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Episode 11: Welcome to The New (Ab) Normal

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Bob Trebilcock: Welcome to The Rebound, where we'll explore the issues facing supply chain managers as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management, and Bob Trebilcock, editorial director of Supply Chain Management Review. Remember that Abe and Bob, welcome your comments. Now, to today's episode. Welcome to today's episode of The Rebound: Welcome to the new abnormal, I'm Bob Trebilcock.

Abe Eshkenazi: I'm Abe Eshkenazi.

Bob: Joining us today is Yossi Sheffi. Yossi is the Elisha Gray professor of engineering systems and director of the MIT Center for Transportation and Logistics. He's also the author of five award-winning books on supply chain management, including his new book, The New (Ab)Normal: Reshaping Business and Supply Chain Strategy Beyond COVID-19. Yossi, welcome.

Yossi Sheffi: Thank you very much for having me. Hi, Bob. Hi, Abe.

Bob: We're looking forward to this. There's been a lot of talk over the last seven months about the failure of global supply chains, but what if supply chains performed as designed? What if the perceived failures were the result of sudden and unpredicted changes in behavior and demand? If so, what do supply chain professionals need to do in order to help their companies recover and prepare for the next disruption? What if the abnormal is the new normal? Those are some of the questions posed by Yossi Sheffi in his new book, and what we're going to talk about today, so let's get started. Yossi, just how have supply chains performed over these last seven or eight months?

Yossi: Sure, in order to answer this question, one has to realize there was a huge gap between the media perception and the media headline and reality. In the media, we saw headlines about food shortage and meat shortage and egg shortage and all kinds of shortage. In reality, there was no shortage. Sure, you couldn't get sometimes a specific cut of meat that you wanted, or the specific flavor of granola bar, and maybe the toilet paper that you got was institutional, it's not as soft and nice as the one that you are used to, but really, it's hard to say that there were shortages.

This is actually amazing, because the change-- Take, for example, the food supply, the changes in the food supply were unbelievable. Restaurants, universities, industrial park, all stopped ordering: order went to zero. Supermarkets and home started ordering in spades because people were at home. Now this is very different. There's different quality and different packaging and different messaging and different regulations that apply to the stuff that we buy on the supermarkets. We don't buy it in 50-pound sacks on pallets. We buy it in small packaging: half a pound, one pound of whatever.

In addition, so not only the destination changes, the packaging, the messaging, the regulation, things that you have to print on the packaging, but the type of things that people buy, very little produce, very little fresh stuff. We saw farmers getting rid of milk and then re-ploughing fields, that was actually as a result of people ordering pasta, bread, cans, both comfort foods, and stuff that lives on the shelf for a longer time. By the way, even the headline about farmers re-ploughing their fields and getting rid of milk was not a big deal because it's in reality 30% of the food in the United States is wasted at the consumer level, so 5% of milk spilled is not that much. However, we know that if it bleeds, it leads. A lot of the headlines that we saw were not really looking at everything. The picture of empty shelves in the supermarket were always taken at night because the people who took them didn't realize that if they come in the morning the shelves would be full. They didn't realize the cadence of fulfilling supermarket happens overnight because the trucks leave the warehouse in the evening, they get at night to the supermarket, people are breaking the pallets, putting stuff on the shelf, you come in the morning, the shelves are full.

Pictures of empty shelves at night, of course, make better copy empirically. As a result, I would say that by and large supply chain not only perform as expected, they perform exceptionally well and adjusted very quickly to the situation. There was one area where we really had shortages, and this is PPEs and some medical supplies. This, however, was not because of pharmaceutical companies or CVS or anybody else didn't-- or hospitals didn't do their job. We used to have a national inventory of medical supplies, started during the Clinton administration, was built up substantially during the Bush administration. The Obama administration did not replenish it, used it in several cases, and did not replenish anything, and neither did the Trump administration, so we got to where we got. We had all these headlines that most of them did not reflect realities.

Abe: Yossi, in your books, you wrote a lot about risk management and resiliency. Obviously, these are not new concepts to supply chain professionals. We've operated as you just described a very efficient supply chain system, just-in-time, low cost, rapid delivery systems were the expectations, and supply chains were really effective at delivering those. If we look at the crisis through the lens of risk management and resiliency, what have we learned about supply chains that will make them more resilient, more agile to respond to the types of changes or disruptions that you just described?

