The pandemic, inflationary pressures, staff shortages and uncertain supply chains have thrown up significant challenges for government departments and suppliers. These forces are raising major questions:
- What are various government departments, agencies and private companies doing to deal with these issues?
- What impact will these factors have on government procurement at all levels – federal, state and local?
- How will private companies that have supplied government departments and services deal with these issues?
In April, the House of Representatives standing committee on infrastructure, transport and cities issued a report recommending the federal government, in consultation with state, territory and local administrations, explore opportunities for standardisation on like projects to improve planning and procurement.
While this may help government collaboration in the longer term, economist Saul Eslake says individual public-sector managers need to consider the urgency of their procurement needs to deliver taxpayer value. He asks: “Do they have to buy things now in an environment where prices are rising very rapidly? Might it be prudent to wait until inflation has subsided a bit?
“It might not be possible, depending on the urgency of whatever you’re talking about. But there may be ways of deferring some purchases to later times when demand pressures aren’t intense. Looking around for alternative sources of supply, where possible, would be a sensible thing to do.
“Can they try to enter into fixed-price contracts without escalation clauses? That may be more difficult in the current environment. Nonetheless, where governments are major purchasers on whom suppliers are particularly dependent, they shouldn’t be afraid to exercise their market power.”
Eslake says private-sector managers at businesses that supply government should ask the same questions, although their position is often perilous. “They’re caught between conflicting forces,” he says. “In many cases, they’re in the middle of supply chains where prices are going up and they may not have many alternatives.”
Eslake says you can’t blame private companies for wanting to cover rising costs from their suppliers, especially if they have exhausted ways to trim their production expenses. Finding alternative suppliers is also more difficult when inflationary impacts are being felt around the globe.
Supply chain difficulties, staff shortages
In its statement on monetary policy in May 2021, the RBA noted that the shift in consumption patterns caused by the pandemic took suppliers by surprise. As a result, it said transport issues had become a major driver of supply chain issues since around mid-2020.
“This primarily reflects a global shortage of shipping containers, particularly out of China, and a mismatch of the location of containers, which are often full in one direction but empty in the other direction,” the RBA said.
“At various times, this has been exacerbated by congestion at some ports around the world as increased import volumes have coincided with reduced capacity due to restrictions. The lack of shipping containers has resulted in sharp increases in global shipping prices since mid-2020, as well as delivery delays.”
According to ABS analysis in January, 18% of Australian businesses that employ staff didn’t have enough employees based on their current operations. There was also a rise in the proportion of medium and large enterprises with staff shortages compared with June 2021.
Shortages were acute in the transport, postal and warehousing industries – vital areas for successful procurement.
Strategic procurement approaches
Government departments and businesses will need to adopt more strategic approaches to deal with current and future procurement challenges.
Buying local rather than overseas may be one approach. As part of a bigger $15 billion national reconstruction fund, the new federal Labor government made a pre-election promise to invest $1 billion in advanced manufacturing. New industrial jobs were to be created in transport, defence, resources, agricultural and food processing, medical science, renewables and low-emission technology manufacturing.
Another strategy for budget-minded procurement managers at all levels of government is to rely on the continued development of transport technology. For example, purchasing electric buses and garbage trucks should reduce ongoing costs.
According to a federal government sustainable procurement guide, whole-of-life costing is vital in sustainable procurement and when estimating the ‘cradle to grave’ expenses of a good or service. It can help officials make a holistic assessment of potential lifetime costs and identify cost savings when comparing options. Depending on the nature of the procurement, whole-of-life costs generally include the costs of acquisition, maintenance, operation and end-of-life.
Another potential tool that will help agencies and businesses make better supply chain decisions is artificial intelligence. For example, a change in customer demand or the supply of an item would be seen instantly by the entire value chain (the organisation, its suppliers and their suppliers’ suppliers). As a result, they could collectively adjust supply plans and production schedules immediately.
Ultimately, these digital and autonomous technologies will help make jobs easier and the supply chain more efficient and optimised in the face of ongoing challenges.
Management consulting firm McKinsey has set out a strategic road map for procurement officers to deal with ongoing challenges. With lessons for private firms providing goods and services for governments, it recommends they ask five key questions:
- Have we quantified the impact of inflation, volatility and supply-chain disruptions at the commodity and supplier level?
- Do we deeply understand our suppliers and their dynamics? How are we sharing our insights with other functions to help protect revenues and margins?
- Do we have a road map to protect margins and mitigate supply risk via pricing, technical, inventory, process, design, financial and commercial levers?
- Do we have a proven playbook to recover and control costs as inflationary pressures subside, volatility trends change and supply chains are redesigned?
- How are we embedding the learnings and improvements from this challenging period into our go-forward operating model? How can we incorporate non-economic factors in our decision-making?