Sustainable Supply Chain

Supply Chain Digitisation And Evolution - A Chat With Dr Sanjay Kumar

March 14, 2022 Tom Raftery / Sanjay Kumar Season 1 Episode 208
Sustainable Supply Chain
Supply Chain Digitisation And Evolution - A Chat With Dr Sanjay Kumar
Digital Supply Chain +
Become a supporter of the show!
Starting at $3/month
Support
Show Notes Transcript

Supply chains are being buffeted like never before. They are being required to become more resilient to survive. But will they, and why didn't they before now?

To answer these questions, and more, I invited Dr. Sanjay Kumar, supply chain expert, and professor at Valparaiso University, as well as a visiting Professor at  Zhejiang University of Technology in Hangzhou, China.

We had a fascinating conversation discussing how supply chain disruptions are nothing new, why in light of that companies haven't invested in making supply chains resilient before now, and what they are likely to do in the coming years. I hope you do too.

And here is the link to the talk Sanjay referenced at the end of the podcast.

If you have any comments/suggestions or questions for the podcast - feel free to leave me a voice message over on my SpeakPipe page or just send it to me as a direct message on Twitter/LinkedIn. Audio messages will get played (unless you specifically ask me not to).

If you want to learn more about supply chain semiconductor shortages, don't forget to check out SAP's recently published Point of View paper on the topic, as well as my podcast with the author of the paper Jeff Howell.

And don't forget to also check out the 2021 MPI research on Industry 4.0 to find out how to increase productivity, revenues, and profitability for your operations. This global study examines the extent to which manufactu

Elevate your brand with the ‘Sustainable Supply Chain’ podcast, the voice of supply chain sustainability.

Last year, this podcast's episodes were downloaded over 113,000 times by senior supply chain executives around the world.

Become a sponsor. Lead the conversation.

Contact me for sponsorship opportunities and turn downloads into dialogues.

Act today. Influence the future.



Support the show


Podcast supporters
I'd like to sincerely thank this podcast's generous supporters:

  • Lorcan Sheehan
  • Krishna Kumar
  • Olivier Brusle
  • Alicia Farag
  • Joël VANDI
  • Luis Olavarria
  • Alvaro Aguilar

And remember you too can Support the Podcast - it is really easy and hugely important as it will enable me to continue to create more excellent Digital Supply Chain episodes like this one.

Podcast Sponsorship Opportunities:
If you/your organisation is interested in sponsoring this podcast - I have several options available. Let's talk!

Finally
If you have any comments/suggestions or questions for the podcast - feel free to just send me a direct message on Twitter/LinkedIn.

If you liked this show, please don't forget to rate and/or review it. It makes a big difference to help new people discover it.

Thanks for listening.

Sanjay Kumar:

I think of disruptions as events that help companies adapt. If you do not adapt you perish. If you adapt, you survive. It's like evolution. It's like, uh, those constraint points in the theory of evolution

Tom Raftery:

Good morning, good afternoon, or good evening, wherever you are in the world. This is the digital supply chain podcast. The number one podcast, focusing on the digitization of supply chain. And I'm your host global vice-president at SAP Tom Raftery. Hi, everyone. Welcome to the digital supply chain podcast. My name is Tom Raftery with SAP and with me on the show today, I have my special guests Sanjay. Sanjay, welcome to the show. Would you like to introduce yourself?

Sanjay Kumar:

Yeah. Hello. I'm Dr. Sanjay Kumar. I am a professor at Valparaiso university, which is about an hour from Chicago. I am also a visiting faculty at Zhejiang University of Technology in Hangzhou, China. I am a supply chain expert or more specifically. I work in supply chain, disruptions management. Supply chains could be good. That's all fine. But I specialize in when things go wrong bigger events like, COVID-19 or nine 11, or hurricane Katrina. And I have spent about 20 years in this field and I have looked at what's the, what has happened in last 20 years. So supply chain disruptions management is my expertise and that's where I uh I'll go,

Tom Raftery:

Okay. Good. Disruptions management. It seems like a you're going to be busy. Right around now there's quite a bit of disruption going on. Everything from, as you mentioned, COVID to ships getting stuck in the Suez through to we're recording this for you for the information and people are listening, we're recording this on the 1st of March. So you were like six days into the Russian invasion of Ukraine, which is going to have all kinds of supply chain implications as well. First of all, let me. Throw it out there. You said you're in this field for 20 years on you. You mentioned nine 11, which was a little over 20 years ago. W was that what got you into supply chain? Disruption and how did 9/11 disrupt supply chains?

