00:00:07 The importance of defining the term ‘supply chain.’
00:01:34 Difference between the macro perspective and operational perspective of supply chain.
00:03:46 Critiquing Wikipedia’s definition of supply chain and its shortcomings.
00:05:02 Comparing the definition of supply chain with the study of physics.
00:07:32 Emphasizing the need for a clearer definition of supply chain as a discipline.
00:10:10 The impact of consultants and biases on supply chain knowledge.
00:13:15 A better definition of supply chain: the mastery of optionality when facing variability.
00:13:47 The concept of optionality.
00:15:30 The importance of mastering optionality in supply chain decisions.
00:18:43 The impact of a company’s definition of supply chain on team dynamics and synergy.
00:21:10 How innovative companies have evolved their supply chain management.
00:23:00 Traditional companies’ supply chain directors and their limitations.
00:24:19 Predicting the disappearance of certain types of supply chain divisions in the future.
Summary
In the interview, Kieran Chandler and Joannes Vermorel discuss supply chain definitions and their evolving nature. Vermorel emphasizes the importance of clear definitions and mastering optionality when facing variability. He highlights that different skills are required for various aspects of supply chain management, as seen in companies like Zalando. Vermorel predicts that traditional supply chain divisions, which handle mundane operations and produce forecasts without executing decisions, will disappear in the next two decades. Companies will need to specialize in different aspects of supply chain management, separating operational tasks from decision-making tasks to focus on optionality while addressing operational issues.
Extended Summary
In this interview, Kieran Chandler and Joannes Vermorel, founder of Lokad, discuss the concept of supply chain and its growing prominence in media and business. Vermorel emphasizes the importance of having a clear definition and vocabulary to facilitate understanding and progress in the field, as well as to help organize large and complex companies.
When supply chain is mentioned in the media, it is often used as a broad term, sometimes interchangeably with “ecosystem.” For instance, supply chain problems with toilet paper or dependency on China for electronics could be rephrased as issues within the respective ecosystems. This macroeconomic perspective can be interesting, but Vermorel argues that it is less useful for individual companies, who usually cannot control or influence larger economic factors.
When talking about a director of supply chain for a specific company, the focus narrows to that company’s suppliers and clients, as well as its position within the larger network. Vermorel believes that this operational perspective is more important for individual companies than the macro perspective.
The interview moves on to discuss the Wikipedia definition of supply chain, which states that it is a system of organizations, people, activities, information, and resources involved in supplying a product or service to a consumer. Supply chain activities involve transforming natural resources, raw materials, and components into a finished product delivered to the end customer.
Vermorel finds this definition unsatisfactory, as it misses the point and is not particularly helpful. He believes that the problem with this definition is that it confuses the concept of a chain with the field of expertise and interest. Vermorel suggests that the Wikipedia definition is not an isolated issue, as many supply chain literature sources provide similar definitions.
Vermorel points out that the definitions of “supply chain” and “supply chain management” are often confusing, and he offers insights on how to better understand these concepts.
Vermorel begins by critiquing the common definition of supply chain, which tends to focus on the people, processes, devices, and tools involved from raw materials to finished goods. He argues that this definition is problematic as it conflates the subject of interest with the thing itself. He draws an analogy with physics, explaining that the study of physics is not about managing enormous amounts of mass, but rather about uncovering the fundamental principles governing interactions at a fundamental level in matter. Similarly, supply chain should not be understood as all the elements involved, but rather the study of the underlying principles governing these elements.
He then addresses the difference between supply chain and supply chain management, noting that their definitions are quite similar. Vermorel believes this is due to the history of the field, where consultants, rather than academics, have driven the evolution of these concepts. This is because consultants interact with large companies and can sell their theories and services to them. Consequently, the field has a bias towards knowledge that is marketable to managers.
