COVID-19 has impacted just about every industry, in sometimes very different ways. But some were already facing difficulties before the virus broke out, such as the Australian retail sector – and those problems have compounded further. Latest figures from the Australian Bureau of Statistics show a 17.9% fall in sales, despite some retailers such as grocery stores and pharma being barely able to keep up with demand.
We spoke to Brad Welsman, Managing Director of our Executive Member SSI SCHAEFER, about some of those impacts felt in the logistics industry and for some of SSI SCHAEFER’s retail customers. Brad also shares some tips on future-proofing e-commerce or shopfront businesses. You can listen to the interview here:
Transcript
Ulrike: Thanks for tuning in to our latest episode of Sound Bites, the podcast of the German-Australian Chamber of Industry and Commerce. My name is Ulrike, and today, I’m joined by Brad Welsman, Managing Director at SSI SCHAEFER, a company that has been a member of the chamber for a number of years. Brad, thank you so much for taking the time to provide us with some insights today!
Brad: My pleasure Ulrike.
Ulrike: First, can you tell us a little about your background and your role at Schaefer, and the impact of COVID-19 on your company?
Brad: Sure, I studied electrical engineering and I’ve spent more than 40 years now in automation. For the last 25 years, I have been involved in automation mainly in warehousing and distribution. I have been the head of Schaefer in Australia now for just over 10 years.
SSI SCHAEFER is a world leader in fitting out warehouses, whether that be with static pallet racking or storage solutions all with very sophisticated automation from conveyors to all sorts of machines and robots controlled usually by fairly customised and specific real-time software.
We see ourselves in a growth industry, whilst manufacturing companies have been automating for say forty years, automation in warehousing and distribution.
We have seen tremendous growth in our business, both in Australia and globally, and generally, we consider ourselves to be in a growth industry. Whilst manufacturing has been automating for forty years, automation in warehousing and distribution is still relatively young. I think what’s happening as companies have got their manufacturing production costs under control, they’re realising that they’re still quite labour intensive in their distribution. So that means warehouse processes – picking and assembling orders and delivering them can be quite a large cost margin. So there’s a lot of opportunity in that. And the other thing that’s pushing the opportunities at the moment is online shopping. Fulfilling online orders is difficult, which I may go into a bit later. What that means is that there is a lot more focus on reducing labour, improving space utilisation in the warehouse as well as speed and quality of delivery which is again pushed by online. That’s what we’re helping companies with.
Ulrike: It’s fair to say that COVID-19 has affected just about every aspect of the economy and society. Could you outline the main implications this has had for the supply chain and automation as well?
Brad: It certainly affected our business to a degree. We have had some of our customers defer major investments, but on the other hand, we’ve had some others forge ahead with new automation projects. Because a lot of our projects are longer-term, and we have a good backlog, we tend to be less affected but we’ve certainly big effects on some of our customers. I have to say it varies a lot from industry to industry, so for example, in groceries and pharmaceuticals, there’s been a massive spike – up to 50% – in demand. That has put enormous strain on their supply chains. On the other hand, we have seen industries, for example, clothing and fashion, where, because all their stores have closed, the overall demand has dropped, but a lot of that demand has been backfilled through online sales. So suddenly they’ve had to adjust from a situation of fulfilling store orders to fulfilling no more store orders, and suddenly coping with a big jump in online orders. Then again, industries, for example, like the beverage industry, which are very dependent on pubs, clubs, restaurants, sporting events, have just had a straight drop in sales and they’ve just had to wind back their operation. So it has had a very varied effect.
Generally, I think Australia is maybe more fortunate than other countries. Firstly, we haven’t had to shut down our production plants or distribution centres or our construction side. And we are still able to import and export goods. That’s not the same in all countries. For example, it’s affecting Malaysia, which was forced to shut down by the government, even though it’s got a full auto book. So factory shutdowns from overseas do affect our supply chain, but mainly through delivery delays. I think the economy is a lot less affected in that we’ve been able to keep trading and that we’ve been able to continue to manufacture, distribute, and construct, which is a really good thing.
