Sustainable Supply Chain

Surviving Supply Chain Disruption - A Chat With IDC's Lorenzo Veronesi

May 09, 2022 Tom Raftery / Lorenzo Veronesi Season 1 Episode 223
Sustainable Supply Chain
Surviving Supply Chain Disruption - A Chat With IDC's Lorenzo Veronesi
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Show Notes Transcript

We are living through some very interesting times - which if you are in supply chain, can seem like a curse, as the Chinese seemingly never said!

How can organisations survive the disruptions, and thrive?

To answer these questions and more I invited IDC's Manufacturing Insights thought leader Lorenzo Veronesi to come on the podcast to talk about this.

We had a great conversation spanning  the disruptions, how Industry 4.0 and digital transformations can help , and the relationship to climate change! 

I learned loads, I hope you do too...

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 how to juggle sustainability and efficiency mandates while recovering from pandemic-induced disruptions, meeting growth targets, and preparing for an uncertain future, check out our Oxford Economics research report here.

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Lorenzo Veronesi:

Industry 4.0 it's allowing us the opportunity to decouple these trends. So having, and improving our living life, living condition, improving our productivity and improvement in the way we operate as a society, without it to be at the expense of the environment. So the same technology that allows us to become more productive and more clever in the way we operate, are, the same technologies that allow us to be more environmentally friendly

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 guest, Lorenzo. Lorenzo. Welcome to the podcast. welcome back to the podcast. You've been on another one recently, would you like to introduce yourself for people who may not have heard the previous episode?

Lorenzo Veronesi:

Hi, to everybody listening to the podcast. I work as associate research director for IDC. IDC is the International Data Corporation, a premier, global provider of market intelligence and advisory services and events for the information technology, telecommunication and consumer technology markets. We are a company that does specifically into the topics of IT. I'm part of a panel of thousand plus analysts, and then focus particularly on the manufacturing industry. And with a sweet spot, let's say on Smart Factory because I lead the Global Smart Manufacturing research. So, I'm very happy to be here in this conversation. Over to you, Tom.

Tom Raftery:

Thank you, again. I know I've said this a few times on the podcast, but this is kind of a weird time for supply chain and for manufacturing. Because there's lots of disruption going on, everything from, we could say going back to 2016 and Brexit, but there's also things like climate change. There's the war in Ukraine. There's the semiconductor issue, which is partly related to those two things, do you want to give us your perspective on all this, what's going on and what impact it's having on supply chain and manufacturing?

Lorenzo Veronesi:

As a you anticipated, there is a tremendous complexity going on in industrial world. We are following very closely the news coming from the Ukrainian region. It's very difficult to assess that it's gonna evolve for sure. It's not my role and beyond my expertise, but what I think is important to note is that this is part of a sort of accelerated disruption that we are living. When the coronavirus crisis happened in March 2020, we had a slide. You see a small fish and we call it business as usual, then a larger fish swallowing up. It's what we need. And we call it COVID. And then there was another larger fish like environmental change and 2030 problems for each industry. We kind of customize this depending on which industry we're talking about. The idea is that business has usually was already complicated. Then we got this COVID that kind of swallowed all the other business problems. And we used it as a sort of a framework to interpret the reality for a couple of years. And now we have something else even more dramatic and more powerful than COVID crisis in a way. Again, it's taking all the public conversation, but doesn't mean that one problem overcrowds the other one. That would be fantastic if you could have a crowd out factor when one problem takes another problem where you actually, they pile up together, that's a big issue. And we still see after COVID the ripple effect of that. You see the semiconductor shortage that was direct impact of Covid we saw the Great Resignation happen. That was a direct impact of COVID. That's a second order impact of the COVID crisis. Evergreen ship caused a ripple effect that materialized the months, and months, and months after that event. So the long story short, it's impossible to really forecast what's going on in every new industry, in a sort of short timeframe. I think what's important is to try and identify the problems by their nature. And we think there are three main order of problems. The first one is a supply problem for a manufacturing company. So this has two sub-components. The first one is direct supply. You don't know what the materials are going to show up at your door. That's plain and simple because if the supplier has enough and capacity, if they can deliver. If they can deliver somebody else's pricing your company out and so on and so forth. The second problem is that indirect supply, like energy costs. This is going to skyrocketing. So you need to contain that cost and you talk to measure processes. And as one company we worked with has said, I hate that because it just add to cost without adding to value. And that's the key principle of manufacturing. Everything you put in the equation should add some how to value. The cost equals cost plus value. Otherwise it's just a waste. And manufacturing people hate waste. Then you've got a demand problem from overnight big markets have been shut down completely and company had to withdraw from key markets or they can stop their operations in the key market. There are factories operating there and they cannot operate anymore. And that's a big problem. So, you have a demand side as well. Plus, on the supply side when you're a factory is shut. And then the last problem is, as I said, is the Bucha squared. Well, I think it can certainly complexity, ambiguity. You don't know what's going on. Every day you come to the office. It's as one company said to us, it's a nightmare. it's not like what keeps you awake at day? Because I say it's a nightmare day in, day out. So, that's not a nice perspective but very close to reality. And you don't know what's going on or you don't know what the next day would bring to your company. That's a big issue, honestly, and company need to do really think about this three problems in different ways. And I think there's a big takeaway here that we'll learn from COVID is that IT is a central to solve these issues.