Yossi: Thank you, Abe, for the questions. There are several things that you should do ahead of anything. For example, one thing is mapping your supply chain. Mapping is not only knowing where all your plants, and all your manufacturing, all your supplier plants are. It's actually knowing what is made in this plant, whether it's your plant or a supplier plant, and tie it to the bill of material and know which product these parts are used to build and which customers the product go into. If something happened in certain parts of the world, and some suppliers are not able to supply the parts, you know the value at risk because you know what is not going to be built and which customers are not being served.

Of course, during the pandemic, you have to set up an emergency management center, one center that will get all the information, decision-making will take place there. You have to worry about the communication to everybody, to your people, to all your stakeholders. You have to review all your suppliers to make sure what percentage of them, or how much capacity they have, and what are they doing going forward. You have to review all your product and customer and sometimes prioritize. You have to make sure that you conserve cash because we are going into recession at the same time not to put any suppliers at risk.

Many companies reduce the number of SKUs, which happens in every recession, but this time, it happens even stronger. For example, General Mills reduce the number of Progresso Soup from 90 variety to 50 varieties. This, of course, helps to keep the fast movers on the shelves. It also reduces costs because you don't have change over cost. All of these are things that the people have been doing and are doing, and many of them did even better during the current disruption. The one thing that I want to say is that people are talking about the end of just-in-time, that we can talk about it later because I don't see the end of just-in-time.

Bob: Yossi, thanks for that. You just used an example of the reduction of SKUs. One of the things that I noticed when I go to my local grocery store, which used to have 27 different kinds of mustard in three sizes per mustard, and now it's much reduced, I joked that everybody's becoming an Aldi’s. What it says to me is that they're rethinking their supply chain, they're rethinking what they're delivering, they're rethinking what they're stocking. Having gone through this, do we need a different kind of supply chain? If so, what does it look like?

Yossi: Okay, first of all, let me answer on two dimensions. First of all, the reduction of SKU that I mentioned before, it's not something new. It actually happens in every recession. At MIT and elsewhere, we called it the accordion phenomenon. Companies expand when times are good and reduce the number of SKUs when times are not that good. They reduce it, as I said, to keep the shelves full with the fast movers and to cut costs. This is happening as we speak. What is more interesting, or just as interesting, is the call from the media, and it's usually not the supply chain management media and not people who are in supply chain. As an aside, I have to tell you that I cannot even mention how many times I got interviewed for-- during the last several months and the journalists would say, "You know what, until yesterday I was a sports journalist, but they told me I have to write about supply chain. The question looked like this. The writing looked like this." In any case, they were talking with the end of just-in-time. Just in time is not going to end. Just in time is one aspect of the Toyota production system that is too good and brought us too many things. It brought quality, it brought participation of supplier, it brought low cost, it brought low waste. This is not going to go away. The Toyota production system does have an element of using lower inventory. This, by the way, is a quality issue because if you have a lot of inventory, sometimes you don't find problems until it's too late because you have to run a whole set of float parts, for example. In any case, this is what brought the Toyota quality, then everybody is following it now.

You can, however. People are talking about for critical parts, for critical items, or critical parts, you have to run with a lot of emergency inventory. Turns out you can do it. You can run just-in-time with emergency inventory, but two things, two different ways of managing it. Inventory A, it costs money, and B, it leads to low quality if you are using it to module day-to-day problems. A critical inventory just for emergency has to be, A, not be allowed to use day-to-day. It has to be used only with government approval or some other high-level approval. Just like the strategic oil reserves had been managed, that you cannot use them to model a day-to-day price, but you need the president to release them. Second, of course, the government has to pay. Somebody else has to pay because companies cannot be competitive with a lot of large inventory.

Finally, two other points. Again, the media talk about the end of globalization. No, I see more globalization, not less. First of all, globalization induce resilience because if you have all your eggs just in the United States, United States can close. If you have all your-- or any other location, especially when we talk about pandemics, both demand and supply can disappear. You don't want to have all your eggs in one basket. That's one. The second issue of globalization is that now we know that lots of people can work from home. If I have a company in Boston and I have parents or offspring in Kansas city, I can move to Kansas City and work from there. If I can work from Kansas City, I can also work from New Delhi or Buenos Aires or Shenzhen. I see globalization of white color that really spread.