Sanjay Kumar:

I would say yes, 9/11 was a strong motivator for me. I was a student at that time. And. Even though nine 11 had a huge loss of lives. And it was a terrible event on multiple levels. But a lot of times we forget that it was a terrible event for global supply chains. What happened to the supply chains during that time? Think of this way right after the attack, us government. Impose a lot of restrictions on what's coming into the country in a way every package that was entering the country, every package that was coming into the air or through the sea, it could have potentially been a bomb in the sense, there was huge control on that. What potentially slow the supply chains down in the sense there'll be bad backlogs at the ports. There'll be lot more restrictions on who is sending what is sending and where is it going? So all of those have potentials to slow down the supply chains, but we know that did not happen. We know that we adjusted to that instead of stopping global. Businesses we increased global businesses. So the innovations that happened right around that time did allow us to counter the long-term negative effects that might have come from from 9/11. A lot of the businesses did go out of business. I think of disruptions as events that help companies adapt. If you do not adapt you perish. If you adapt, you survive. It's like evolution. It's those constraint points in the theory of evolution a uh, comet, hitting, The place in earth t hat's going to take away a lot of species, but the rest will survive. And those who survive are potentially those that have a much better underlying principles underlying financial structure or any of the operations that they do.

Tom Raftery:

Okay. And nine 11 was one disruption. We've had things like tsunamis we've had things like hurricanes, there's lots of disruption. Brexit is another big one. And Mo more recently COVID and the current war that's happening as we speak now in Russia, Ukraine, how are these impacting? These are impacting supply chains, enormously, all these kinds of disruptions, but how are companies responding to these disruptions and how should companies respond to these disruptions?

Sanjay Kumar:

So we know that. COVID-19 was a strange event in the sense it disrupted whole economies, not only supply chains, connect economies, but it's, it's something that uh, disrupted almost every company across the world. The other examples that you cited about tsunami um, tsunami was this pretty bad, event. Right before tsunami Toyota was the biggest automaker in the world. Obviously Toyota had a lot of suppliers in China. They had a lot of manufacturing network and not in China, sorry. In Japan. All of those were disrupted. So right after that, Toyota was the big, not the biggest car maker. It was overtaken by GM. So that's just a small example that companies do get affected by that. Going into more specifics simple things. We know that we cannot find flowers right now. And talking about north America, most of the flowers in us come from Colombia, Guatemala, Kenya, and Netherlands. the, flowers that are grown in the U S are mostly special varieties that are not common, that are pretty expensive and not a common use thing. And it's primarily happened because of COVID-19. In early 2020, we were stuck at home. There were no weddings. There were no big parties. We were not buying flowers, nobody was getting flowers so that the farmers stopped taking care of the crops. The crops died. Now the demand has recovered, but the crops have died. That implies that it'll take a couple of years before the new plantation start to yield flowers again. So it's just a long-term. Small events lead to much longer impact of the things and its supply chain field we know that supply chains are designed more like dominoes. So a small event leads to much bigger consequences on the other side of the supply chain. What we get to see is the big consequences on the other side, but what initially started it sometimes. It's it does not get that focus, but that is what we need to fix. Tom, going to your second question. How should companies respond to all of this that's happening or all the impacts that they experienced? The first thing is, do they need to address these things? Are these big enough problems that needs to be addressed? Some survey do suggest that these are pretty big problems. For example, J bill did a survey in 2020, and they came up with a number and the number was every 3.7 years a company faces one month long disruption. Or every 10 years, a company loses 42% of an annual sale and assuming 42% to be six months of revenue, six months, every 10 years is pretty significant taking this idea further companies realize that these are problems in the same survey 95% of company executives said they would like to plan for supply chain resilience, but only 20% said they are ready for it. Only 20% plan for it. So there is a disconnect between what we want to do and what really happens.

Tom Raftery:

Okay. Why is that disconnect there?