Tom Raftery:

Okay. And you know for companies who are experiencing these kinds of issues, what can they do to try and overcome some of the disruption that's happening?

Lorenzo Veronesi:

IT is a quite central to this equation and there's an interesting take. I was shown by my colleagues, a charter that highlights the evolution of IT spending against the GDP growth in Europe. And you see that until 2016, 2017 there was a very strict correlation between these two lines. So for example, the crisis of 2009, 2008, GDP dropped, IT spending dropped dramatically. Companies realized that they didn't have money. They had a lot of business issues, they stopped spending in IT, plain and simple. After 2017, this relationship was broken. So you see, we saw the big dropping during COVID in 2020, but there was no matching drop in IT spending. IT spending decreased a little bit but was quite solid, actually. It didn't go into negative tone at all. So that was quite an interesting element to consider is that IT is not something you can save money on. It becomes all your way out from the crisis. It becomes part of the key tool for getting out from the crisis. And we also track the performance of a company who have spend more and better in IT over time and are more digitally advanced than the company who are less digital advanced. And even in, we saw the latest data for 2021 as well. The company who spend more in that more digital, they had much better performance in terms of revenue and net profits, share. And the gap is widening. So you can really see that the company who didn't invest enough in IT that are paying the consequences of that, whereas a company who had a solid digital infrastructure they are very much better. I mean to this problems that I described before, the one of the solutions centrally having a better way of handling information across organization being, becoming more resilient, becoming more operationally savvy and intelligent if you want. We can dive into that. That's lot of things to say about that, but I think the key principle

is this:

IT is not something you can save on, and you need to keep investing because that's quite central.

Tom Raftery:

Sure, but IT by definition is quite a broad term. Do you want to dig into it a little more and say, what should you be spending on? Because if you're spending on, let's say buying extra licenses for Microsoft Excel, that's not necessarily going to do a lot for you.

Lorenzo Veronesi:

Exactly. that's why it gets a little bit complicated. During the pandemic, we saw that very strongly. There were some technology, some IT projects that were divested or software from our budget reduction and some others who actually got accelerated quite significantly. Some others even that were kept idle the until March 2020 when they were kept out for about from a drawer and say that now, we need that. We already, we've postponed that so long now it's time to execute this. So, they had everything ready. We did the fastest software evaluation assessment in this time because company already had that mindset that, but they say, tell us whether this is right or wrong, we start. It was quite interesting. That's because, companies are scrutinizing, they invest IT investment that don't make a direct contribution to business, whereas a privatizing everything that helps a business leader to operate in their day to day better. So investing in IT for the sake of IT for future-proofing infrastructure for looking at bigger picture it's important, but probably in this time and age is less relevant. Whereas when your business people tell you, I need this data, this information I'm always late with my decision because I'm lack this specific type of decision-making tool, if you want, or information then company will just go through it. And a lot of companies that don't even look at the price for their ROI, they don't even look at the price because they saw see the business contribution in this time it's so high that they they're just calculating their ROI on the basis or the additional business capability they get, not just on the actual money they invest. So that's quite interesting. And that's quite powerful as well. So, it's not like everybody's going to spend carelessly. Actually they would be extremely careful how they spend the money, but when they decide to spend the money in an area, that would take sort of a priority lane for sure.

Tom Raftery:

Okay. Okay. And have you seen any good examples of companies that are doing particularly well? And could you speak to some of those what they've done right?

