00:00:07 Introduction and background of Bram Desmet.
00:01:37 Overview of the supply chain triangle concept.
00:04:00 Joannes’ initial thoughts on the supply chain triangle.
00:06:43 Challenges faced in balancing the supply chain triangle.
00:07:53 The conflict between sales and operations in managing the triangle.
00:09:08 Investor’s perspective and its impact on the supply chain triangle.
00:10:21 Balancing economic drivers with supply chain optimization.
00:12:30 Finding balance between service, cash, and cost using supply chain tools.
00:14:36 Engaging stakeholders and overcoming challenges in understanding supply chain concepts.
00:16:01 The impact of marketing investments on inventory allocation and supply chain.
00:17:12 The use of return on capital employed as an operational metric and its role in strategic decision-making.
00:18:38 The importance of seeing supply chain as strategic, rather than purely operational.
00:20:15 How integrating economic drivers can lead to better supply chain decisions.
00:23:41 Bram’s recommendation for supply chain practitioners to read his book and consider the supply chain triangle.
Summary
In this interview, host Kieran Chandler talks with Bram Desmet, a supply chain professor and CEO of Solventure, and Joannes Vermorel, founder of Lokad, about the supply chain triangle, which represents the struggle to balance service, cost, and cash. The experts emphasize a holistic approach to supply chain optimization, considering various economic drivers and conflicting department priorities. The supply chain triangle simplifies complex concepts and promotes collaboration between departments, which is crucial for strategic decision-making. Adopting this perspective can help companies recognize the strategic potential of supply chain management and make more informed decisions.
Extended Summary
In this interview, host Kieran Chandler discusses the concept of the supply chain triangle with Bram Desmet, a professor in supply chain and operations at Vlerick Business School and CEO of Solventure, and Joannes Vermorel, the founder of Lokad, a supply chain optimization software company.
Bram Desmet begins by explaining his background as a professor at Vlerick Business School and his work at Peking University. He then describes his company, Solventure, which implements Sales and Operations Planning (S&OP) in production companies. Desmet has spent over 20 years in the supply chain industry and has developed the concept of the supply chain triangle based on his experience.
The supply chain triangle represents the daily struggle companies face to balance service, cost, and cash. Desmet provides examples of companies making decisions to reduce costs, such as sourcing from the Far East, but not considering the impact on inventory levels due to longer lead times and more challenging quality control. He also discusses how marketing departments often push for an expanded product portfolio, which may not necessarily result in proportional increases in top-line revenue and can lead to a long tail of slow-moving products. This affects average inventory turns and requires more inventory to be held.
Finance departments are concerned with inventory levels because inventory represents cash. In larger companies, hundreds of millions of euros can be tied up in inventory. As a result, finance departments often push for reducing inventory to free up cash, sometimes by lowering safety stocks. However, this can lead to service issues and increased operational firefighting costs. Desmet highlights the difficulty companies face in finding an equilibrium within the supply chain triangle, as pushing on one element often causes issues with the others.
Joannes Vermorel shares his thoughts on the concept, noting that it aligns with his experiences at Lokad. Initially focused on improving forecasting accuracy, Vermorel and his team realized they were fighting the wrong battles. They needed to consider the economic drivers and how they conflicted with each other, rather than solely focusing on accuracy. The supply chain triangle concept reflects the dilemma companies face when trying to optimize their supply chain while balancing multiple, often conflicting, objectives.
The discussion begins with the concept of a “whack-a-mole” situation, where resolving one issue in supply chain optimization leads to another arising. Various factors can impact supply chain management, such as inventory obsolescence, product freshness, and the need for sales and discounts in certain industries. This complexity results in a “trilemma” where companies must balance between service, cash, and cost.
Bram Desmet observes that companies often struggle with this trilemma because different departments have conflicting priorities. Sales departments typically focus on service to drive revenue, while operations departments prioritize cost efficiency. This conflict can lead to significant inventory fluctuations, with finance departments stepping in to control cash flow. Desmet attributes this tension to companies working in silos with strong functional KPIs.
When asked if there will always be a conflict between sales and operations, Joannes Vermorel agrees that the struggle is prevalent. Lokad’s approach to addressing this issue involves balancing economic drivers through predictive optimization technology. Vermorel emphasizes the importance of understanding the payback for each dollar or euro invested in inventory and having all products compete for a company’s cash. The main challenge in this approach is dealing with the complexity of integrating diverse drivers into a single optimization process.