Vermorel also highlights how this consultant-driven history can create biases in the field. For instance, there is a bias towards theories that appeal to upper management, as opposed to more abstract concepts that might be more difficult to sell. This focus on sellable knowledge may not necessarily be bad, but it is important to be aware of these biases when considering the development of supply chain theory and practice.
When asked to provide a better definition for supply chain, Vermorel suggests that it should be understood as a company-wide concept. However, the interview ends before he can provide a more complete definition.
They touch on the importance of mastering optionality when facing variability in supply chains, as well as the skills and mindset needed within supply chain divisions to ensure synergetic effects and efficient operations.
Vermorel explains that optionality refers to the various choices available to a company in managing its supply chain, such as adjusting stock levels, moving stock around, or changing prices. Companies have limited flexibility in aspects like infrastructure, branding, and location, which can be difficult or time-consuming to change. However, they can benefit from the rapid exercise of options that are more adaptable and have lower capital involvement.
Mastering optionality involves both understanding and nurturing the options available to a company. Vermorel emphasizes that companies should strive for a wide range of options to better manage fluctuations in the market, their own operations, and other unpredictable factors. This includes external variability, such as fluctuating commodity prices, and internal variability, such as varying lead times or production issues.
The ability to create and exercise options allows companies to cope with these uncertainties without becoming cornered by market shifts or internal issues. For example, maintaining a large safety stock can help serve an unexpected surge in demand. Vermorel argues that mastering optionality and dealing with variability is at the core of supply chain management.
From a company’s perspective, adopting the concept of optionality can lead to a more consistent and synergetic approach within the supply chain division. This approach can help identify the right combination of skills and mindsets for optimal performance. For example, dealing with variability requires analytical and quantitative skills for accurate forecasting, whereas managing logistics may require a different set of skills.
Vermorel suggests that following this definition can help companies determine which ideas and practices are beneficial and which are not. Placing planning and logistics under the same supply chain umbrella might not yield the best results, as different skill sets are needed for each function.
The interview explores the importance of mastering optionality when facing variability in supply chains, emphasizing the need for a wide range of adaptable options that can be exercised rapidly. Adopting this mindset can help companies build a more synergetic and efficient supply chain division with the appropriate combination of skills and perspectives.
They discussed the challenges in defining supply chain management and its evolving nature. Vermorel emphasizes the differences in skills required for various aspects of supply chain management, such as managing truck drivers versus producing accurate forecasts. He highlights companies like Zalando, which are ahead of their peers, consolidating inventory optimization and pricing into one division.
Looking ahead, Vermorel expects traditional supply chain divisions, which handle mundane operations and produce forecasts without executing decisions, to disappear in the next two decades. He believes that companies will need to specialize in different aspects of supply chain management and separate the operational tasks from decision-making tasks. This separation would allow companies to focus on mastering optionality in the face of variability while still addressing important operational issues.
Full Transcript
Kieran Chandler: Today we’re going to go back to basics and unpick exactly what is meant by the term supply chain. So, Joannes, it sounds like a fairly academic kind of subject. Is there anything to be really gained by defining what is supply chain?
Joannes Vermorel: Yes, clarifying terms is an important element of progress in general, including technological progress. Usually, until you have the proper vocabulary to even describe the universe, it becomes very difficult to even reason about things. For example, until physics clarified the notion of force, there were tons of things that were nearly unthinkable. It was very hard to think about simple things like gravity before you had anything that was like force, and ultimately it turned out that gravity is seemingly not a force. But I digress.
For supply chain, it’s a topic that can be very fuzzy and broad. So when people speak of supply chain excellence or they want to improve their supply chain, what are we even talking about? How do we even know whether we are in the right direction? And I’m not talking of KPIs; I’m talking of conceptually, are we even in the area of the supply chain field or are we even doing something else? I mean, it’s obviously important to have a sharp definition and sharp concepts to structure your company, and supply chain is one of them.
