I am giving the opening keynote at the SAP Supply Chain Resilience Conference this coming Tuesday October 6th. Unlike previous years, this years event is a virtual conference, for obvious reasons, which means anyone from any part of the globe can participate!
Giving the closing keynote at the event is McKinsey partner Knut Alicke. McKinsey recently published the results of a survey of 60 senior supply chain executives on "the impact of the pandemic on their operations and their future plans to make supply chains far more flexible and agile"as well as their McKinsey Global Institute report on Risk, resilience, and rebalancing in global value chains which Knut will discuss in his closing keynote.
So, I reached out to Knut to invite him to come on the podcast to discuss these and other topics around pandemic responses and the future of supply chains, and we had a really fascinating conversation, I think.
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It's quite interesting to see that also due to Covid people and not thinking about if we work from home is is OK, why don't we combine our planning functions in a kind of a shared service centre? It might even be a virtual shared service centre here. Clearly, cloud is important.Tom Raftery:
Good morning, good afternoon or good evening wherever you are in the world. This is the Digital Supply Chain podcast. Number one podcast focussing on the digitisation of supply chain. And I'm your host, Global vice president of 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 Knut. Knut, would you like to introduce yourself?Knut Alicke:
Sure. Thanks a lot, Tom, for having me. Looking forward to the conversation. So my name is Knut Alicke. I'm a partner from McKinsey. And yeah, I spent my life in supply chain the last 25 years and 16 years with McKinsey. And we work in an all interesting topics of planning of execution, network, organisation, transformation. Clearly over the last years, a lot in digital, how digital can help supply chain to be to be better, to be, to be more efficient and to have a better service level. And then this year in McKinsey, we we set up a team to also work on responses on Coronavirus. Next to McKinsey, I'm still teaching at the university. So I'm also active as a as a professor.Tom Raftery:
Very good. Very good. You're in supply chain, I think you said 25 years. How does one get into Supply-Chain initially? What was your start in Supply-Chain?Knut Alicke:
My start was it was I would say by coincidence. So when I when I did study mechanical engineering, I'd say, you don't know exactly whether you end up in production or logistics or in other topics like engineering. And for me, it was it was logistics. So I kind of fell in love with this this this whole physical flow stuff. And then at the institute where I started my PhD there were two former colleagues who did today call it a Start-Up. Back then, we would call it a spinoff. They did start this company where they would help companies like Hewlett Packard in their planning processes. And I found this quite interesting. So during the PhD I already worked at that company. And then after finishing that, I, I joined them. And since then, I must say, Supply-Chain is an exciting topic and I've been only doing Supply-Chain since then. It is also interesting if you look back like 20 years ago when we when we did implement the software at HP, there was something where you thought that that's probably in five years or in 10 years. It's it's done right. So kind of it's it's standard. Everyone is understanding that End-to-end planning is much better than this silo thinking. And I am 20 years later and I'm still seeing a lot of companies where this is not the case.Tom Raftery:
Interesting. Interesting. And yeah, I mean, supply chain has gotten a whole lot more interesting in the last six to eight months, hasn't it?Knut Alicke:
Indeed. So the Corona crisis is clearly a crisis. And the only the only good thing about Corona crisis is indeed that it boosted the importance of Supply-Chain. So that is also what we what we see and what all of us see, that if you have your supply chain under control and you do manage to to plan, then it's I would not say easy, but it's it's much easier to fight the crisis. I did discuss with a lot of my clients, and especially in March and April when hit in Europe, and there was basically two camps. There was there was one camp where they said, look, we have our supply chain set up. We have our our end to end planning processes. We work together. We have the right infrastructure. We have a planning tool that works fine. So sending our people home is no problem at all. And we just continue like we did before and there everything else. And then there is the other camp who is still working mainly on Excel, where you are even not able to do an MRP run on a daily basis. And these people then typically kind of walk to the receiving area and see what is delivered to see whether they can kind of feed the assembly line or not. And this kind of helped, especially for those people or those companies who were immature to increase the awareness of supply chain.Tom Raftery:
Interesting. I should, of course, mention that we're both speaking at an event next week. No, I say next week. This is actually Friday, the 2nd of October. I'll be publishing this on Monday the 5th, I think it is. So we're both speaking at an event on the 6th of October. So for people listening on the date this is published, we'll be speaking at this event tomorrow. So it's on the 6th of October. It's the EMEA north SAP supply chain resilience conference where I'm kicking off with John McNiff. We're doing the opening keynote and Knut you are doing the closing keynote. What are you going to be speaking about at the conference?Knut Alicke:
Yeah, the topic will be indeed Supply-Chain risk and resilience. And there is some there's a couple of interesting insights. So we we did work on the topic over the last month, also with our McKinsey Global Institute, which is which is a think tank to understand the implications of the crisis and how to how to respond and to to give you a look to give you some ideas. We started with a bit of a survey in April and May where we wanted to understand from hints of supplanting what is it that happened. So did you face any any problems? And most of them face problems. And what is it that is going to change going forward? And that is quite interesting. So most of the nearly all kinds of Supply-Chain said that they need to increase the resilience of Desplechin. That is kind of clearly kind of expected. Right. That you need to do something. If we then kind of go a bit more into detail. They made it very clear that we need to do. We need to look into dual sourcing. We need to look into inventory profiling. And that doesn't make sense that now kind of all of a sudden from zero dual sourcing, we go to 100 percent towards sourcing. It kind of is is a process way to do this step by step. Same with inventory. And then quite interesting is that they they said that, hey, we probably need to localise or more or regionalise our supply chain. And this is something where you think that companies that are because of Covid now under constraints. So they need to kind of save money. Why could they nearshore? And this is where we looked into a little bit more detail in with our colleagues and found that in some industries it can be up to 30, 40, 50 percent that off the trade flows, that could be reassured. So, for example, in pharmaceutical, where especially from non economical factors, so kind of governments thinking about, hey, how do we ensure our our pharma supply chains are up and running? How do we ensure that the API is delivered? Here we see clearly that this will lead to a to a shift in the mid-term. That's nothing that is to be expected in the next two, three months or so. But, Mizoram, there will be another interesting topic is the whole planning topic. So as I already said, there were kind of the camp who said that he and we we navigated the crisis. It was it was quite OK. And the other one who said that we had really a big problem. It's interesting that those who navigated the crisis also said that, look, we are much faster in decision making. So there was no kind of a big group of people sitting together. We were much faster, much more efficient. So they want to keep this. They said that, hey, we can we decreased our cycle of, for example, the SNL people's. So from monthly to a week because they had to because it was always so much more information that they had to kind of reduce the cycle or increase frequency. They want to keep this right. So they want to keep this this high frequency to be much closer to what what really happens. So quite interesting. And they want to boost more advanced analytics, digital tools, because that also proved to be very beneficial to have this set up in the crisis. And the last topic was that is also quite interesting, as some when we asked about do you have the right talent in your organisation? And this is clearly something that was already discussed over the years that, hey, we need to have more digital. Tell him we need to have more data scientists in an organisation. And this, again, with with Covid, it boosted again where people said, hey, 90 percent of the heads of some blacks and say we want to increase the digital Supply-Chain talent that we have where reskilling or also hiring.Tom Raftery:
And some of these term. But some of these things, as you said, are not going to happen in the next couple of months to be kind of mid-term. But will they be long term? Well, some of these changes, you know, will people revert or will people, you know, keep going or where do you think that'll go?Knut Alicke:
So it will clearly take take a while, indeed, some to implement this. But I think it will it's now kind of it's going to happen to celebrate it. So that is some kind of positive part of of Covid. If you think about the future of the supply chain organisation, there is there's clearly some some elements where you get you always had a demand plan or you always had a supply of planning that production plant. And this is this is going to change. Right. And this is kind of an interesting shift. I'm going forward. There'll be half them. We will not necessarily have the classical Demopolis until we have more the data scientists that can kind of figure the algorithm. And then the algorithm calculates the demand plan sample for order management, for example, where you have someone who is then taking taking care of the of the robot. That is, so to say, taking the order and managing the order. So there will be a shift in the in the job requirements. And that will happen clearly over the whole of the next year. Maybe one one more genes that will hopefully happen is some because of these increase of importance of Supply-Chain. We will see companies then also kind of opening up senior management positions for for for Supply-Chain people, which was always a bit of a problem of the past. This industry is where this was always the case. Consumer electronics, consumer goods, but them in other industries that was not necessarily happening. And this is something that I expect that will change in the next coming years.Tom Raftery:
