Supply chains diversification offers protection

As COVID-19 continues to interrupt power tool supply chains globally, hardware retailers are discovering the wisdom of carrying diverse brands to help offset the risk of supply shortages. JOHN POWER reports.

‘Don’t put all your eggs in one basket’: this maxim applies just as well to hardware power tool inventories as it does to share or property portfolios.

The current COVID-19 pandemic has underscored the vulnerability of hardware retailers to single-origin supply chains, with sudden lockdowns in China in March affecting that country’s manufacturing and freight activity, followed by similar flow-on interruptions in different countries and markets worldwide.

While global supply chains are invariably complex and multi-tiered, as we will see below, the simplest strategy to streamline supply (from a retail perspective) is to build a diversified portfolio of brands, and hopefully lower the risk of being left short-stocked.

Not just COVID-19

It is important to recognise at the outset that supply chain interruptions come in all shapes and sizes – pandemics are just one example.

In a recent report1 addressing global industrial supply chains, the management consultancy McKinsey & Company identified more than 30 severe supply chain interruptions of international significance since the year 2000, the latest being COVID-19, of course. Others have included the SARS epidemic (2002), the Indonesian tsunami (2004), Hurricane Sandy (2012), BREXIT (2016 and beyond), as well as Australia’s bushfires in 2019-20.

Indeed, supply chains may be subject to a huge range of negative events and circumstances, including: natural disasters like earthquakes, cyclones, fires, and floods; warfare; terrorism; disease; political disagreement; economic recession; the imposition of trade blockades and tariffs; as well as industrial action and strikes.

Supply chain ‘communities’ 

It is equally important to be mindful of the multi-tiered nature of supply chains associated with every power tool. In shorthand terms, these tiers might include:

  1. Delivery of raw materials, such as metals or plastics, to a processing facility.
  2. Delivery of the processed materials to a components manufacturer.
  3. Delivery of components to a wholesaler (or direct to a manufacturer).
  4. Delivery of manufactured items to warehouses for distribution.
  5. Distribution of manufactured items from warehouses to retailers.

Of course, each of the above steps might involve subsets of complementary supply channels – many manufacturers are unaware of downstream suppliers that may be three, four, or more steps removed from their direct ‘tier one’ contracted supplier. Other variables include the locations and stockpile sizes of goods made at different stages of production, and whether goods are made in facilities owned and operated by the manufacturer or outsourced to other parties – such decisions might affect quality control relating to supplier activity. 

The recent rise of ‘just in time’ manufacturing, whereby goods and components are made only when needed, has also be called into question in the wake of COVID-19. Clearly, manufacturers that have retained more traditional stockpiles of components have coped better with sudden supply interruptions.

So, when hardware retailers seek to diversify in-store stock, they are doing much more than choosing rival shipping lanes for the delivery of finished products; they are really mitigating the risks relating to an elaborate international network of subsidiary suppliers.

Brand diversification in stores, therefore, is all about choosing multiple ‘communities’ of suppliers with the aim of streamlining peaks and troughs of supply. 

Diversity pays 

Throughout the COVID-19 pandemic, a number of power tool manufacturers have made great inroads into both established and fresh hardware retail outlets in Australia, taking advantage of the market’s renewed respect for reliable stock availability, good access to spare parts, high performance, as well as solid servicing options. 

A good example is Makita, which has enjoyed “unprecedented growth” this year.

Andrew Cronin, Makita Australia’s National Sales Manager, says Makita, like all major manufacturers, has an international presence. 

“Makita was founded in Japan and still manufactures there; however, we do manufacture product all around the globe,” Andrew says. “The key thing to remember is that we are controlling the manufacturing process in all of our factories, so the output product is to the same standards you would expect from any of our Japanese manufacturing plants.”

Having a high degree of manufacturing flexibility, he adds, helps address the potential impacts of unexpected supply shortages at any particular site. As Andrew explains, “One of our factories may do a manufacturing run of a product, but due to volume globally it is not uncommon for additional manufacturing plants to replicate the same product.” 

The same cautious dexterity applies to spare parts: “In relation to outsourcing the consumables or spare parts, a majority of the manufacturing is done in-house as well.” This insistence on direct control over as much of the supply chain as possible helps guard against surprise downstream interruptions, and also allows for more effective auditing of indirect suppliers and their industrial compliances.

In the case of Makita, the onset of COVID-19 led to many account customers watching stock levels closely in the early days of the restrictions. The consumer demand caught out a number of suppliers across a number of trade categories and Makita was no different. However, strong stock levels in warehouses in New South Wales, Western Australia, and Tasmania softened these fluctuations. Furthermore, Andrew notes, “Continued improvement to our warehouse management system, as well as additional work shifts, have assisted in trying to keep abreast with the output demand. Credit is due to all departments in our business – with a special mention to the Customer Service and Warehouse Purchasing and Distribution teams, who have gone above and beyond to service our dealer network.”

“Continued improvements to the business are a priority to better service our customers needs.”

By providing resilient and responsive product supply, he adds, Makita has been able to help retailers react to emerging trends associated with prolonged lockdowns. For example, the company has managed to satisfy sudden increases in demand for battery-powered garden products and cordless tools.

Apart from being able to maintain full shelves, another key benefit to retailers of featuring diverse brands, particularly high-quality labels, has been the ability to promote a market transition to items of higher quality and performance. COVID-19 has motivated many customers to look beyond price, and seriously scrutinise the fundamentals of their purchases in terms of future security of supply. Retailers with strong connections to different high-quality brands have been well placed to help customers switch to higher-quality power tool platforms, creating healthier customer-retailer relationships.

Stocking lots of reputable brands in-store certainly provides a buffer against interruptions to any particular brand… but there will always be a slim chance of industry-wide chaos. Some materials like rare-earth metals are scarce or sourced from monopoly suppliers, creating universal problems in the event of a supply interruption, while a number of mainstream industrial categories are intrinsically more prone to disruption than others. These categories, according to the abovementioned McKinsey report, include miscellaneous electrical components, ball bearings, mechanical gears and drives, as well as assembly hardware.

Notwithstanding these factors, by choosing to partner with different manufacturers and their respective communities of suppliers, retailers can hedge their bets against most natural and manmade catastrophes. There is no such thing as ‘guaranteed supply’, but there is certainly ‘safety in numbers’ when it comes to brands on shelves.

Footnote

  1. ‘Why now is the time to stress-test your industrial supply chain’, McKinsey & Company, July 2020.