Bram Desmet also highlights the importance of economic drivers in finding the balance between service, cash, and cost. From a tooling perspective, he suggests looking at margins and capital employed, which includes working capital (inventory, receivables, and payables) and investment in fixed assets. A fragmented product portfolio may require more assets and reduce efficiency, while a low-cost player may focus on producing more volume using the same assets. The supply chain triangle concept is valuable because it simplifies the optimization process and can be understood by individuals across different departments.
Throughout the interview, both experts emphasize the need for a holistic approach to supply chain optimization that considers various economic drivers and the competing priorities of different departments. By finding a balance between service, cash, and cost, companies can better manage their supply chains and navigate the complex challenges that arise.
The discussion revolves around the concept of the supply chain triangle and its role in balancing a business’s strategy, as well as the challenges and benefits of adopting this perspective.
Bram Desmet explains that the essence of the supply chain triangle is balancing the interests of various stakeholders, such as sales, operations, and finance. The triangle helps in change management by simplifying complex supply chain concepts and promoting collaboration between different departments.
Joannes Vermorel shares an anecdote highlighting the importance of understanding the strategic implications of supply chain decisions. A large retail network had inventory that served both clients and marketing, and when the costs were quantified and allocated accordingly, it led to better understanding and decision-making within the organization. However, Vermorel also notes that political battles and data issues are common challenges when implementing supply chain optimization.
Bram Desmet believes that the supply chain triangle can help companies realize that supply chain management is a strategic function and a value driver. Currently, many companies are not yet recognizing the full potential of supply chain management and are more focused on mergers, acquisitions, or launching new products.
Joannes Vermorel recounts Lokad’s journey, which started as a tool to automate mundane supply chain decisions. They realized that many decisions made little sense, and the company began to integrate economic drivers to improve decision-making. Vermorel emphasizes that businesses need to embrace these factors to make more informed decisions and avoid costly mistakes.
Bram Desmet advises supply chain practitioners to read his book and actively manage the balance of the supply chain triangle. He envisions a future where supply chain management is an independent function that challenges decisions made by sales, operations, and finance, with a focus on the overall balance and return on capital employed. Desmet encourages supply chain professionals to decide whether they want to take on a more strategic role or focus on operational excellence.
The interview highlights the importance of understanding and implementing the supply chain triangle to optimize business strategies and drive value. Adopting this perspective can help companies recognize the strategic potential of supply chain management and make more informed decisions.
Full Transcript
Kieran Chandler: Hey, finding the equilibrium between costs, service level, and the amount of cash coming in is a constant battle in any modern-day company. This daily struggle is captured in a concept known as the supply chain triangle, which was conceived by today’s guest, Bram Desmet, a professor in supply chain and operations at Vlerick Business School. So, Bram, thanks very much for joining us today, and perhaps you could just tell us a little bit more about your company, Solventure, and also a bit about your background.
Bram Desmet: First of all, thank you for the opportunity to participate in this exciting series of interviews and talks. I’m very honored to talk about myself and the triangle here. My name is Bram Desmet, as you correctly mentioned. For around 10 years, I’m a professor in supply chain and operations at Vlerick Business School. Most of my assignments for Vlerick are abroad; I do most of my teaching and research in statistics and operations at Peking University, which is a highly regarded university in China. For approximately 10 years, I’ve been running Solventure as a company and as the CEO. At Solventure, we implement Sales and Operations planning primarily in production companies. After 10 years with Solventure and 20 years in my career, most of it in supply chain, I came up with the concept of the supply chain triangle, which we will discuss today because, for me, it captures the essence of the struggle I see in many companies. We believe SNOP is one of the processes that can help bring better balance to that famous supply chain triangle.
Kieran Chandler: Ok, brilliant. So perhaps we should just dive straight in then, and perhaps you could give us a brief overview of the supply chain triangle and how that actually works.
Bram Desmet: With pleasure. As I mentioned, after many years in the field and consulting, I discovered that companies struggle with balancing service, costs, and cash. I’ll give a couple of examples. I see that companies start buying in the Far East to reduce costs, but they ignore that because of the longer lead times or the more difficult quality control, the inventory will go up. Marketing people are eager to expand the product portfolio because they believe it will improve service towards the customer and be good for sales revenue. However, if you introduce 20% new products, you risk that the top line is not going up by 20%, so you risk introducing a long tail of more slow-moving products, which means that the average inventory turns go down, or on average, you need more inventory. Finance has become more concerned with inventory because inventory is cash, and if you look at larger companies, you can easily have 100 million or a couple of hundred million euros tied up in inventory. If finance is planning an acquisition, they want to deal with the inventory to free up cash. I’ve also seen supply chain managers trying to free up cash by bluntly lowering safety stocks, but if you lower the safety stocks, the inventory will go down, and you will get service issues. If you have service issues, you get all kinds of operational firefighting costs. So, in the last ten years, I’ve seen that it’s hard for companies to find a good equilibrium in that supply chain triangle.