Tim Cook came from a supply chain background.Knut Alicke:
Exactly. So he is the most famous example of a of a CEO that that had a supply and background. Exactly. And we would see more of these tim cooks in the future.Tom Raftery:
Good. Good. And an increasing awareness on the digitisation of supply chain can only be good for this podcast because we focus on the digital supply chain. So that's that's great news as well. Has there been any implications, do you think, for topics like sustainability or are they just getting thrown out completely?Knut Alicke:
That is a very interesting topic. And the beginning of the Covid crisis, everyone thought that sustainability will now be paused so to say. So we need to solve other things. And in the beginning, it was also right. We need to make sure that we have safe workplace and we need to continue collaboration. But then it was very interesting to see kind of also how how the government hope was kind of focussed not only in kind of resetting the economy, but resetting with the right broad side. So huge sustainability came back. And that is also interesting that now looking into how how companies kind of go back to tool to the new normal. Sustainability is is is not pushed out. It's still a very important topic. It will be a very important topic. And I I foresee that in the next coming years, this will also accelerate. And clearly, digital can also help you. Right. If you just think about the CO2 footprint. People talking about transparency not only to the first tier supplier, but also to the second tier, fourth tier and so on which is a topic of supply chain risk management. But it's also a topic of sustainability because you need to have this transparency to be able to to assess your footprint. Otherwise, you just look into the first tier and that is clearly not so helpful.Tom Raftery:
Indeed, far the likes of manufacturers. Right now, they've got to be under some kind of, you know, pressure to increase output. But they are also under pressure to maintain physical distance between employees. And these are kind of contradictory demands. How how are manufacturers coping with the physical distancing requirements or was that did that come up at all in the surveys?Knut Alicke:
That that clearly came up? And and there is also all manufacturers have there have there measures in place where, you know, basically you changed the workplace. And with this to ensure that physical distance is in place and a lot of manufacturers, they they reduce the speeds, so to say the lines, to make sure that you can work more distant, that you're not so close to each other. And then they all implemented measures off them, shift patterns that that were different, that you have kind of staggered lunch breaks and that you to disinfect your your workplace. So all of this happened. And clearly decrease. So to say the the only or the utilisation or the efficiency of the of the production lines. But basically it will it will clearly take to take a while to come back. But it some it looks like then they managed it quite well in terms of in terms of efficiency, what's what to produce.Tom Raftery:
So if they're slowing down the lines, that would seem to imply that production will slow down if they have increased cost, like, you know, disinfecting lines, rolling out PPE to staff some things about if we're getting increased costs and reduced output. That would seem to imply the cost of goods is going to increase. Is that a fair assertion?Knut Alicke:
That is fair, and that is also what we see, that the manufacturing company is clearly looking to into cost cutting programmes. Now to cope with this. Right. So it kind of. And either you can increase your prices, which in the crisis is also not so easy. Right. Because also your customers are affected by the crisis. So you need to look into further cutting costs down, which then kind of it seems to contradict the discussion we had on sustainability, because this always feels like, hey, we just at cost to be more sustainable. So if it needs to be done in a smart way and also not kind of immediately. Right. So you should take a couple of months or next year. You're after when things stabilise, then you should be prepared to do to implement dismembers and cost cutting could be things like increasing automation, which things like, you know.Tom Raftery:
Yeah. OK. Cool. Is there anything, any topic, any topic that you're going to discuss that we haven't talked about so far?Knut Alicke:
There is some. One topic I kind of mentioned it briefly, and that is this this whole thing on multi-tier transparency, that is quite interesting. It's kind of a specific topic. OK, but if you think about the complex supply chains, how complex supply chains after they kind of ramp down in the beginning of the Covid, how they should ramp up again, then this is a huge task because before it was kind of a well oiled machine. Everything was kind of well working. There was only a little bit of inventory. So a lot of companies working in a just in time, just sequence even set up. And now kind of all the suppliers came to a stop. And question is, how do we know ramp up this this super complex network. And this is something where a lot of companies also struggled with, to be honest. End of April. Beginning of May. And what is required is that you want to have a transparency on that on your first year, but also your second year, third year and so on. So this is something that the problem is looking at solved, right? Because there is also contractual issues. The third tier doesn't necessarily want to have transparency off of the OEM rights to kind of knock at the door and then negotiate prices down. But this is something where digital can clearly help a lot to make them inventory, to make capacity, to make ability to respond transparent. And and with this have a pre warning system that that is really a pre warning system. And not only saying when we have stuck out at the receiving area that, hey, you can't produce today. So this is kind of one of one of the topics I will stress in conference.Tom Raftery:
It sounds super complicated. I mean, as you say, these these massively complex webs of supply chains that were built up over years or decades even suddenly have to crash to a stop and bringing them all back online again. Yeah it's, I can't imagine the complexity involved.Knut Alicke:
Exactly. And this is this is something where we we did an in a study two years ago, we looked into global flows because this complexity is often like the the products tend to fly around the planet two or three times before they deliver to the customer. My question is whether this will kind of continue like this or whether we see something that is going to be more regional and Covid deal is triggered the discussion again. But it's very interesting to see that over the last 10 years, the the flows in a region did increase. So we basically saw that globalisation reduced a little bit. The total flows increased. But mainly within a region. So we also see a little bit of some, I would say, d complex thing. This is Global Networks. On the other hand, with digital tools, we are teeley more able to manage those global networks because we have the transparency. We know what's going on. We have better data. We have better forecasts. We can react. We can have of alternative scenarios. Simply can't cope late. And with this, we are much more able to manage these complex networks.Tom Raftery:
If I am a manufacturer and I have this complex web of suppliers setup and most of them are outside of my region, how do I go about finding suppliers that are closer to home to help, you know, make my supply chain hopefully more resilient?Knut Alicke:
So there there's clearly agencies that that help you to identify the suppliers. I think the challenge is that there is there's some of the industries, especially in high tech consumer. Signs on where we have seen a massive shift towards Asia. And with this also the capability, so the ability to produce did shift to Asia, right. So even if you now say that, hey, I want to find a supplier in Europe, we don't have the capabilities. And this is something that we also see in the next years to to rebuild. You should think about them labour rates. Eastern Europe is nowadays at par with regions of China. So there is no reason for labour rates to kind of go to China wages. But currently for first for some of the products. And we just look at the components we just don't have the capability to supply. So to produce screens, for example. It's it's hard in Europe. And this is something we have we also need to do not only to find the supplier, but kind of them talking to agencies, but also making sure that that we build these these capabilities.Tom Raftery:
Interesting, because we're seeing it does a huge uptick in demand now for things like electric vehicles. I saw the the sales in Norway in September or something like 60 percent for purely electric vehicles, 60 percent of new vehicle sales. And so we're seeing a shift to building battery plants in Europe rather than sourcing them from Asia.Knut Alicke:
Exactly. And this is a very interesting, very interesting trend. It's also hopefully we will then also kind of build these plans and and build these batteries in a more environment friendly setup. And it's gets quite interesting if you if you look at what what Tesla is now building next to Berlin. Right. So it's a it's a huge site. And it's not only that the site, which is also the way they they they believe they want to be faster than than anyone. And the knowledge about them, about batteries is clearly core to be to be successful. And, you know, also from a supply chain point of view. All right. So the batteries are dangerous goods. So you're also not necessarily want to to send them around the world. So if it's kind of sure. In the region, that makes sense.Tom Raftery:
You mentioned that there's an increase in the importance of planning for supply chains as well. Is that something that is going to be done on premise or on cloud or is it a you know, depends on the company kind of situation?Knut Alicke:
It's a very good question. I think at the end, it depends a bit on the on the company situation. I would I would add one dimension to this. And this is kind of how how central we can do planning. And this is some. And then I come to the cloud. It's quite interesting to see that also due to Covid, people are not thinking about if we working from home is it's okay. Why don't we combine our planning functions in a kind of a shared service centre? It might even be a virtual shared service centre here. Clearly, cloud is important. This this church shared service centre has the benefit of we don't need to have under critical planning functions. Right. So every production line has a planner or one point five planner. And there is no replacement. So this is something where we have Teeley economies of scale that we are not under critical. We can share experience. And this is what we would see more and more in the future to kind of combine planning. And this is true for forecasting, for SNOP, for inventory correction, production planning, supply planning, all the planning functions. I see that there is some. There's clearly the idea of of having planning in the in the cloud makes makes a ton of sentence for for a couple of reasons. It's it's much easier to implement. So planning projects are normally endless projects because everyone wants to have every single N exactly. Fits to the to their current process. And here that's just not possible in. So here kind of let's take the standard. And if there's anything that is super specific, then you find a solution, but it's due. We can then also benefit clearly from experience from from other people, which I see as a huge benefit. So we will see update process is also much more often. Right. Not kind of once per year, but it's much more often. And ideally, if this is true, that it's more standardised and we have more updates and learn from others. Ideally, this is then leading to a larger supplanting community. Maybe we have a SAP' something like standard operating model, which in manufacturing we have with the Toyota production system that not everyone that is a blessing. We don't have to write. The score model tried to be, but it's not yet so implemented. But maybe with this we can have a standard operating model that is continuously improved. So this would be a pretty cool vision for the next couple of years.Tom Raftery:
Okay. We are past a 20 minute mark Knut. Is there anything we've not talked about that you wish we had any points we've not brought up that you think it's important for people to be aware of?Knut Alicke:
I think we covered, we covered a lot of topics, maybe one one of my favourite topics, I always stress is even though supply chain managers now are boosted because of Covid, there is still the challenge that often Supply-Chain managers, like all of us, love their numbers and their algorithms. And with this, they not necessarily speak the language of for example, the board or of the adjacent functions. So I always encourage supply chain people to to improve their their communication and their storytelling and even invest into a budget for Supply-Chain marketing to make sure that, hey, this is the message is well understood. Supply-Chain is very important. It's kind of making the difference over happy customer and not happy customer. And it needs to be integrated. Silos do not work. Let's work together and then make the supply chain better.Tom Raftery:
Nice, nice, nice. So if people want to know more about keynote are about planning or about McKinsey or about the surveys you talked about are about the stuff we talked about on the podcast today, where would you have me direct them.Knut Alicke:
So to learn more about me, check my LinkedIn profile. I'm pretty active on LinkedIn, on the topics we talked about today, we we have some articles in published on McKinsey I will share the link.Tom Raftery:
And then this report of the McKinsey Global Institute. I will also share the link. And you also find it on McKinsey. Very rich, very data rich, very insightful. So we'll be super to check this out.Tom Raftery:
OK. And of course, we should also reiterate that we are both speaking at this conference on Tuesday, next to October the 6th, the SAP Supply Chain Resilience Conference. It's the EMEA North SAP event. So it's morning time CEST, but you know, it's online, so anyone can register and go to it from anywhere now I guess so, see you all there. In the meantime Knut, thank you very much for coming on the show today. It's been a pleasure talking to you and learning all about your surveys and the reports and everything.Knut Alicke:
Thanks. Thanks a lot. Tom, thanks a lot for having me.Tom Raftery:
OK. 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 dot com slash digital supply chain or simply drop me an email to Tom Dot Raftery at SAP dot com. If you like to show, please don't forget to subscribe to it on your podcast application of choice to get new episodes as soon as they're published. Also, please don't forget to rate and review the podcast. It does help new people to find the show. Thanks. Catch you all next time.