Kieran Chandler: When supply chain was used in the media over the last couple of months, it was used as a very broad term, and whereas when we discuss supply chain in terms of a company, it’s often much more narrow-focused. So, are we even talking about the same things here?
Joannes Vermorel: Not really. I mean, when you hear in the media about a problem with toilet paper, it’s a supply chain thing. So, basically, they wanted to say there was a lot of stockouts. That was the first part, and it was a more elaborate way to say we had tons of stockouts. Using the term supply chain makes you look smarter.
If you can also say the supply chain involves all the companies that are interconnected to end up delivering a certain set of products, then basically the term supply chain can be interchanged with ecosystem. So, from the media perspective, you could use “we have a problem in supply chain” to mean “we are too dependent on China for electronics.” You could actually rephrase this sentence by just saying, “we have a problem: the ecosystem of consumer electronics is in China.” That would be pretty much the same sentence from the media perspective. There is no nuance and certainty between the two.
So, I would say that’s typically the macro perspective, the macroeconomic perspective, where you look at networks of companies. And this perspective is interesting mostly from an academic standpoint.
Kieran Chandler: Could you provide us with an overview of supply chain management?
Joannes Vermorel: From an operational perspective, unless you’re a super gigantic company that can shape the world economy around you, the perspective of one company is usually moot. It’s like the interest rate of the central bank; you can think about it, but you can’t really do anything about it. Thus, this macro perspective is not of much interest. When people say they’re the director of supply chain, they’re not the director of the supply chain of consumer electronics in China. Instead, they’re the director of the supply chain of one company that is making one specific component and that has suppliers and clients in between plenty of other companies.
Kieran Chandler: Could you give us the definition of the supply chain from your perspective?
Joannes Vermorel: The textbook definition of supply chain that you can find on Wikipedia and in most supply chain literature is almost entirely missing the point. I think it’s not worth much. There are a series of problems with this definition. First, there is confusion with the field of expertise and the objects themselves involved. To clarify, if I make an analogy with physics, physics is not about all there is in the universe. Instead, it’s about discovering the fundamental principles that govern all the interactions you can find at a fundamental level in matter.
Kieran Chandler: What is the problem with the current definition?
Joannes Vermorel: The problem with the current definition is that it misses the fundamental interactions involved in the supply chain. The definition provided on Wikipedia is accurate, but it’s still garbage. It’s not just one page on Wikipedia; most supply chain literature provides a definition along similar lines. However, from my perspective, it’s not worth much.
Kieran Chandler: Can you define supply chain for us?
Joannes Vermorel: It’s the study of fundamental interactions. One of the problems with the definition that goes like “it’s all the people, processes, devices, and tools that goes from the raw materials to the finished good” is that you end up thinking that supply chain is like all the things that have just been listed. But supply chain is not manufacturing; it doesn’t include things like mythology, human psychology, or designing and producing trucks.
Kieran Chandler: So you think the definition is too broad?
Joannes Vermorel: Yes, if you read this definition, you would think that the director of supply chain would be pretty much the CEO. But that’s not usually the case. Supply chain management involves the movement and storage of raw materials, work in process inventory, and finished goods, as well as end-to-end order fulfillment from point of origin to point of consumption.
Kieran Chandler: And how is supply chain management different from supply chain?
Joannes Vermorel: The distinction between supply chain and supply chain management is the consequence of how history is being made in this field. Most of the history of supply chain is actually written by consultants. If you have a new, better, fancy theory of supply chain, you can sell it to many companies. And the only way to learn about the supply chain is to interact with many large companies, which is why consultants play a big role.
Kieran Chandler: So you think that consultants have a bias in the way they define supply chain?
Joannes Vermorel: Yes, there is a certain bias because the books that have historically influenced the field of supply chain were written by consultants. But they are limited by their relatively short interactions with companies.