Finally, just one point, people talking about getting out of China. Again, there will be some spread beyond China, especially its companies are using the term China Plus One because in some extra CapEx with capital investment will maybe put outside China, but most companies, complex manufacturing, high-tech aviation, automotive, is not leaving China. They spent decades building complete ecosystems, good suppliers, sub-suppliers, sub-sub-suppliers, and their suppliers. It took them decades to build. The suppliers know what they're doing. You cannot move all this ecosystem outside of China. Now many in the media don't understand it. It's not only the final stage of assembly. You can assemble a final stage of some product in the United States or in Mexico, but when you have all this ecosystem of suppliers, suppliers, suppliers, suppliers, you cannot just move them out of China. Some companies that came to China for low costs have been leaving for a while.

Garment has been moving to Sri Lanka and Bangladesh, but just for the final cutting and sewing because this is the stuff that does not require a lot of expertise, does not require significant capital investment, just a lot of people, usually women, just cutting and sewing to make garments. However, it's interesting that the percent of worldwide export of garments out of China went down significantly from 39% to 30% or so, if I recall the numbers, very similarly, the export of textile out of China went the other way from 31% to 37% because textile is sophisticated manufacturing, requires significant capital investment and significant machinery. Not sure that people are going to leave China anytime soon and certainly I don't see them coming into the United States. The administration, happy talk notwithstanding. I see them mostly moving to other South Asian countries.

Abe: Yossi, those are really fascinating concepts. Let me pivot a little bit on the discussion of resiliency and just-in-time and a little bit of a focus on sustainability. You looked at that in your last book. As we're sitting here today and talking about resiliency and agility and the ability to respond to the disruptions, how do we make sure that sustainability isn't a forgotten aspect of supply chains? When we were rocking about a year ago, a lot of the corporate roundtable and business roundtable, a lot of the organizations started to talk about social responsibility as well as economic sustainability. How do we ensure that as we're exiting this disruption, that sustainability does come back to the forefront in terms of supply chains and our responsibility?

Yossi: Thank you, Abe. That's, of course, a critical question. I actually covered it in my book, but there are several sides to it. On the one hand, in the short term, three to five years, we have a problem. The problem is that as I did studies and showed data in my last book, when people are answering a poll or interview, there's a lot of happy talk. Most people are saying there are seven-- Lots of headlines. 70% of the people are going to pay more for sustainable products. 80% of the people. It's nonsense. When you do actual experiments, not what people are saying, what they're actually doing, how they're choosing the supermarket share, which I did with my students. We got about 5%, 7%, 10%, depending on what product, and that's in Massachusetts, one of the most progressive states in the nation. In Europe, it's a little higher, 11%, 14%. People will choose sustainable products. By the way, only when the difference in price is really small.

Now we're going into a recession. It will really become a luxury good. A sustainable product will become a luxury good. On top of it, we see that the companies are now worried, as your previous questions indicated, they are worried about risk management more, they're worried about resilience more. Companies now the top three issues are revenue, costs, and risk management. Sustainability is dropping below the top concerns. It's a problem.

In addition, we have a lot of issues that happened during COVID like the fact that the countries starting bigger thy neighbor policy, which means, "We will use all the vaccines for our people, and then the rest of the world." The United States, the EU, they're all guilty of that. Not understanding that unless we do everybody, then it's not going to work. The reason it applies to sustainability because COVID and sustainability have a lot of things in common: they're a global problem that requires global cooperation. The fact that countries were looking after themselves rather than after the global issues, my guess, will leave a lot of bad feelings around that are going to make it harder to cooperate later about sustainability.

Let me give you also some of the hopeful news that I also cover in my book. A, while we don't see cooperation among countries, we see a lot of cooperation among scientists and companies working together, helping each other, in getting vaccines to market and getting pharmaceutical to market. Second, we see a lot of money being thrown at the problem. One would hope-- Hopeful issues are the following: A, maybe people realize that we should listen to the scientists. In my book, I cover a lot of warnings that we have about pandemic. I have I think six or seven covers of Time Magazine that talk about the incoming pandemic. Bill Gates had a TedTalk about it.

