Buying and selling at Level 3 – Expert Reaction

New Zealand will move from Alert Level 4 to Alert Level 3 at 11:59pm on Monday, 27 April, Prime Minister Jacinda Ardern announced yesterday.

Last week, the Government clarified which businesses will be able to resume trading under Alert Level 3 restrictions, and updated the regulations for these businesses.

The SMC asked experts to comment on potential supply chain issues for New Zealand businesses and consumers.

Professor Tava Olsen, University of Auckland Business School, comments:

“Supply chains involve both supply and demand. From a supply perspective, while L3 is clearly less restrictive than L4, the social distancing required means that most plants won’t be able to run at full capacity. It is good that the government has allowed access to facilities to prepare this week, because for some factories there will be quite a lot of legwork required to adjust for social distancing requirement. Running extra shifts (each with fewer people) might be an option for some plants. But that, of course, assumes that the demand is present.

“In terms of what is happening with demand, it all depends on the product. If we think construction materials, for now demand is likely to be sluggish as teams adjust for socially distanced work and home improvement stores figure out if it is possible to be contactless. Further, the US and Europe look like they have a long way to go before they start ordering nice-to-haves from NZ in anything like previous volumes. However, many of our raw materials or component parts come out of Asia, and China in particular, which looks like it is recovering, which will be good for both supply and demand.

“Supply chain courses emphasize that diversification (in both supply and demand) is an important risk mitigation strategy. This virus has illustrated that concept in spades.”

No conflict of interest.

Professor Julia Kotlarsky, University of Auckland Business School, comments:

“NZ produces a lot of food products, therefore food take-away shops and restaurants that are able to offer delivery of ready meals should be able to get food supplies easily to start operating during level 3. Retailers, however, may be disadvantaged if they rely heavily on import from outside NZ, because they are likely to face delays is supply of goods that come from overseas. For such businesses it is really important to have a reliable inventory management and online retailing system.

“Retailers that are able to differentiate in their online system between items that are in stock in a warehouse somewhere in NZ from items that needs to be shipped from abroad, will be in the position to promote items that are available locally. The construction industry is also likely to be affected due to delays in materials that are usually shipped from overseas. Construction companies may need to prioritise projects for which they have materials in stock or can be purchased locally.”

No conflict of interest.

Professor Ilan Oshri, Graduate School of Management, University of Auckland, comments:

“Global supply chains have gone through a massive storm. In particular, China’s manufacturing sector output dropped significantly, suffering from the lockdown as well as from the lack of demand since COVID-19 moved outside China. Food supply chains, on the other hand, seemed to be holding up well in terms of supply and surely in terms of demand. Clearly, the current crisis exposed many economies to the high degree of supplier concentration (e.g. dependency on China for electronics) and lack of flexibility in supplier management strategies. Disruption was also evident in service supply chains such as business process outsourcing, with delivery centres in offshore locations such as India and the Philippines failing to meet business continuity requirements under lockdown.

“The move from Level 4 to Level 3 is likely to expose New Zealand to these weaknesses in manufacturing and service supply chains. In the short term, New Zealand business are likely to struggle with shortages of components and products originated in China. Expectations are that China will be able to ramp up production to desired levels in electronics only by mid 2021.

“The shift from Level 4 to Level 3 is likely to also stimulate demand across various products that were not considered essential during the lockdown. With government allowing businesses to use either delivery or click and collect services, there is a serious concern that most businesses in New Zealand have not prepared their supply chains and logistics to meet the upcoming demand. Unfortunately, our recent experience of most retailers failing to properly respond to customers’ stocking-up behaviour is still fresh.

“At the heart of this failure is the retailers inability to quickly adopt alternative logistics tactics by, for example, ramping-up online shopping capabilities and the outsourcing of food delivery services to platform-based delivery services such as Uber Eats. I believe we are going to see a similar approach by traditional and large businesses in New Zealand that will start trading under Level 3, thus resulting in a much delayed delivery of goods to customers.

“On the other hand, it is very likely that restaurants and other small product-based services will start trading in Level 3 looking for creative ways that will allow them to engage in the delivery of their products as well as offering pick-up services. These two behaviours are both the concern and the hope of the New Zealand economy. Large traditional businesses in New Zealand will be able to cope with similar challenges only if they become nimble, experimental and integrative with external service providers. On the other hand, small businesses in New Zealand that have been innovative and daring over the years, can once again re-invent themselves.”

No conflict of interest.

Dr Bodo Lang, University of Auckland Business School, comments:

“Consumers like their freedom. They like to buy the products and brands they prefer, enjoy experiences with people they like, and travel to places of their choice.

“However, at present that freedom is greatly limited. Reactance theory predicts that consumers can have strong negative reactions when they realise that their preferred alternative is not available. Reactance has two key effects: The first effect is that the alternative that is not available becomes even more desirable. In other words, consumers really want what they cannot have. The second effect is that consumers have a negative reaction towards the agency that they believe has limited their choice. Thinking about the ‘out of stock’ example, consumers would have likely shown reactance against the supermarket, other shoppers, or the government. So how can agencies and organisations possibly lessen consumers’ reactance?

“Communication is critical. For example, informing consumers why restrictions are in place, what is and what is not restricted, and how long the restrictions are likely to be in place for are important. Messages – and their delivery – need to be authentic and relatable. Providing examples that resonate with a highly diverse audience is key.

“One way to achieve this is to make things personal and getting consumers to see the linkage between short-term, non-compliant behaviour and the possible detrimental long-term consequences, for them, their family and whānau, and particularly for vulnerable people in their network. Think grandparents, parents, aunties, uncles, etc. As a country, we respect old people and those who are vulnerable, particularly if they are part of our social network and our bubble. Tapping into that respect to craft messages around the ‘why’ is one fruitful avenue to encourage New Zealanders to comply with – and show less reactance towards – maintaining level 4 until Monday 27 April. Using such appeals will also help with achieving high levels of compliance with level 3 after 27 April.”

No conflict of interest.