Kieran Chandler: I would say there’s a mechanical bias in the way this knowledge is generated. One bias is that if you generate knowledge and you have uncovered something of genuine interest, you want to be able to sell it to your clients, and who are your clients? They are managers. So, I would say the primary difference between supply chain and supply chain management is a matter of branding the knowledge itself because if you brand it as supply chain management, you can directly make it more sellable to your clients as a consultant.
Joannes Vermorel: And obviously, because knowledge is relayed by other consultants, even if you’re a successful consultant, there will be others that will read your theories and start to promote them so that they can sell consulting services on their own, et cetera. And again, I’m not saying that these behaviors are bad; they’re just fine. But it means that you just have to be aware of certain types of biases. So, I would say you end up with a bias toward selling to the upper management, and thus you tend to have a bias toward what makes sense to a supply chain director rather than someone at the bottom of the pyramid. And you have to be aware that because of this bias, it’s usually tough to sell something more abstract, just because it’s not directly aligned with a certain path to sell consulting services.
Kieran Chandler: So we’ve spoken about a lot of the problems between the definition of supply chain and the definition of supply chain management. In your opinion then, what would be a better definition of a supply chain?
Joannes Vermorel: A better definition would be company-wide, concerning the flow of physical goods, and the mastery of optionality when facing variability. The very short version would be the mastery of optionality when facing variability.
Kieran Chandler: What do you mean by optionality here?
Joannes Vermorel: Let’s unpack that a bit. Optionality is all the options that are available to you. For example, you have infrastructure like plants, warehouses, and trucks that you can’t change. You’re kind of stuck with those things for maybe a decade or sometimes more. Your locations throughout the world are also not things that you can change easily. You’re stuck with those for better or worse for long periods of time. But there are lots of things that you can change at any point in time. Your stock levels, for example. You can decide at any point in time that you want to buy more or less, or move stock around. You can change your prices up or down at any point in time. So, what I mean by optionality is all those options that are available to you and that you can change rapidly with minimal capital involved compared to everything else, such as research and development or creating a new product.
Kieran Chandler: Brand that has a very strong value, identifying markets that really fit your products, etc., it’s much more short-term, and those things are always present. So, optionality, and it’s not just the fact that you’re going, and when I said so, optionality is all those options. And when I say mastering the optionality, I mean that you are intentional with regard to those options that are available to you.
Joannes Vermorel: First, you have many options, and you can exercise them or not. That means that you can decide whether to buy or not, and in which quantity. You have options, and you exercise them. I would say part of the mastery is nurturing your options. You want to put yourself in a position where the options available for your company are plentiful. Now, why do you need all those options? That goes to the second part of my sentence, which is mastering optionality when facing variability.
It’s because you spend decades building your brand, doing research and development, accumulating patents, building technologies, and infrastructure. But the market is always fluctuating in unpredictable ways, to a large extent. And even what you do can have uncertain results. If you are a farmer, you have both the uncertainty of the market, whether the price of your commodity will be high or low, and you have your own harvest that can be plentiful or scarce.
Even if you’re a manufacturer, you still have internal variability. Sometimes your lead times vary, or you have a batch that fails due to a quality problem. So, there is typically a lot more variability outside of your company, especially variability that you cannot control. However, variability is also very much present inside your company. Having those options available lets you cope with that, so you’re not completely stuck in a corner.
When there is a spike of demand, you were fortunate enough to have a big safety stock in place that gives you the option to serve this somewhat unexpected surge of demand. You’ve created options on one side to deal with variability that you cannot completely control on the other side. And I would argue that this mastery is very much what supply chain is about.
Kieran Chandler: Let’s look at things from a company’s perspective. Obviously, a definition is just a convention at the end of the day. So why should a company really care about something like this?
Joannes Vermorel: I would argue that if you adopt this definition, then you realize that the sort of skills
Kieran Chandler: So, when you think about supply chain optimization, do you think it’s important to have a consistent mindset and perspective within the supply chain division?