Maybe we should start listening to the scientists. Same thing about global warming. Maybe we should listen to the scientists, especially we will start seeing already the impacts of global warming. It seems to be not just hypothetical forecast, but things that are happening. Second, we see that if there's a big problem, there's a lot of money to be thrown at it. If we can throw money at it, then we'll find a solution. Third one, I argue in my book and in my blogs and writing, that at the end of the day, the solution is technical. We cannot convince people to do the right thing. We cannot convince people to reduce their standard of living in the name of sustainability. We see already that in the COVID case, the solution was science and engineering, new vaccines, new therapeutic. That's where the money is going.

In global warming, we also see that the-- We see already part of the solution. Renewable costs are coming down very fast. Engineering and R&D development are working. We will need even a bigger solution there in terms of sustainability. We will need technology that will take carbon out of the air. There are many technologies like this developed starving for money. I hope that once the world will realize that when the problem is big, we can throw money at it and solve it. I hope there'll be enough money thrown into all this carbon sequestration and taking carbon off of the earth solution because I don't see any other solution. We have more than half the world living on less than $5 a day. They want to attain a middle-class lifestyle, which means they want cars, and they want to eat meat, and they want to live in concrete-built houses, and so forth and so on. This will be a huge increase in emissions. We have to find a way to allow them to get into the middle class while taking-- not only reducing the rate of growth of emission but taking carbon out of the air. The other technology will do it, and I hope several of the lessons of the COVID disruption can be applied once the first shock of the three, five years is over. I hope the world can turn into doing something real about global warming.

Bob: Yossi, you may have just addressed this last question, but sometimes big disruptions do result in big changes. I remember hearing you at the APICS Conference last year where you talked about sustainability. At the end you were saying, "The opportunity here, despite everything you've just said, is maybe there's a moonshot, or it'll take a moonshot." If you look at the changes as a result of COVID, from your perspective, what's the best opportunity for a moonshot?

Yossi: Okay. First of all, let's talk about some of the changes that will come out of COVID. COVID is-- I think it's a fundamental inflection point, and in the past, such inflection points resulted in big changes. This is one type of disruption that will result in the big changes. People, years from now, the kids will ask them, "How was it during 2020?" If we think about the depression, the depression brought in, actually, the Nazi party and many regulations. World War II brought in NATO and the UN. 2008 brought the idea that massive government help can make a difference. I think that what will happen going forward is, in terms of this type of inflection point, is that more will be expected from governments. This ties back to the money that will have to flow because the money that will have to flow is government money. The type of money, the billions that are needed are not something that companies can do, but in general, more will be expected from government.

By the way, we saw it. Even though Bill Clinton, I think it was the president that says, "The end of big government." Government in the United States kept growing. Regulation just keep growing almost without abatement, but people will expect more from government. By the way, you see it in these elections, you see how much the left is talking about humongous government programs. We will see, of course, much more tech, automation, optimization, communication, robotics, the cloud. There'll be massive changes in education. As I mentioned before, all of this, especially the role of government, will grow and we will expect government to put huge funds into, one, fighting global warming, but there are many other, many, many other challenges: inequality that expose, the politics, the rise of populism, a huge industrial concentration we have to worry about of this tech companies, the fake news in the media. You can't believe anything anymore that you see in the media. The difference between opinion and news doesn't exist anymore. Even people who report the news come with an axe to grind. This is bad for democracy, in general. We have all these issues to tackle and maybe giving such a big-- shaking everybody to the core, like this thing did, will help us start to thinking differently and coming out of this crisis better, but I'm always an optimist.

Bob: [laughs] Well, we're optimists too as well. Thank you for that. That's all the time we have today. I want to thank Yossi Sheffi for joining us. For those of you who are interested, The New (Ab)Normal is available as an ebook and a paperback on amazon.com. Thank you for joining. We hope you'll be back for our next episode, and we look forward to seeing you then. I'm Bob Trebilcock.

Abe: I'm Abe Eshkenazi. Thanks again.

Yossi: Thank you guys very much.

Bob: The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.

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