Lorenzo Veronesi:

It's difficult to say what they've done right. I make an example. If you're a doctor, tell us you don't have to smoke You have to keep yourself reasonably fit. And you have to exercise and you don't eat too much junk food. That's a sort of reasonable advice from a doctor. This is sort of a recurring advice now, and then you meet a girl that you want to be with and she tells you, I hate people who smoke. I want my future partner to be super fit. Then, I hate eating junk food. So, is an exalted as drive to something that was already something that you should have done before. So for a good reason for our pro actually positive, and let's say lucky reason, IT requirements that sort of the skills we needed to go through the COVID crisis were the same that were actually being implemented by the standard digital transformation programs. So in a way company who already invested, they have already found themself in a better position. A typical example is like company who had that unified communications in the companies in their organization. Okay. You have to send everybody working from home. That's not a big disruption. If you didn't have that infrastructure, it was a massive disaster for our company. So we were lucky that the IT requirements were exactly those that were already being brought forward by digital transformation to my example. Girlfriend asked you, I want you to become a horse rider, a proficient, a horse rider. You never ride a horse in your life that that's something completely new to start, but that was not the case. So in this sense I say company didn't do anything like particularly well in 2020, it's just a company who did something reasonably before they had this advantage because it's sort of got this tailwind that you say that we're really pushing them further because I had to say it's in first place. That's the point. I was discussing with another company yesterday, maybe there would be a buyer regret. We saw an acceleration in some investments. Maybe that will be a buyer regret, that kind of thing in the next few years. But today is probably too soon to tell. One thing that is going to change though, I think that's the only out of that, the thing that's going to be a strong revaluation of investments. it's around the edge to cloud architectures. Before cloud was invested with an idea of, uh, fixing sort of the cost structure that IT department and, to changing the way, pretty much people to decision and to enable new people with technology and having new functionalities delivered and so on and so forth. Now that's another element that comes in the equation is that that's a sort of a cyber warfare being fought. Companies realize that they are potentially the target of an active war happening through a cyber warfare. and so they are considering whether they want to keep hold the liability for that. Especially some type of IT projects. if you know your subject hacking attack, maybe you don't want the data to be on your premise. Because you don't have the capabilities to counter that maybe, or maybe you think you can, but that's another element to the consideration of how I define my IT architecture that wasn't there before or wasn't this prominent before and now it's really on everybody's face. So, that's going to change and drive some reevaluation the IT investments. but besides that, it just goes in the same direction as it was before.

Tom Raftery:

Okay. And how would you frame the initiatives that companies are taking today?

Lorenzo Veronesi:

I mean, in a sense that there are some capabilities that company need to achieve no? For example they need to get resiliency, better ability to take action when something bad happens without disrupting the core strategy. So that's a very important element. Another important element is understanding better what's going on in the business in terms of visibility and granularity of analysis of information, because of course if you are a company who spends an enormous amount of money on energy. you want to know exactly where this energy is going and how much its product you're producing is contributing to this global energy, to this compounded energy costs. So the cost of goods stores, but very, very granular. You need to have this analysis. And also this is also relevant for environmental and CO2 calculations. The moment, you know exactly how much energy you're consuming for each product you produce, then you cannot have much better information to run. For example, sustainability report that could be very needed in this. In these times for, so for competitive differentiation. And generally speaking, it's very difficult for companies to prioritize exactly what decision and world it project to give the tailwind I would say. Because they have some last things on the plate. For example, in IDC, we have created a framework that we are using very actively with our subscribers with our customers with both end user and the it market that's called prime. So Purpose, Resiliency, Imagination, Mastery and Execution. So these five elements are very important to let company, frame, as you said, their IT direction. So the first element is a purpose today more than ever as a manufacturing company when a company has to know exactly what's our role in the society. This encompasses consideration about sustainability, this encompasses consideration about social responsibility as well. And a big example of this conflict, not to company got very big, bad press by not retreating from Russia when other company had done this already. So that is out the market jets a company for their actions and for their stance on public matters on global situation on environmental sustainability. So something that is good only for the business. Maybe it's not good for the business. This is something a company need to understand. The second one wants to define your purpose. Also, you need to be a good company that people want to work for in times of great resignation, people don't work to work for any company. They want to work for the company. For a company that is meaningful to that sort of life path. And you have to be attractive for employers because a lot of companies don't realize that. They pay employers to work, but also the employers invest their careers in a company. So it's a mutual relationship. The second element is resiliency. Resiliency means that being able to withstand an operational issue without losing your central purpose that we defined already. And that's very important and IT is certainly central to defy augment the resiliency of company. So if your supplier doesn't deliver what to do, you have a plan B. You had an extra buffer stock. You have a new supplier. You are an ecosystem of suppliers or a trading network like you can tap in. The third element is imagination. And this is also linked with purpose in a way you need to move from the simple focus on innovation to focus on imagination. So what's your role? How we can create value in such a changing ecosystem. So it's not just about making better products and more with more features and a lower cost. That's innovation. You need to maybe think maybe I should do completely different things. I change a market going to virtual world, maybe invest in metaverse in 10 years from now. I mean, how I can bring value to the market, that's a big consideration that a lot of companies are doing now. A lot of company, for example are starting selling their it solution. So we worked with company who had a good solution. They deem it to be a good solution for their factory and they wanted to resell to the market and there ask us how we can evaluate the market size for our solution. We produce products, but now we had this good solution we put together and we want to see to somebody interested with that. That's a completely different to create value as a manufacturing company in the market. So that's imagination. Then you got mastery. So from excellence to mastery, and this is linked to this one. Every company is already excellent. Otherwise there will be not to be on the market. Operational excellence has been the mantra for many, many years. And we can say that if you have survived though this crisis, you are excellent. That's plain and simple, but then you have to become a master, a company that is seen as leading the way for example in operations, in their supply chain, in the product innovation doesn't matter because you can teach other companies, how to be better. You can be even seen as a company that that really innovates in their own field. when I see reputation and trust among companies is very little, being seen as a master, as a recognized reputation, you have a strong reputation in your field of competence, it's really powerful because you're operating on an ecosystem. This is the last letter of our acronym. And so it's a dynamic value network is not a supply chain is not a masters lay supply chain, like it was in the past. You need to be very active in understanding what's creating value in industry and where it comes from. And then that's also quite relevant today. and trust is a common currency in this ecosystem. So, you don't establish a long term partnership with company you don't trust. If they're not able to deliver you don't trust them. Maybe you have a distribution company that is failing, overnight. So what you do? So you also have to choose your customers wisely or your distribution network. So it's not just about the supplier. Mark Carney was, the chief officer of a bank of England. Before he took that role, he said "trust, comes on foot, but at leaves on a Ferrari". And the means that it's very difficult to build trust over time. It's a slow exercise, but you can lose it better rapidly when something bad happens. And you don't want to be in that situation, especially in an ecosystem that is very dynamic. And that's a keep being reconfigured as evolution, as a changed business situation evolves. That's also quite important.

