the role of government
• A Consultation
• B Case studies in vulnerability
  • B.1 Estimating global supply concentrations
  • B.2 Case studies
• C Technical application of the analytical framework
  • C.1 Assessing import vulnerability
  • C.2 Assessing essential goods and services
  • Annex A: Data sources
  • Annex B: Classifications
• D Import demand elasticities
  • D.1 What is elasticity of demand and why is it useful?
  • D.2 Estimating elasticities for chemicals
• References