Recent conflict with Iran has disrupted supply chains. This joins a run of events, including COVID-19, the Suez Canal blockage and the Ukraine war, that have caused disruption and highlighted that access to key inputs cannot always be taken for granted.
James Hillcoat and I recently prepared a paper and presented at the GRDC Farm Business Updates in Kimba and Kadina on “Capital spending to manage input supply risk – is it worth it?” While our initial focus was fertiliser and diesel supply due to recent events, the principles apply more broadly to risk management and capital allocation.
Global markets have trended towards a "just-in-time" supply environment. Suppliers, importers and distributors are generally holding less inventory, meaning more supply risk is being pushed back onto individual businesses. When supply chains are functioning well, this is rarely noticed. When disruptions occur, the consequences can be felt quickly through rising prices, longer lead times and uncertainty around availability.
One of the most important distinctions is between price risk and access risk. Price risk is painful, putting pressure on margins and increasing working capital requirements. However, access risk can be far more significant. The cost of not having a critical input available during seeding, spraying or top-dressing can extend well beyond the cost of the input itself. Missed operational windows can have lasting impacts on productivity and profitability.
The natural response is to consider additional infrastructure, such as fuel tanks or fertiliser storage. However, this can overlook lower-cost options. Instead, it is best to start with the specific risks and consider the following questions:
- What input would cause the greatest disruption if it were unavailable?
- How narrow is the operational window?
- What would a delay of a day, week or month cost the business?
- How likely is that scenario?
Once those questions have been explored, it becomes easier to determine what is needed. This could include earlier purchasing, firmer supplier commitments, improved inventory management rules or storage.
In some situations, storage can stack up. In others, management discipline may achieve much the same outcome at a fraction of the cost. Clear procurement rules, minimum inventory levels and proactive supplier engagement are often cheaper than steel and concrete.
If we choose to invest in storage, it needs to come with clear rules, including when it must be full, when to reorder, who decides and how it is funded.
For those interested in exploring the topic further, the full GRDC Farm Business Update paper is available here.
Royce Pitchford
Lead Consultant – Farm Business Management
James Hillcoat
Manager – Farm Business Management