Also, government assistance programs have helped a lot. Whilst demands dropped off, we’ve managed to avoid a complete collapse in consumer demand, and again a lot of that is reflected in e-commerce. But at least we’re trading, you know, and it’s not what we’ve seen in other countries. Generally, I think we’ve managed the crisis well as a nation under 7000 cases and around 100 deaths compared to the 10s of thousands we’ve seen overseas. So it means that we’re able to get back to normality quicker which in turns means that confidence is a bit higher. If people can see light at the end of the tunnel, they’ll keep spending. And spending is key to not collapsing into a bad recession.
I’m not saying there won’t be lasting effects, but we’re definitely better off in terms of implications for the supply chain and automation. There’s been a couple of key factors and I’ve alluded to them both already. One is operations have been really tested by this very sudden, unforeseen change in demand. With the up and down or even in the type of orders. So, as I mentioned, grocery and pharma, which really had to deal with more than Christmas-like peaks, more than 50% than normal, and with varying outcomes. Some of them are saying that their operations have coped quite well, which gives them the confidence to expand their business and take on more work in the future. For others, the peak has highlighted limitations in their systems and operations.
The lasting lesson out of all this is the built-in flexibility. Automation’s very important to allow you to deal productively with high volumes. But it’s also important not to forget that automated systems have tender for finite output. So whilst you can work more hours, there are only 24 hours in the day. So I think that while now companies work on disaster recovery strategies, they also need to keep in mind, you know what happens when you have a massive increase in demand.
Ulrike: Now because you have mentioned long-term effects before, some of them will definitely be negative, but there might be some positive effects. I read something by David Simchi-Levi the other day, a thought leader in supply chain management. Companies have, in recent years and in addition to offshoring, emphasized “just in time” delivery, keeping only 15 to 30 days of stock or products on hand. Which has made global companies obviously more profitable but has significantly increased certain supply-chain risk and some of them have been exposed recently. Do you think the logistics industry will try and counteract this vulnerability in the future?
Brad: Yeah, it’s a very good question. There definitely is, and has been for a long time, an ongoing trend towards a greater variety of products, reduced inventory and more frequent smaller orders, and that’s been driven both out of stores and online. So in stores, retailers are trying to maximize the use of their shelves, trying to put on more products, which means less of each product, which means that the stores have to be replenished more often. So, in general, there’s this trend towards more frequent, smaller deliveries. Whilst that may be good for the store, it puts a lot of pressure on the operations in the distribution centres, because suddenly now they’re doing a lot more work, even though it’s only the same number of units going out the door.
And you’re right, this also represents a risk because there is less inventory in supply chains. What you see is less inventory and a higher velocity of goods moving, and that makes their supply chain more vulnerable. Any disturbance in the supply chain is likely to cause more disruption. In automated distribution centres, we see that even maybe a couple of hours can lead to deliveries being missed, which might lead to an empty store. And an empty shelf for a retailer is a lost sale.
What’s really important these days, particularly with automated systems, is making sure that the services support is there to keep those systems running. For example in our company 2/3 of our staff are dedicated to service and support, they’re available 24/7. Spare parts are kept at the site to ensure that the downtime is absolutely minimal. What it really means is: reliability is absolutely essential to a robust supply chain and as you say, that’s where the emphasis is, in managing that risk.
Ulrike: Looking at SSI SCHAEFER being a German company and also your experience of having worked in Germany, how would you describe the main differences between Australia and Germany? I mean, this could probably fill a day.
Brad: It probably could fill a day, but I think – certainly in terms of business – it is quite different working in Germany. The German economy is very different. It’s a powerhouse of manufacturing, whereas Australia’s manufacturing industry has tended to dwindle over the years. We’ve relied more on mining, tourism and services, and in some sense have become a big warehouse. In Germany, you have the backbone of the economy that’s the Mittelstand where you’ve got a lot of the medium-sized companies. A lot of those are actually privately owned. Schaefer, for example, is a global company with 10,000 employees but is a private, family company. And I think there are some really good aspects to that, particularly in decision making. In Germany, companies which are privately owned or medium-sized can focus more on their long-term profitability rather than the short-term share price. In Germany, it’s not uncommon for companies to look at a 10-year return on investment as being acceptable. Whereas in Australia horizons tend to be shorter. German companies tend to be happy with steady growth over a longer period.
