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April was largely a disaster, but JobKeeper helped businesses stay afloat. May brought with it supply chain issues, but June and July saw sales off the richter with a renewed sense of optimism in the market place. With the AFR reporting last week that Australia ranks a solid last in manufacturing self-sufficiency according to the OECD – there is clearly opportunity to grow.
Mark Phillips, manufacturing expert at Grant Thornton discusses how the manufacturing sector is responding to the ebbs and flows of demand, the supply chain and difficulties with freight and logistics, and the procurement power that the government holds.
Jonty Davies-Conyngham
Welcome to Grant Thornton’s Navigating the New Normal podcast series. My name is Jonty Davies-Conyngham, and I’m here talking to Mark Phillips, National Head of Performance Improvement and manufacturing industry specialist at Grant Thornton. In our last podcast in April, we talked about supply chain issues, and how this was impacting the manufacturing sector. However, a lot has changed since then, and there seems to not only be a light at the end of the tunnel, but a beacon, for the manufacturing sector. Thanks so much for joining us again, Mark. I think first up, really, we have to touch on what has changed for the sector in the past couple of months, as there seems to have been a remarkable change in fortunes for many Australian manufacturers.
Mark Phillips
Yeah, look, it’s been an interesting last few months. As we know, COVID has created absolute turmoil in the marketplace, and I’ve been talking to quite a few of the manufacturers, about 20 to 30 of them; I actually sit on a couple of committees, and we get to share some ideas. There’s a common theme that’s coming through. The first common theme for many is that April was pretty much a disaster. Sales were down, there was a real concern about the future. Luckily we had JobKeeper come into the marketplace at that time. The May supply chains were difficult; it was difficult to access supply. But June/July has seen… As one manufacturer put it to me, he said, “Sales are off the Richter scale.” There’s a renewed form of energy in the marketplace. There’s a different type of enquiry that’s coming through. They’re getting their traditional enquiries, but they’re also finding that people are finding multiple ways to get to them, and it’s been sales on sales. So it’s actually been quite interesting. What we thought were going to be the problems going into COVID-19 haven’t been the main issues; and in fact, the main issues that have come through is that freight is causing a lot of grief, and in particular, air freight. At the moment, you thought air freight might take you five days; it’s now taking up to five weeks, with air freight. So air freight is causing massive issues. The other thing with freight is because we’ve lost a lot of the domestic flights, and the international flights, we’ve lost the flexibility of locations, and we’ve lost the flexibility of timing.
Resourcing has been a big issue; and when I say resourcing, accessing people in the logistics area has proven to be quite a challenge. I listened to a group of manufacturers trying to swap forklift operators, because they had a problem with accessing enough logistics style people. Cybersecurity has been a major issue. The major issue with cybersecurity is because we’ve now got most of the manufacturing people working onsite, but most of the administrative people working offsite, to minimise people in the workplace, it means that you’ve got the use of systems and processes that weren’t designed to cope with this, and IP has been at risk. A couple of manufacturers noted that they’d had breaches. The style of information that seems to be of quite a lot of interest is costing data, customer data, supply chain data, and of course any IP that you’ve got. So there’s been some real issues around that.
The flip side though, wow, what a united group of people at the moment. I was particularly pleased listening to one meeting, hearing Mark Pedder from Pedders, manufacturers shock absorbers, saying to a group of 10 manufacturers that with the impending face mask requirements, actually saying to the manufacturers, “If you don’t have enough face masks, let me know; I’ve got some, I can loan them to you.” This is when we were just about to step into face masks in the Victorian marketplace. So it’s been a really interesting period.
Jonty Davies-Conyngham
And yet the AFR reported last week that Australia ranks a solid last in manufacturing self-sufficiency, according to the OECD.
Mark Phillips
Yeah. Look, this is not new. I mean, we’ve been slipping, and slipping, and slipping for a long time; and actually, when you look at us, we’re actually below a lot of the developing nations, let alone the OECD. So our ranking has been quite poor. There’s two ways of looking at this, though. If we go back to February of this year, the fact that we ranked so poorly wouldn’t have even made the press. One of the things I really like, and as I said last time we met, I talked about how COVID-19 has brought about transparency to manufacturing. It’s brought about transparency in understanding who manufactures what in Australia, which wasn’t happening before; and this is just another brilliant opportunity for further transparency in the marketplace. So you could look at this and go, “The glass is half empty”, because we don’t have the level of manufacturing that we really require for self-sufficiency; but you can also look at this as the glass half full. It shows that we have a huge amount of growth opportunities sitting in the marketplace, just for us to get to what is deemed a more acceptable position on self-sufficiency. So, yeah, as I said, pre-COVID-19 this wouldn’t have made the press. Post COVID-19, this is making the press, and I’m really pleased, on behalf of manufacturers.
Jonty Davies-Conyngham
So there’s a sense of optimism, with local manufacturers experiencing an uptick. I have to ask; what will this mean for those that were accessing JobKeeper?
