Productivity – Australia’s Next Challenge

Well, 2024 is well and truly underway. I hope it has been a great start to the year for you after a relaxing holiday. 

The start of the year has many interesting topics to comment on, so I will bundle them together in the following summary.

I was at an economic outlook breakfast last week with Paul Bloxham from HSBC as the keynote. He made some very interesting observations.

• Significant inflationary pressures were experienced globally. Inflation rates have reached levels not seen in decades, prompting aggressive interest rate hikes by central banks. The concern is whether high inflation would persist and if economies would need to enter recessions to combat it. However, by early 2024, inflation has begun to decrease without leading to a global recession, though growth has slowed.
• United States: The US is highlighted for its successful inflation management, with rates decreasing impressively while maintaining economic growth. The Federal Reserve’s actions and the overall resilience of the US economy were noted as significant positive factors.
• Europe: The situation in Europe is described as less positive than in the US, with inflation also declining but at the cost of economic stagnation. The impact of the energy crisis, particularly due to gas supplies from Russia being cut off, is a significant factor contributing to Europe’s economic challenges.
• China: The economic outlook for China was discussed in detail, focusing on the challenges the property sector faces. Paul explained how the pandemic triggered the existing issues in the property market, leading to a significant downturn in property sales and investments. Despite these challenges, China’s growth is supported by its role in the global energy transition and manufacturing, particularly in renewable energy sectors. He mentioned that China’s GDP growth was down to 5.2% last year and is expected to drop to 4.9% this year. China is experiencing a significant deflationary trend, marking it as the largest decrease in 15 years at 0.8%.
• Australia: The Australian economic outlook was presented as neither as positive as the US nor as negative as Europe. Inflation in Australia is described as stubbornly high, driven by domestic factors such as rents, electricity, and insurance costs. In response to a question I asked about the new IR laws, Paul discussed the challenges of increasing productivity and the potential negative impact of industrial relations laws on the economy.
• He discussed the relationship between productivity growth and wage increases, emphasising the importance of aligning the two for sustainable economic growth. Productivity has fallen 6% since it peaked during the pandemic. I made a point of writing down his next comment – “Productivity in Australia is really quite dismal”. He said, “It is worse here than it is in Europe. It’s worse here than it is in terms of performance post-pandemic. It’s much worse than it is in the US. Our productivity is weak.” He surmised it is how we are paying workers. Workers used to receive a 2% wage rise; now it’s 4% – but there is 2% less output than in the past. Therefore, we’re paying people more to do less.
• He expressed concern about how this would impact the speed at which the RBA will lower interest rates. He believes interest rates will be higher for longer than the bond markets think. He is not predicting any lowering of rates this calendar year.
• He also spoke about the impact geopolitical events are having. Troubles in the Middle East are impacting the Red Sea and Suez Canal. Shipping lines now avoid this area, resulting in longer and less reliable lead times. Add to this the troubles DP World has had with the union movement, slowing the handling of goods at the port and further exacerbating the reliability of lead times. We must also consider the impact on prices (and inflation) due to their 23% wage deal. You must examine your margins closely if your goods pass through a port. You can read more about the DP World matter here.
• He was unsure what impact recent developments in AI would have in a business sense but sensed it was highly probable this could be a major shift in history.

I gleaned from this presentation the importance of investing in productivity improvements for manufacturing and distribution firms. Improving supply chain operations and resilience will help the organisation battle the inflation dragon. Clearly, the fight against inflation is not over yet – despite the media and political hype around banks lowering interest rates.

Why You Need an Inventory Policy

This may explain why I am doing a lot more inventory policy work with clients of late. For those who aren’t fully familiar with inventory policy, here is a quick summary of what it is and why it is important to your business.

An inventory policy, often called an inventory management policy, is a set of guidelines and procedures that a manufacturing or distribution company establishes to manage its inventory levels effectively. This policy outlines how inventory is monitored, ordered, stored, and utilised within the organisation.

The importance of an inventory policy to a manufacturing or distribution company cannot be overstated. Here are several reasons why it’s crucial:

1. Optimising Inventory Levels: An inventory policy helps determine the appropriate level of inventory to maintain. This ensures that the company has enough stock to meet customer demand without excessive overstocking, which ties up capital and increases carrying costs, or understocking, which can lead to stockouts and lost sales.
2. Minimising Costs: Effective inventory management can significantly reduce costs associated with holding inventory, such as storage, insurance, and obsolescence costs. By establishing policies that optimise inventory turnover rates and minimise carrying costs, a company can improve its profitability.
3. Improving Customer Service: Maintaining optimal inventory levels helps ensure that products are available when customers need them. By preventing stockouts and backorders, companies can enhance customer satisfaction and loyalty, leading to repeat business and positive word-of-mouth referrals.
4. Enhancing Operational Efficiency: An inventory policy streamlines the procurement process by providing guidelines for when and how much to reorder. This helps avoid unnecessary stockpiling and reduces the risk of excess or obsolete inventory. Additionally, it facilitates better coordination between different departments, such as production, sales, and procurement.
5. Forecasting and Planning: Inventory policies often incorporate demand forecasting techniques to predict future demand accurately. By analysing historical sales data, market trends, and other relevant factors, companies can make informed decisions about inventory replenishment, production scheduling, and resource allocation.
6. Managing Supply Chain Risks: An inventory policy allows companies to proactively address supply chain risks, such as supplier disruptions, lead time variability, and economic fluctuations. By diversifying suppliers, establishing safety stock levels, and implementing contingency plans, companies can mitigate the impact of unexpected events on their operations.

In summary, an inventory policy is essential for manufacturing and distribution companies to effectively manage their inventory levels, minimise costs, improve customer service, enhance operational efficiency, facilitate forecasting and planning, and manage supply chain risks. By establishing clear guidelines and procedures for inventory management, companies can optimise their inventory performance and maintain a competitive edge in the market. 

If your ERP system has been implemented for some time, configuration settings that drive the inventory policy can be significantly outdated for the current environment. Changes in the market and supply chain dynamics, such as increased lead times thanks to the shipping lines avoiding the Red Sea, are not being catered for. 

Our work auditing various companies’ inventory policies has brought them significant working capital benefits. Please, if you have any questions about how this might help your business, reach out and book a virtual coffee.

© David Ogilvie