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.
Bob: Hello and welcome to today's episode of The Rebound: How to Win in the Era of Dynamic Supply Chains. I'm Bob Trebilcock.
Abe Eshkenazi: I'm Abe Eshkenazi.
Bob: Joining us today is Arun Kochhar. Arun is a partner with Kearney, and he and his colleagues are also frequent contributors to Supply Chain Management Review, the magazine I used to edit. Arun, welcome.
Arun Kochhar: Good afternoon, Bob. Nice to be here.
Bob: We're glad to have you. Arun, I was fascinated by this topic last spring when you and I first talked about it, and I've since heard you present on it. I guess I'm still fascinated. Let's start with a really basic question. As you define it, just what is a dynamic supply chain, and how is it different from how we've traditionally thought of supply chains? In other words, what's changed?
Arun: Yes, Bob, the word dynamic really stems from this idea of an activity that changes very often and several times in an unpredictable manner. That's really what we're seeing in the supply chains today, which is the change is unpredictable and it's happening very fast that cannot be planned for.
Abe: Arun, when we hear a lot of terms and definitions of supply chain, whether it's value chain, there's a variety of different terms for it. Give us a sense of how this is different from a supply chain ecosystem and the idea of a dynamic supply chain. Give me a sense of why this is different from perspective.
Arun: Yes, Abe, the way we define supply chains today is, first of all, more end-to-end than how we have looked at supply chains in the past. What I mean by that is it really starts all the way upstream from your suppliers, supply chains themselves, and in some cases, their suppliers. Then downstream, it goes down to your distributors, your customers, and finally, the consumer. As we think about supply chains, the definition has expanded and it has gone end-to-end across the entire, what we call in often terms, the value chain.
The second thing that has changed is that within the supply chain, there are certain elements such as that we're going to get into in a moment around distribution, manufacturing, and planning. What has happened is that within those verticals, we have now micro supply chains within those, right? As we think about planning, there's demand, there's supply, there's inventory management. We're in a world today where the supply chain has become more end-to-end and there are lots of changes happening at that micro supply chain level.
Bob: Arun, one of the outcomes of these changes is that companies can no longer meet their own supply chain requirements or at least not do it independently. We think back to the famous Ford, I think it was River Rouge plant, where they did everything from, bring in the iron ore to make the steel to the final assembly. Anyway, so why is it that companies can no longer do that, why they're no longer vertically integrated from end to end and can no longer meet their own supply chain requirements independently?
Arun: Yes, it's such a good question, Bob. There's been a lot of conversation about how there has been tremendous amount of disruption that has happened across the supply chain. We are facing one roadblock after the other. It was the pandemic, then it was inflation, then we had geopolitical tensions and those tectonic shifts. What has really happened is that if you think about just a few examples, planning has become almost impossible, right? If you think about the interest rates, how quickly they went up and how now they're starting to come down. No one really predicted such a rapid change.
If you think about product design and innovation, we have more than 80% of consumers that are urging CEOs to tackle sustainability issues, which, again, was not on the radar for CEOs up until three to five years ago or at least not to the degree that it is today. If you think about distribution, we all saw what happened in the ocean markets over the last 24 months, where we had a logjam at the port of LA, and ocean rates went up to $20,000, $30,000 a container coming from China to the US where they then skyrocketed and now, they're down more than 200%.
The point of it all is that no matter how large you are as an organization, it is very hard to both predict and navigate these challenges on your own. That's really what we're seeing as a big change now, where big corporations are realizing they have to tap into their broader ecosystem to handle these supply chain disruptions.
Bob: Hey, Arun, before I turn this over to Abe again, just one follow-up. You mentioned in the list of things geopolitics. That, just like sustainability wasn't, as high on the radar, geopolitics really wasn't. As companies start figuring out how to navigate the political relationships that they now have to navigate, what impact is that having on the ability of companies to meet their supply chain needs?
Arun: It's such a big factor today, Bob, in terms of global corporations thinking about not just their demand in terms of where the demand comes from, but where does the supply come from? It's not really limited to the behemoths of the world in terms of the global economy, such as the United States, China, and Russia. We have countries that are relatively smaller, but still very important players, such as the countries in the Middle East and in Latin America, where because of a wide variety of reasons, it could be relationships between the governments or the stability of the government itself. There is a complete rethink as to where should I have my manufacturing footprint?
Where should I source my products from? Because the consumers can tell where it was made or where it came from. That influences their buying decision. It is by far the top three topics on any CEO's agenda right now, which is what does their geographic footprint look like from a supply chain standpoint?
Abe: Arun, interesting. I want to get into the supply chain as a service. Before we do that, I do want to dig into one of the areas that you're bringing up here, and that is the active management of your supply chain. Is this more than risk management that we're seeing because of the pandemic that you can't sit back, set it, and forget it type strategy?