Sanjay Kumar:

Well, It starts with the culture, or it starts with I would say humans, we are much more inclined towards making short-term decisions. We are much more satisfied with a short-term rewards. So a company executive, if they want to invest money in resilience and in their mind in most collective mind, investment in resilience, cost money, it's not free. It will cost money and that money could have been used to increase the efficiency of the company. Their performance is usually measured in the sense of how well the company is doing now. So we reward executives that make the company efficient. We, as consumers are not ready to pay for resilience. We are sometimes ready to pay for things like sustainability. If a product is sustainably produced, then we are ready to pay a little higher money or there's a market for that, but we don't have a market for say a company has spent money on resilience. Let's pay that company higher price. So multiple aspects, the market is not ready to pay higher price for companies that plan for resilience. The executive's that plan for resilience and spend money on that may be in trouble because financial markets want higher return on assets. If you reduce inventory, if you do not plan for resilience, the return on assets or any of the financial figures start to look good. So there's multiple issues with that. The consumer side the way we design our businesses, the way we judge the performance of executives and that's why nothing gets done.

Tom Raftery:

Sure. And it's also hard to measure, right? I mean, If you make a supply chain more resilient and there are no disruptions then, there's no way to tell that the supply chain is more resilient.

Sanjay Kumar:

That's right. That's right. COVID-19 happened two years back. We are still going through it, but it started about two years back. I would think that in five years time, most managers would go back to business. As usual. Right now we are talking about let's spend money, let's spend efforts on resilience, but I would strongly argue that in five years time, we will be at business as usual. And again companies do plan, do intend to plan for it, but it just does not work. It's not the way we have designed our busineses.

Tom Raftery:

Yeah. Yeah. Yeah. The only thing I, would say against that is that feel free to jump in and tell me I'm talking rubbish. But one of the things I would say is that one of the ways that you hedge and make your supply chain more resilient is by making it more digital, by digitizing it, hence this is the digital supply chain podcast. And if you do the. And then you're not going to go back because you're not going to rip out the digitization of your supply chain that you, you will de facto be more resilient. No?

Sanjay Kumar:

I I agree with that. So resiliency could come in multiple ways. Digitization is one of the ways a lot of times executives think that inventory is the way to go. A higher inventory will hedge against the short-term issues that they might experience. And it does work in some instances, but yes, a digitization or any of the modern concepts, blockchain concepts would put, increase the visibility in supply chains and visibility is a resilience mechanism. Companies need to understand. What is their tier two supplier is doing, or what is their tier three suppliers are doing in most instances, companies do not have even information about who is their tier three supplier. They may have never tried to find that information. And that's a problem. Digitization would definitely help with that aspect.

Tom Raftery:

Okay. Very good. What about things like Geopolitical risk is something that has reared its head in the last few weeks and months. How big an issue is that? I mean, Brexit would be another potential, a geopolitical issue, for example, and those are two big ones that. happened. Brexit was 2016. This is 2022. So six years between them is geopolitics a big risk for supply chain in general? Or just have we been unlucky the last six years?

Sanjay Kumar:

I don't think we have been unlucky. I would expect this to continue in the future. The future expectations would be, there would be more issues that are coming along. I would put things like trade wars in the same category as other geopolitical risks. So a lot of times. When we have a geopolitical event, like what we are having right now between Ukraine and Russia, the Russian invasion of Ukraine, or Brexit or any of those events. A lot of time, government entities try to encourage companies to bring manufacturing and operations in-home. I think that usually backfires because manufacturing and any of the operations should be market-driven. So here's an example. When COVID started two years back, March, April, may of 2020 masks were in huge shortage everywhere across the world. And the U S in Europe, in Africa, everywhere masks were in short supply. a number of us companies spent their own capital building up new facilities to make masks. And they were able to start making masks at a pretty short notice. I would think some of these were a lot more patriotic kind of executives. Those made the decision that even though it's our personal capital let's, let's do this operation. Unfortunately, most of those companies are out of business by now. In that industry, the companies that had popped up at that time to make masks, those companies, most of them do not exist. Data from a few months back of all the people that these new mask making companies had hired, 50% of those are already laid off. And I would not be surprised if in a short time, all of those companies closed down. So geopolitics does influence it most of the times, especially in north American context. We think that we can bring manufacturing back, but forcing manufacturing are any operations to come into a country may not be the right idea. We have to look at where the factors of production are, where it is relatively cheaper to make the item where the quality is higher are the raw material level are the other resources needed to make the item are available at that specific place. So geopolitics will continue to play a role, I do not expect neither. I do not hope that it affects how we run our supply chains. Supply chains should be market driven.