Kieran Chandler: Ok, great, and we’ll get on to that idea of finding equilibrium a little bit later. As always, we’re joined by Joannes Vermorel. Joannes, what are your initial thoughts on this concept, and how does it fit in with your idea of the Quantitative Supply Chain?
I started with Joannes as the idea, I should look under the Wayback Archive as Lokad, forecasting as a service, you know. And thus, I was pretty much focused initially on improving the accuracy, the percentages of error, and I realized that it took us a few years, you know. To my defense, I was fresh out of university, but we realized that frequently we were just fighting the wrong battles, you know. Improving accuracy is, I mean, yes, in itself, it’s not a bad thing, but if you don’t put it into the picture, all those economic drivers and how they conflict with each other, then basically you end up optimizing the wrong thing and mostly not delivering any added value.
Joannes Vermorel: So, it’s this dilemma that you describe, with three things where you end up with this whack-a-mole situation. You can slap something, and then the other one goes back, just like the game for children where there is always one head that comes up, and you have to whack it. You have maybe three dominant corners, and you have many sub-corners that are maybe smaller, but you have actually plenty of them with extra dimensions that can still hurt you. You can have problems with inventory obsolescence, problems with product freshness if you’re into food, which is not exactly something that your clients don’t like. It’s kind of a violation of the service. Or if you have too much inventory and you’re in fashion, you’re going to do more sales. If you do more sales, you’re kind of getting your clients used to buying at a discount, so that becomes a struggle for the next season to sell at full price. So, it’s another angle of the service. This concept is quite frequently present, and we are struggling with our clients very frequently. It’s literally the main problem.
Kieran Chandler: Okay, so Joannes mentioned a really interesting word, which was the idea of a trilemma, so you’ve got three sort of decisions that you have to balance between. Bram, what were you observing in the industry, and how did you see people reacting towards that trilemma?
Bram Desmet: My first result or conclusion was that companies really struggle, and then I started questioning why companies struggle with balancing the triangle. What I’ve discovered is that in a lot of organizations, people in sales are primarily driven by service because service is driving the top-line and the sales revenue and the growth. So, you could say that salespeople are primarily putting that top side of the triangle. I’ve seen that operations people are primarily driven by cost efficiency and, in a sense, are primarily putting the cost side of the triangle. In some companies, that’s the eternal debate, and it seems like an eternal debate between sales and operations. It’s like they are both pulling a rope, and as a result, I do see that inventories may make huge swings. So, I see companies which finish the year end with 100 million of inventory, and then three months later, they are at 135, which is a 35% increase. It’s 35 million, which needs to be financed by somebody.
Then, finance steps in and says, no, we need to play this game with less inventory and lower inventories. So, finance is primarily driving the cash aspect, and when you bring in the cash aspect, that’s when you really close the triangle, and when you close the triangle, you get tension. My understanding is that the tension in the triangle, or the pressure in the triangle, is due to the fact that a lot of companies are still working in silos and still
Kieran Chandler: We still have strong functional KPIs, and that brought me to another question that somebody once asked me. They said, “Bram, I like the idea of the triangle, but is this not how companies work? Will there always be conflicting objectives between sales and operations? And will different departments not always speak a different language?” And though that’s a fair question because it does seem the dominant mode of operating still today.
Bram Desmet: And then comes an interesting tweak because if you look at the triangle from an investor’s perspective, that’s when it really changes the game. How do we link it to an investor’s perspective? I say, well, if I look at the service side of the corner, service in the end is a driver for top-line growth – sales revenue. If I’m improving my service and nothing happens to the top line, then something is wrong. Then maybe I’m in a difficult market, but as an investor, I’m not only interested in growth or in top-line. I also want to see a margin. Well, if I combine the top line with the cost side of the triangle, then I get to the margin.
Kieran Chandler: Joannes, what were your thoughts on that question then? Do you think there will always be this conflict between sales and operations? And is that a conflict that you’ve ever observed?