Arun: Abe, it really is. You're hitting on what I call two sides of the same coin, which is you have the risk management piece and then the other side of that same coin is the ability to navigate whatever comes your way. I call it resiliency or agility, which is you can only predict as much and safeguard yourself against as much risk as your supply chains allow you to, as well as what you can predict. There is a huge amount of unpredictability. Having that agility or resiliency in your supply chain to address and quickly pivot, depending on what situation you face is really what we're talking about also, which is the unknown. How do you deal with the unknown in a small amount of time?
Abe: Really interesting, because obviously, the role of responsibility has expanded significantly for supply chain professionals. Let's dig into that supply chain as a service. How can companies, how does this enable organizations to meet their needs in this new environment that we're all facing today?
Arun: Yes, the way we are thinking about supply chain as a service is actually not very different from some other concepts that we have seen outside of supply chain, such as you think about the subscription models and enterprise software where companies started to work with other companies who would provide software and hardware services. They would not have all of those capability in-house. If you were to extend that concept to supply chain, we're calling this a SCaaS model, which is supply chain as a service model.
Simply speaking, it really extends from one on the one end where you have supply chain expertise within the four walls of a company, which has been the traditional model. On the other hand, you have what we call a supply chain for hire and supply chain as a service where you go ahead and purchase a particular capability because it is available in the marketplace at a lower cost. Quite honestly, that capability doesn't exist within the four walls.
Bob: Arun, you've broken this down into four components of supply chain as a service. Let's go through this to the end, talk about each of those four. I'll kick it off with center of excellence. Walk us through what is a center of excellence.
Arun: Yes, well, center of excellence is on the more initial stages of supply chain as a service model where it's a little bit more traditional. The whole idea of center of excellence is that you have within an organization, an entity, and that could be geographically in one region, but be providing service to several other regions or business units. The point of it is that that center of excellence has certain supply chain expertise and capabilities that the other business units and regions within an organization tap into.
It could be as simple as doing certain types of manufacturing of certain products, and it only happens in one plant or within that center of excellence. Another example would be you would have a certain type of planning capability, and it could be a demand planning or forecasting. For certain types of products or demand patterns, you have that center of excellence team providing that service to other business units. Think about it as a SWOT team that sits within an organization that provides that service to the rest of the organization.
Bob: I wanted to use an example and run it by you and see if this fits in what you're talking about. I did a story with Pratt & Whitney a few years ago when they were getting ready to introduce their new jet engine that had demand that they had not anticipated. They really had to ramp up their manufacturing capabilities and realize that their relationship with their partners was really going to be important.
One of the things they did, I can't recall if they called them centers of excellence, but they had in various regions around the world where they had major suppliers, they had as you described, again, whether they called it center of excellence or not, where they had people from Pratt & Whitney who had particular skills, who were then working with either their parts manufacturers or other areas outside of their supply chain, to bring them up to speed and integrate them within the Pratt & Whitney enterprise to produce this new jet engine. Is that the thing you're talking about?
Arun: Yes, very much so, Bob. That's such a good example. A couple of others that come to my mind are companies such as Kraft Heinz and PepsiCo. They have these hubs. For example, PepsiCo has some digital supply chain hubs in Dallas and Barcelona where they're able to do digital twinning and other types of digital supply chain experiments and build capabilities that can then be scaled up and deployed. Similarly, Kraft Heinz has a global center of excellence in Netherlands and Holland where they're able to provide that expertise to the rest of the business.
The example that you gave is a great one which could apply in manufacturing. Yes, you're exactly right. That would fit under the bill of center of excellence.
Abe: Arun, following up, the second is in the rubric here is traditional outsourcing, which obviously has been a part and parcel of supply chains for decades now. Explain how this fits in supply chain as a service. It's more than just working with your traditional outsource partners.
Arun: That's right, Abe. As you rightly mentioned, outsourcing has existed for several years now. It really became popular in the '70s, '60s, if I'm not mistaken. I might have the year or the decade a bit off. When the whole local cost country sourcing started to come in fashion, it started with several industries such as apparel, where majority of the apparel giants started to move in that direction because of the low cost of labor and relatively lower cost of shipping because you could pack products in a pretty tight cube.
What we're talking about here is very different in the sense that we're talking about outsourcing, as I was mentioning a moment ago, micro supply chains and not those macro supply chains such as manufacturing and distribution. We're talking about within manufacturing or within planning certain elements of your supply chain. Take, for example, what we have seen is that a company like Bacardi has outsourced its management of distribution or freight in North America, but not necessarily the contracts with the freight providers themselves. It's a micro activity within your freight operations that's been outsourced.