Whereas in Australia, we want to see a meteoric rise tomorrow. On the other hand, I think Australia is a very, very flexible and adaptable country. I’ve heard Europe being described as being change-resistant, which I think is part of the charm of Europe. That also means it is slower to adapt and I think Australian is a very flexible and adaptable country. Which is not really surprising when you consider that much of the population is made up of people who’ve decided to leave their home in Europe or America or Asia and move to the other end of the world. So, we really have a population made up of flexible, adaptable people, and so I think Australia is very innovative. And I think we adjust very quickly to a changing cycle.
Ulrike: Yeah, I think that’s very true. I mean, even if you look at the head of state and how long we’ve had the German chancellor compared to Australia! One of the things you talked about previously was a huge increase in online shopping since the start of the COVID-19 crisis. I mean, this is not a new development. The retail sector, even before the virus has faced its challenges and there’s been gravitation towards online shopping. But this huge increase, where do you see opportunities for the industry in this?
Brad: Yes it’s interesting. I think the ordering online has been steadily growing, and growing quite rapidly, even before COVID and it had its spike with COVID and I don’t think it will return to its pre-COVID volumes. I think that there’s a whole group of people out there who become more comfortable, maybe more dependent on online shopping and offshore. People will go back into stores. I do see those volumes remaining so that brings both challenges and opportunities. It’s interesting, at least from our point of view. The fulfilment of online orders is much more difficult to deal with, than the performative store orders. So why is that? Generally, online orders are very small and maybe 1, two or three items – groceries is perhaps an exception to that. But what that means is online orders are more labour intensive and time-consuming to pick than say store orders. It is not a matter of just sending a couple of cartons to the store, and you pick one of those and one of those and one of those. Packing is a major requirement for online orders, online retailers. Consumers expect there to be a good out-of-the-box experience, which means an item may have to be packed into satchels, may have been gift-wrapped, it may have a special message. All of this adds time and labour at the distribution centre. Response time is more onerous. It’s not a matter of sending a delivery to store once a week. Ideally, you should dispatch the same day or next day for online orders.
And then you have this very high unpredictability and growth rates and peaks. Mondays tend to be a big peak, people have been ordering over the weekend. You have Christmas, Easter, back to school, Black Friday and so on. It’s a much more a volatile and unpredictable business to deal with. If you have a 50% increase tomorrow, how do you get the people deal with that? So I think that the opportunities are there for companies who can overcome the challenges of dealing with online orders, in a way that’s flexible and allows them to be a reliable platform. I think with online, delivery experience is really important. People want the supply that delivers on time with good quality. And that’s only possible with good systems and robust processes.
The other interesting thing for us as well is, virtually all our customers who have a store also have an online business, it’s not just online-only providers. It’s providers with stores and online orders. Quite often when companies start out, they have stores. They start an online business, they’ll deal with it separately, maybe through their stores, maybe through a separate operation, or maybe through the third-party logistics provider. And I think that’s good when you start out. But, at the end of the day, the inventory is the same products. You go through the process of picking, packing and delivering, and the opportunity is really if you can integrate the online order process with the store order process and into one facility. And we’ve seen our customers do that really effectively, deal with the variability of online orders and day-to-day store orders out of one system. Companies that can do that have a real opportunity to take market share and also sustainable profitability, and profitability out of their online operations.
Ulrike: What I hear from you is that integration is key, which actually would have been my next and last question: advice for businesses that are either new to e-commerce or who have struggled to keep up with the surge in demand. But what I hear from you is establishing an integrated platform is really key to a successful e-commerce business, if it’s just a branch of your business, whether it’s a combination of both or purely online.
Brad: Yeah, that’s right. I mean, there are opportunities to save on inventory. There are opportunities to save on overheads. You know, we sometimes see businesses and they have a different general manager for online with a different set of inventories and a different operational style to the store order process. But if you can integrate that, then there are definitely savings and opportunities to increase growth and profit.
Ulrike: Which I guess leads back to the flexibility that you have mentioned before. We hope that many of our members – and companies everywhere – will come out of this stronger and with great ideas for the future. That’s it from me today. I really want to thank you for your time today.
Brad: Thank you, and thank you to the chamber, it’s been an absolute pleasure for me.
Ulrike: Next week we will be talking about advanced manufacturing in Australia with one of our members. Thank you so much.