Tom Raftery:

Sure. Okay. That makes sense. And the Semiconductor shortage we have at the moment, as well as another kind of, it's a knock on effect from COVID in large part. I want to think, but there's some climate aspects to it as well. I remember back in, I think it was 2020, or maybe it was 2021. There was a large drought in Taiwan, for example, and the semiconductor factories were having to have water tankered in so that they could continue their production. So a lot of these things are multi-factored.

Sanjay Kumar:

Yes. I was reading something about it when Russian invasion of Ukraine started. And and obviously there are a bunch of news articles saying that global supply chains will be disrupted again. I could make a news article for the future and I could replace a country with country B. It does not matter where the disruptions are happening, that the world is extremely interconnected. So we could say that Russia, Ukraine issues causing global disruptions in supply chain. I could change Russia and Ukraine to, two other countries, and they do not have to be major countries. They could be relatively small countries. So supply chains have become extremely. Inter connected, especially when you're talking about the chip supply chains, we know that chips are in extreme shortage. It has affected the auto industry considerably along with other industries. Taiwan obviously makes a significant portion of chips. I think the data is close to 63% or 65% of global chip supply comes from TSMC. The chip manufacturers get their semiconductor grade neon from Ukraine. Ukraine makes 90% of semiconductor grade neon, which are used in making chips for semiconductor chips. So I think we are going to see that problem pop up very soon. I do not believe that TSMC is sitting on a huge pile of semiconductor grade neon all supply chains are JIT and and lean, so they may not have too much of supply. And we are going to experience that pretty soon.

Tom Raftery:

I was unaware, interesting where too, from here for supply chains. What's coming down the line do you think?

Sanjay Kumar:

In the short term, companies are talking about resiliency,

Tom Raftery:

um,

Sanjay Kumar:

uh, redundancy extra capacity in reentry location. And I think partly that's the right strategy to go with. So, So going back to the chip example. Toyota was the company that was least effected by the chip shortage until now, or until about two months back. And the reason is they experienced a lot of problems right after, after Japanese tsunami, their suppliers were down and they realized that they need to keep some inventory of chips. They need to make some of these inventory higher level than what they used to have, they carried extra inventory and the dividends paid off 10 years later, or 11 years later. So Toyota did not experience too much of a chip shortage until two months back, but they are along with other chip manufacturers at this time. So I think, I personally think we have taken JIT and lean to an extreme. Most of the company executives, most of the people who apply JIT and lean principles think that reducing inventory or constraining the resources is the right way. Well, a JIT and lean says that eliminate waste. They do not say eliminate inventory. So we need to start apply JIT better. We need to start understanding what the real waste is. So if you, if you look at japanese literature and companies, they call the word in Japanese for waste is muda M U D a. So they say eliminate muda and somehow we took the word and we changed it to inventory most of the time. So companies have to set, analyze what is waste and eliminate waste. Not inventory, not resources, but as I said earlier in the podcast, reducing inventory pays dividends. We'd be reducing inventory makes financial figures look good. So that's a pretty short term focus for a lot executives. If they can show that there's reduction in inventory, it looks good on their, on their balance sheets. So coming back to what companies should be doing. I think partly they should be doing nothing. And here's what I mean by they should be doing nothing the way we have designed our supply chains have led to a lot of benefits, a lot of positive things. We have created an infrastructure of. Supply and network that is extremely efficient. It relies on different resources that are available in different parts of the world. We have in a way contributed to global prosperity. I would argue that the way supply chains are now helps everybody across the world. Yes. There are some parts where workers have to train themselves again, but overall it leads to global, global prosperity. So five years down the line, I think executives will go back to business as usual. And I would support that. At the same time, I think we have to come up with policies, inventory policies supply chain design. That is efficient as well as resilient. So I, I think part of the burden goes on academics like us academics, like me to come up with new designs of the supply chains that do both sides. I would think that it would not be sound, it would not be a wise decision to lose efficiency at the cost of resilience. It's not sustainable. It's not going to work in the sense that if a disruption happens once in 10 years, if you plan for that disruption, you might be out of business in next nine years because the competitor did not plan for it. And. captured the market. So in order to take care of the disruption that happens in 10th year, you have to survive nine years first.