A similar example, I would say, is with a company like Mark Anthony Brewing and Mark Anthony Brands, where the Mark Anthony Group actually has built a strategic partnership with a distributor in the United States called Mark Anthony Brewing that provides that contract manufacturing capability, which has equipment that's patented by Mark Anthony Group. They're IP protected, but it's outsourced to a provider and they can only focus on brand development and product innovation. These are very unique partnerships that are a combination of micro supply chains as well as JVs and strategic partnerships.
Bob: Arun, the third component is unique partnerships, which to me also implies partnering with peers. We're hearing more about this. GAP has opened up its distribution centers and transportation providers to other retailers. Is the market, explain A, what it is, but B, is the market ready for this?
Arun: Yes, this is where, Bob, we start to get into the realm of somewhat uncharted territory in the sense that we are starting to get into partnerships that are, in some cases, even shared P&Ls. In some cases, it's joint debt and equity structures and also shared risk by virtue of doing that. A couple of examples, some that have existed for several years now, such as the Coca-Cola ecosystem, where Coca-Cola, the brand owner, is separate from the Coca-Cola bottlers. Not to mention that they have split and combined six to seven times over the last several years.
It's a very unique partnership where the Coca-Cola bottlers don't necessarily bottle products for Coca-Cola's competitors. It's a very strategic partnership. Another one that comes to mind is with Nestle and Red Bull. They have several of these partnerships where it's a very unique strategic partnership that is new. More and more companies are moving in that direction because it distributes the risk while protecting IP and creating an integrated supply chain across the whole value chain that we were talking about.
Abe: Arun, let's get to the fourth point here, and that is what you refer to as supply chain for hire. Give us a sense how this works.
Arun: Yes. This is the one, Abe, where we start to get into the absolutely cutting edge and bleeding edge idea of supply chain as a service. If you think about every element of that extended supply chain that we were talking about, product design through all the way to customer service, you would have almost a stack of supply chain service providers who you could go to on a daily, weekly, monthly basis as and when your needs change. It's really no different than going ahead and trying a new branded shampoo or a toothpaste.
While it might seem provocative, that's really where we're moving towards. You have companies such as Bosch and IDEO who provide product design capabilities that are off the shelf. You also have similar companies, whether it's Jabil, or Flex, Foxconn, to a certain degree that provide manufacturing or contract manufacturing capabilities, not just for products that are well designed and established, but also innovative products. This is where companies like Kylie Cosmetics by Kylie Jenner, as well as Shopify come to mind.
If you think about Kylie Cosmetics for a moment, they don't really have any infrastructure balance sheet per se. It's all a brand-led innovation engine, and they are relying on these value chain providers who manage their end-to-end supply chain. The other piece that's unique about this part, this archetype, is that it makes your speed to market super-fast because now you suddenly have a plug-and-play type of a relationship with supply chain providers. You can change very quickly.
Abe: Arun, before we wrap this up, give me a sense of how an organization starts to take a look at this. Is it a strategy discussion? Is it a competency? Is it collaboration? Where do companies start this discussion using supply chain in a dynamic environment?
Arun: Yes, the way we encourage companies to start to think about this is in really five steps. It all starts with thinking about what capabilities do I have, and where are those gaps in my capabilities in the supply chain? Those gaps could be both in terms of navigating uncertainties as well as in some cases, not being able to deliver on their consumer promise. That really sets the stage for starting to talk about how much value can I unlock if I were to go ahead and have a supply chain as a service model?
Which then steps us into the third stage, which is, well, now let's start to think about how do I approach my supply chain upgrade, and what exactly would that change look like? Then before you actually go ahead to the final step of scaling for your SCaaS model, as we are starting to call it, there's a fourth step which talks about how do I establish a sustainable arrangement. This is an often overlooked step, which is what would the pay-as-a-service model look like? Is there a joint P&L arrangement? Is there a risk-reward relationship?
Then finally, you get to step five, which is scaling with your entire demand. In a nutshell, it starts with verifying capabilities and identifying scope. Number two, starting to think about what value are you going to unlock? Then comes number three around the approach for upgrading our supply chain and where are you going to upgrade it? Number four is what does that sustainable arrangement look like? Finally, number five is scaling it for consumer demand.
Abe: Arun, I can't thank you enough. There's quite a bit to unpack here, and I'm sure we could spend almost an hour on each one of those topics there. I do want to thank you. This is all the time that we have today. A special thanks to our guest Arun from Kearney, and a special thanks to you for joining us today. We hope you'll be back for our next episode. For The Rebound, I'm Abe Eshkenazi.
Bob: I'm Bob Trebilcock.
Abe: All the best, everyone. Thanks.
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.