Joannes Vermorel: Yes, I’m not going to be a good debater, you know, contradicting you and that, but absolutely. And it’s actually quite interesting, you know, that you’ve done that because Lokad, although it was relatively empirical, in the end, we built a predictive optimization technology where the main point was to pretty much balance together all those economic drivers. What you’re describing is we are getting close to the initial baby steps that Lokad took in this direction to think, “For every extra 1 euro or $1 that I put in inventory, what is the payback?” And then to start thinking of having every single product that I can produce compete for my cash. So a question and then you go back, colloquially, you would say it’s your bangs for your bucks, you know, and you have the most scientific term which is something like return on capital expenditure. I believe, but fundamentally, it’s this key idea. And where I would say, where it was a long journey for Lokad was to have a technology where we can integrate so much diversity in terms of drivers into one optimization because people say it’s better if software is super modular. And I would say, yes, it’s true, but when you’re trying to do end-to-end supply chain optimization, in the end, you need to bring all those factors integrated into one single numerical recipe. And it’s not, you know, you can’t just split that into subproblems just because you really want some kind of numerical optimization to balance out all those forces. So it needs to have something that connects all those forces, and then you end up with something where the main challenge becomes how do you deal, software-wise, with all this complexity?
Kieran Chandler: Bram, Joannes mentioned it there, this idea of economic drivers. When it comes to the supply chain triangle, what is it that you’re trying to optimize? How would you find that balance between service, cash, and cost?
Bram Desmet: From a tooling perspective, we can try to model that balance, and we can look at what are the dollars invested in inventory and what are the margins that are coming out as a result. And what would that be for existing products and what would that potentially be for new
Kieran Chandler: In any case, looking at two sides of the equation, you need to look at margins and you need to look at what is the capital employed or the capital invested in capital employed. On the one hand, this is the working capital, so that is inventory, receivables, payables, and that’s also your investment in fixed assets. So, also, if I have a very fragmented product portfolio, most probably I will need more assets to be able to produce them. If I’m a low-cost player, I don’t want to have a wide variety of products because it’s killing my efficiency. So typically, I will produce more volume on the same assets or try to use my assets more intensively. So it’s always about looking at margins. That’s why I came up with that triangle concept because it’s simple enough that everybody understands.
Bram Desmet: So, explaining supply chain to salespeople can be hard because only if they hear the word “supply chain,” they start sweating. And for me, the essence of supply chain is balancing that triangle. That’s something that everybody can relate to. It’s also something that they experience as their daily struggle and getting them on board in a kind of a change journey and making them understand what supply chain is about in non-technical terms so that at least they are willing to make their contribution, for instance, in forecasting or in a product portfolio decision. That’s where I hope that this triangle can really deliver value for also any customers Lokad, for instance, would be working with today.
Kieran Chandler: Yeah, I mean, Joannes, you probably agree with that one. From a strategical perspective, it’s very hard to get all of the key stakeholders on board if there’s a lot of concepts they don’t fundamentally understand.
Joannes Vermorel: Yes, or sometimes they are not super incentivized to understand them as well. Sometimes they understand it very well, but you know, just a simple anecdote: So, with one prospect we were moving forward a few years ago, imagine it’s a large retail network, and in the stores, inventory serves two purposes. One is to serve the client so when somebody walks into the store, they will find what they want. But there was also the fact that there was the merchandising angle, which was the store has to be full so that it’s very appealing, and people like the brand and like to come back. But when we started to quantify the fact that for every euro that there was in the store, it could either belong to supply chain, fundamentally there to serve clients, or to marketing because the stock was there but mostly for marketing purposes. And thus they were making an investment that was competing with the money they were spending, let’s say on TV ads. Suddenly, when you start putting those quantitative tools in place, if marketing just realized that you’re going to push back to them 50 million euros worth of inventory and tell them well, this inventory is not really allocated because of supply chain, it’s a marketing investment that competes with your other marketing investments. Suddenly, you know, it’s not actually super technical, but you might have super strong incentive to not understand that very clearly because you just don’t want to have all this money being pushed back, all those investments being pushed back to your budget. So actually, at Lokad, it’s probably this sort of political battles is actually the second reason why we lose clients at the pilot stage. The first one is because data is a mess, and we never manage to extract all the basic data that we would need. That’s the first root cause for failure in those initiatives. But the second one, just
Kieran Chandler: Is it the aftermath of trying to bring together all people with, I would say, an end-to-end financialization of the supply chain? And Bram, what would you say your experiences are? I mean, is it easy to prove tangible benefits if you’re using this idea of the supply chain triangle? Does that make it easier for people to become on board with maybe a new quantitative approach?