Tom Raftery:

Okay, cool. We are coming to the end of the podcast now, Lorenzo. Is there any question I haven't asked that you wish I had, or any aspect of this that we haven't talked about that you think it's important for people to be aware of?

Lorenzo Veronesi:

The only thing that important to consider and we didn't really delve into is a concept that, all good things you can do for a business; as we saw in the COVID, they tend to cluster together in a positive direction. Add the value in a compound way. And I make an example. I was talking about the energy consumption analysis. So it's good for your business, and it's also good for your environmental credentials. And this is very, very important. these two elements, because we are in a time where I said we are suffering tremendous pains in the supply chain, in the factory floor. But we also should not lose the bigger picture, which is like we are facing. For example, an environmental, climate change problem. And we're already facing it and that will be just become larger and larger. So all company to be ready for this new crisis that we already know it's going to come. So there's no excuse. I didn't see it coming. I have a nice chart that they show, quite frequently now, what I brought it to the eye, showing an IPCC, graph with rising temperatures over, the past two centuries. And that's an indication of how much that was the man made. And then you, kinda highlight the inflection point of this curve, when, uh, there were an industrial revolution, so do the second industrial revolution, when people put together, coal, steel, electricity and production line and so on and so forth. And a little bit of a globalization then that disappeared with the world wars, but then you see a steep increase in the temperature rise. then you see that third industrial revolution in the seventies when you got globalization, global transport, air transport. You saw, the factory, automation, robots, et cetera, and the electrification, not electricity, but the electrification electronics that become created and even steeper increase in temperatures. Now we are in an industry 4.0, and this is why the thinking to see 5.0 should be a term because you cannot talk to industrial revolution five years apart, by the way, but industry 4.0 it's allowing us the opportunity to decouple these trends. So having, and improving our living life, living condition, improving our productivity and improvement in the way we operate as a society, without it to be at the expense of the environment. So the same technology that allows us to become more productive and more clever in the way we operate, are, the same technologies that allow us to be more environmentally friendly. So again, let's say the benefit compound together. So tackling this crisis in a clever way is also a way to tackle future crisis using the same set of tools. So I really encourage companies not to shy away from investments and from a bold approach transformation. Because, hiding away in a crisis is never going away. It's not a good strategy. That's, that's sort of my takeaway here.

Tom Raftery:

Okay. Very good. Very good. Lorenzo, if people want to know more about yourself, or IDC or any of the things we discussed in the podcast today, where would you have me direct them?

Lorenzo Veronesi:

Google my name at it's there. And of course I encourage people to check out, we are a city I'm part of our panel of a thousand plus . Analysts. We cover every element in the IT world from every type of technology. So that's very important. They also, we are quite active on LinkedIn. So again, you can check out what we do on LinkedIn. Yeah, that's my contribution to today's conversation.

Tom Raftery:

Super. That's been fantastic. Thanks a million for coming on the podcast today.

Lorenzo Veronesi:

Thank you very much. Thank you, Tom.

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.raftery@sap.com. If you like the show, please, don't forget to subscribe to it in your podcast application at 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.

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