Joannes Vermorel: Yes, having a consistent mindset and perspective in your supply chain division is crucial. This consistency leads to a truly synergetic effect when everything comes together. To master supply chain variability, you need better forecasts, which require analytical and quantitative skills. If you’re building a team to get good results, you’ll want people who are very analytical and quantitatively minded.
Kieran Chandler: So, would you say that combining planning and logistics under the supply chain umbrella might not yield the best results?
Joannes Vermorel: Exactly. Combining planning and logistics under the same umbrella isn’t ideal because the required skills are quite different. For example, managing truck drivers is a tough job and requires a different set of skills compared to someone who is good at statistical analysis. You can be a fantastic statistical analyst but a poor manager of truck drivers, or vice versa. There’s no correlation between the two skill sets. That’s why it’s important to have a definition that gives you a clear distinction between different aspects of the supply chain, ensuring consistent teams with positive internal dynamics for your company.
Kieran Chandler: Looking ahead to the future, do you see the definition of supply chain evolving? What do you expect in the next decade or the next 20 years?
Joannes Vermorel: Interestingly, many companies have already started to perceive this distinction. For example, on LinkedIn, you can see that companies like Zalando have people working on inventory optimization and pricing as part of the same division. They might have a director of inventory optimization and pricing optimization. Although they don’t have the title of supply chain director, their roles are very similar to that of a supply chain director. They are essentially bringing the same aspects under the same umbrella. For a retailer like Zalando, the main options are what you buy, the price at which you sell, and assortment optimization.
Kieran Chandler: So, as a retailer, you have to decide on the assortment, how much to buy, and at which price to sell. This gives a broad picture of the options available at any point in time. Interestingly, some companies that are ahead of their peers are already consolidating all these aspects and may not even have a dedicated supply chain title.
Joannes Vermorel: Yes, that’s correct. If we look at more traditional companies, we usually see supply chain directors leading the Sales and Operations Planning (S&OP) process. They deal with the analytical parts such as forecasting, planning, and scheduling, but they don’t necessarily make the final decisions. This means they produce a forecast but don’t have to follow through; other people have to make the final decisions for them. This can lead to supply chain divisions that are weak because they merely produce numbers that everyone else ignores.
I expect this type of division to pretty much disappear in the next two decades. Similarly, I also expect the supply chain divisions that conflate supply chain management with operations and execution to disappear, as they require different skills.
A typical anti-pattern would be to bring IT and logistics under the umbrella of the supply chain, due to the dependency on enterprise software. However, this can lead to a focus on the mundane details of day-to-day operations, which is not ideal. Going back to my definition of supply chain management, it’s about the mastery of options, not just operational execution.
Kieran Chandler: Optionality when facing viability, you literally don’t have time to even think about the future, make good forecasts, think about your options, and optimize. You’re completely stuck with IT problems and mountains of bugs. You have thousands of open tickets about things that you’ve not fixed and decided not to fix. If you’re in the operations, you’re always stuck with nonsensical super operational problems, such as people being unhappy and going on strike. That might be a French thing, but you can have all sorts of other very mundane things where there’s no air conditioning in the warehouse and it’s just too hot, and people refuse to work for very good reasons. That did happen to Amazon, for example.
Joannes Vermorel: So, it’s not easy to have intellectual bandwidth to think of those problems of mastering the optionality facing viability. In conclusion, 20 years ahead, I believe that survivors of this market, because markets don’t educate, they just filter, will have identified the fact that in order to have a very good supply chain division, you need to have people that specialize on those problems that I’ve just described. These people need to push away other very important problems because they are very important but, due to the fact that they are not the same type of problem and they don’t require the same skills, there’s not really much of a point in putting them under the same umbrella. Obviously, those people still need to talk to each other, but it’s very different skills.
Kieran Chandler: Okay, we’ll have to wrap it up there, but maybe we should try and get that Wikipedia definition changed. So that’s everything for this week. Thanks very much for tuning in, and we’ll see you again in the next episode. Bye for now.