Bram Desmet: I think today, the triangle is at a stage where we use it to do change management, really on the top level in the organization. We are not that far, and I’ve not seen any organization which is using return on capital employed as an operational metric. I do see companies who use it more on a strategic level for instance if they do strategic investments like what will it do to our return on capital employed. So, I think today it’s helping to have a different kind of debate and to create the required change in alignment in metrics, to make sure that companies adopt, for instance, more powerful supply chain solutions which then can actually help them drive that. But there’s still a lot of work to be done even there.
One of my personal missions in life is to make sure that supply chain is not seen as something operational, but supply chain is seen as something strategic and contributing to the business value. So, you could almost say that today, with the triangle, we are addressing the senior management and we have good chats there. But with the current implementations, we are doing a lot of it is again, let’s say, on the nitty-gritty details and connecting the two is still a challenge. But that’s what we made our mission off, so to speak.
I’m also sure that once companies really see that connection and make that connection, they will understand that supply chain is most probably the most overlooked value driver. But we are not yet there. Companies still think it’s still much more popular to create value by buying another company or by expanding into a new regional market or by launching a major new R&D program and a major new product, where most of the value is basically within the alignment that can be done within that triangle. So most of the value can be unlocked by supply chain solutions, but there’s still a way to go to make decision-makers in organizations, and certainly if it’s not supply chain people, fully understand and fully realize.
Kieran Chandler: Joannes, will you start wrapping things up? Would you agree with that? Would you say companies are ready to see supply chain as a much more strategic part of their business?
Joannes Vermorel: I don’t know. What I do know is that it’s very funny because we ended up at the same point, but through a completely different journey. Actually, we started with the idea of generating mundane supply chain decisions automatically, all of them. So, we were fully operational from day one in terms of the spirit of what we wanted to do. The funny thing was, we realized with our clients that many decisions were nonsense, not actually because the forecast was bad. Sometimes there were problems with forecasting and statistics, but most of the time, the very bad decisions were just because we were missing an angle, and sometimes it’s a fairly simple but brutal angle.
For example, in aerospace, you buy a part for an aircraft, a repairable part that is going to last for three decades. So it’s a part that has a lifetime of thirty years for an aircraft that in five years will not be allowed to fly in North America or Europe. So basically, you buy a part, and you know that this part will only be used for just a few years, and so it’s a very bad strategic
Kieran Chandler: Strategic investment is essential for any business to survive. But, what happens when you realize that some aspects of your business are generating nonsense decisions? Joannes, can you tell us more about your experience at Lokad and how you dealt with this issue?
Joannes Vermorel: Sure, Kieran. At Lokad, we started to realize that some aspects of our business were generating nonsense decisions. We were struggling with this problem for four years, and it was becoming more challenging every day. We were generating decisions like, how much should we produce? How much should we buy for our suppliers? Where should we put our stock? Every single SKU was generating thousands of man-hours, which was not making any sense. So, we started to integrate different economic drivers that led us to the problem. We wanted to generate decisions automatically so that people would not waste time dealing with nonsense decisions.
Bram Desmet: I completely agree with Joannes. The first step in identifying your own supply chain triangles is to understand the consequences of the triangle, such as the KPIs. When it comes to inventory, everyone has an influence, so every function should be responsible. But, the problem is that if everyone is responsible, nobody seems to be responsible. Therefore, we need a function that actively manages the balance in the triangle. Supply chain needs to be independent from sales, operations, and finance. It should be in the center of the triangle actively balancing and challenging the organization. It should continuously challenge decisions made on each of the corners in the light of the overall balance and the return on capital employed.
Kieran Chandler: So, Bram, can you tell us what’s the first step that supply chain practitioners should take if they want to identify their own supply chain triangles and ultimately see supply chain as a key part of their business’s strategy?
Bram Desmet: Well, it’s an open door, Kieran. Of course, they need to buy my book, and we will put a link in the description of the video. But in general, the challenge I see coming up for the supply chain community is to actively manage the balance in the triangle. We need to have supply chain in the center of that triangle, actively balancing and challenging the organization. It should challenge decisions made on each of the corners in the light of the overall balance and the return on capital employed. SNOP should be a tactical process, financial forecasting and planning, and budgeting also as a kind of tactical process, and strategic planning as processes.
Kieran Chandler: Thank you, Bram, for your insightful thoughts. That’s all for today. If you agree or disagree, join the debate, drop us a comment below, and don’t forget to check out Bram’s book. Thanks for joining us, and see you in the next episode. Bye for now!