Mark Phillips
Yeah, look, JobKeeper is an interesting program. Very pleased the federal government went down the pathway of JobKeeper. If you were a bona fide manufacturing business that had a decline in your quarter, to which you lodged your returns to request JobKeeper, and then you’ve subsequently had an increase in sales and revenue, well, you know what; use those funds that you’ve got available to you to invest, because you can. If you were a little bit liberal with your language, JobKeeper is a program that is a self-assessment program, so if you’ve overclaimed it, you need to talk to your relevant accountants to actually make sure that you actually make adjustments. It’s going to be a program that, come the end of September, will be harder to qualify if you are actually in a better position; and I’d like to think that if we’re lucky, most manufacturers will not seek JobKeeper post September. That said, I’ll wait to see what happens with the Victorian stage four lockdown. It will be interesting to see if there’s any flow-on effects from that.
Jonty Davies-Conyngham
So that’s not exactly a bad problem to have. Now, you’ve said business is on the up, but with border closures and other restrictions on the way, how are we getting products to customers?
Mark Phillips
As I mentioned earlier, logistics is probably the biggest issue. Air freight has certainly blown out to all proportions, and that’s creating some issues on both the delivery to customers, and also creating some issues on supply of product into your organisation. So there’s clearly a need to look at that. Domestically, there’s just a lot more planning that’s got to go into logistics these days. The other issue that’s causing some new learnings in respect of logistics is because the mix of customers is changing, as I said, some of our manufacturers are getting all sorts of enquiries, and they are enquiries from B2B, but there are also consumers coming directly to businesses. Better understanding logistics in delivering outside the B2B market is a bit of a challenge, and it would be good to see that we get some further improvement in skillsets in those areas. One of the things that we do have to bear in mind with one of the things that could be as a result of JobKeeper though is that as I said, we can’t at the moment access sufficient logistics people. I’m not sure at the moment if enough people are looking for alternatives, given that they’ve got an employer at the moment. Post-September, hopefully there’s a little bit more availability of labour to further support the logistics side of things.
Jonty Davies-Conyngham
The government has made it clear that jobs are their number one priority - what support does the manufacturing industry need from the government to revitalise?
Mark Phillips
The government is the largest procurer in the Australian marketplace, and we need government to consciously procure locally. We need government to put down their mindset of pricing and some of their commentary around open and free market, and look to what can the Australian marketplace provide for government. Now, government has done a good job in seeking local manufacturing support for things like hand sanitiser, face masks, medical equipment; but you know what, government buys a lot of other product, and we need them to start to consider to procure that locally with price being the secondary factor. The first primary consideration needs to be what impact does the local purchase have on the economy. So I’m going to keep reinforcing that it’s really important that government is the most powerful procurement business in the Australian marketplace; we need government to procure locally on everything that it procures.
Jonty Davies-Conyngham
We are approximately three months out from the federal budget. What are you specifically hoping to see from the budget to support the sector?
Mark Phillips
Reflecting on where the market is at, at the moment, and what role government can play, the main thing that government can do – I mean, it’s done great work in its support around JobKeeper – but we really need government to go back to some of the core issues in the marketplace. Streamline red tape. Understand the burden that compliance has on the manufacturing sector, and in fact, has on all sectors. Understand that we’ve also now got another level of compliance, with our need to mitigate risk in respect of COVID. We do all the right things to ensure that we procure responsibly, that we do the right thing by our workforce, we do the right thing by our community, we document everything we need to document. There are manufacturing countries that don’t actually do as much as we do. So I think government streamlining its focus on understanding what the impact of requests are, and ensuring that they can reduce the compliance burden where they can; and then we need government to spend, but spend in the right places. Spend on infrastructure, spend on those projects which are actually going to create opportunity for the supply of product. Spend on infrastructure, but demand that you procure locally. Where you can’t procure locally, accept it, but procure locally. When it comes to manufacturing specifically, support the investment in new equipment, if they can. We need to stay ahead of the curve, and effectively ensure that we are as efficient as we can be. Because if we’ve got the right equipment, we can compete, and we can compete on a global platform, not just on a national platform. And of course, the question always is, “What comes first?” Is it the job that comes first, and then the materials and equipment to support it, and the sales, or is it the sales, the material, the equipment, and the jobs? As I said, I think government setting about doing some of the big spends on infrastructure would be very beneficial to manufacturing. Government putting teeth to its procurement processes to ensure that they genuinely seek to buy locally. Government supporting manufacturers with leading edge equipment, whether that be more efficient, more effective, more reliable, whatever the circumstances may be; and then jobs will come after that. So that’s what we would really like to see from the federal government.
Jonty Davies-Conyngham
Mark, thank you for your time. You can find further information on how COVID-19 might affect your business, and assistance available to you, on the Grant Thornton COVID-19 hub at www.grantthornton.com.au/covid19/. If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton Australia on iTunes, Spotify, or SoundCloud.