Tom Raftery:

Yeah. Challenging Toyota managed it with their strategic reserves. So I guess there's a lesson there for everybody.

Sanjay Kumar:

Yes. Yes it is. And in a lot of instances, we try to blame JIT and lean. I think JIT and lean makes a company resilient. They not only provide resources to be invested somewhere else. In that sense, the savings could be invested in the right way. They make a company nimble. They make a company easy to adapt to something that might be happening in the future, or if the customers demand changes, they allow the company to make those changes very fast. So if we defined resiliency right, where I think JIT and lean lead to resiliency, assuming that we had understood what waste is. If we are thinking that the waste is inventory reduction, then there's a problem. But if you have understood what the real waste is, and in my mind, a waste is something that does not contribute to the company that does not contribute to the customer, the value for the customer that does not create value for the customer. So if we understand the waste the right way, design the supply chains, right way. Use JIT and lean lead to resiliency.

Tom Raftery:

Good. We're coming to the end of the podcast now. Sanjay, is there anything I haven't asked that you wish I had, or any aspect of this that we haven't touched on, that you feel it's important for people to think about?

Sanjay Kumar:

Yes, there, there are a few things as I said earlier, I think supply chains evolve. We do not design supply chains, intentionally. The market forces us to take the supply chain in certain direction. So a very simple example again. If you think about the history of globalization we can think it started 50 years back, a hundred years back. But I would argue a longer history. So supply chains move three things, material, finance, and information. We learned that moving material across the globe is beneficial. Probably a few thousand years back, or a few hundred years back to the least. The Silkroad was designed for that purpose. The age of conquest which was in 14 hundreds and 1500 was primarily designed to or primarily intended for getting bit primarily intended to get material right material from a different parts of the world spice trade. For example, we learned about the second aspect that is the finance. I could argue it happened somewhere around 18 hundreds when we made our finance based on gold standards. So finance became much more uniform. We learned about the information flow, probably close to 1990s when computers and internet and information technology became much more prominent. So the developments that have happened over time are much more forced by the market forces, much more forced in the sense of evolution going closer to us. Nine 11 or things that happened around that time, I would say of the period 1960s, seventies, up until year 2000. A lot of those things happen because of market. I think of globalization as something that's a byproduct of. Cold war, for example. So during the cold war companies, or countries, the allied countries that were against USSR had to come up with a network, a structure where they can trade much better than what USSR was able to do. And we came up at a trade structure, are we started creating free trade zones, for example, which enabled globalization, which enabled global trade. The issue that we experienced in year 2001, after 9/11. We required a lot more transparency in the supply chain. We require a lot better information flow. And I think that was enabled by.com bubble or Y2K problem where companies had started investing a lot more resources to come up with new softwares, where they could talk to different companies or the ERP software, the SAP, and all of those kinds of things were primarily enabled by the investments that were made around.com bubble or Y2K products. So over time we evolved market forces makes us evolve. It's very difficult to predict the future, but I think things like COVID-19 will make us smarter. We'll make supply chains a little different. Will those drastically change unlikely, but definitely they will lead to certain changes.

Tom Raftery:

Okay. Super, super Sanjay. If people want to know more about yourself or about supply chain, disruption and management or any of the topics we discussed on the podcast today, where would you have me direct them?

Sanjay Kumar:

I gave a talk yesterday about the supply chain evolution and in that talk, I talked about how supply chains have evolved more specifically in 20 years, but I did go to little bit time period before that I took the evolutionary part of supply chains and predicted a few things about the future. I will provide you information about that talk. It will be uploaded on YouTube and interested people could go to that and watch that it will be useful.

Tom Raftery:

Excellent. I'll put a link to that in the show notes. So people who are able to find that easily. Cool. Sanjay, that's been really interesting. Thanks a million for coming on the podcast today.

Sanjay Kumar:

Thank you. Thanks for having me. And uh, I hope that we get smarter and we see supply chain evolves to something better than what they are right now.

Tom Raftery:

Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about digital supply chains, head on over to sap.com/digital supply chain, or, or simply drop me an email to Tom dot Raftery @ SAP.com. If you'd like to show, please, don't forget to subscribe to it in your podcast application of choice to get new episodes, as soon as they are published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show. Thanks catch you all next time.

Podcasts we love