00:00:07 Discussing supply chain strategy and Dr. John Gattorna’s background.
00:00:47 Importance of a company’s strategy overlapping with its supply chain strategy.
00:03:59 Dynamic alignment concept and understanding customers.
00:05:17 Range of supply chain configurations and the need for supporting subcultures.
00:07:00 Importance of leadership in business and supply chain management.
00:08:56 Understanding customer expectations and designing dynamic supply chains.
00:10:38 The role of technology and automation in supply chain management.
00:12:53 Explosion of complexity in supply chains and the impact of customer understanding.
00:14:57 Useful complexity in product catalogs and supply chain sourcing.
00:16:16 The importance of segmentation in managing supply chain complexity.
00:17:41 Discussion on the importance of approachable strategies in complex situations.
00:19:11 The concept of Ashby’s Law of Requisite Variety and the struggle between complexity and sophistication.
00:21:28 Reducing complexity by understanding customers’ behavior and using outside-in approach.
00:23:00 Identifying four different supply chains to cater to different customer segments.
00:25:26 The fifth segment, innovative solutions, and its challenges in times of crisis.
00:26:45 Analyzing customer behavior and the role of data in understanding patterns.
00:28:10 B2B transactions and the increasing complexity of supply chain management.
00:29:35 Gaming competitors’ pricing strategies and the role of technology in deception.
00:32:17 Capitalistic value in supply chains and the potential for automation.
00:33:49 Managing a two-speed world and the impact of values on human behavior in business.
00:35:51 Understanding customer psychographics and supplier relationships.
00:37:26 Evolution of supply chains and complexity in the last few decades.
00:39:00 The divide and conquer approach leading to siloed software and teams.
00:42:19 Tech-driven bureaucracy and complex processes.
00:43:30 Comparing modern complexity to simpler supply chain management in the past.
00:45:00 Discussing channel strategy in supply chains.
00:46:26 How e-commerce affected supply chains during the pandemic.
00:47:25 Predicting the duration of supply chain issues.
00:48:56 Companies reevaluating their manufacturing locations.
00:52:38 Addressing the challenges of managing mundane tasks in supply chains.
00:54:15 Discussion on capacity management and supply chain volatility.
00:55:25 The role of mental capacity and software limitations in supply chain issues.
00:58:17 Importance of adjusting business practices instead of relying on software changes.
01:00:39 Impact of company culture and organizational design on supply chain efficiency.
01:01:47 Identifying the main bottlenecks in supply chain today, such as company culture and transportation.
01:03:17 Importance of integrating legacy systems into a digital layer.
01:03:51 The new breed of technology personnel focusing on digitalization.
01:04:07 The OODA loop and quicker decision-making for competitive advantage.
01:04:30 Importance of making quick decisions in business operations.
01:04:48 Closing remarks and appreciation for the guest’s insights.
Summary
In an interview with Nicole Zint, Joannes Vermorel, founder of Lokad, and Dr. John Gattorna, a supply chain thought leader, discuss the importance of dynamic alignment, understanding customers, and embracing technology in managing complex supply chains. They highlight the significance of supply chain strategy, agile approaches, and the role of data analysis and machine learning in forecasting. Both experts stress the need to invest in talent and collaboration among stakeholders. The conversation touches on the challenges of navigating supply chains, the shift towards resilience, capacity management, and company culture in adapting to disruptions. Dr. Gattorna emphasizes the role of digitization, integration layers, and quick decision-making for supply chain success.
Extended Summary
In this episode, Nicole Zint interviews Joannes Vermorel, founder of Lokad, and Dr. John Gattorna, a renowned supply chain thought leader. They discuss the importance of aligning a company’s strategy with its supply chain strategy, the role of technology in supply chain optimization, and the need for dynamic alignment.
Dr. Gattorna highlights the significance of supply chain strategy, as it connects the company with its customers. He uses Schneider Electric as an example to demonstrate how supply chain overlaps with other aspects of the company. Dr. Gattorna also points out that companies often misalign their intentions and achievements due to over-reliance on external consultants.
Both experts emphasize the importance of dynamic supply chains, which are responsive to changes in demand and customer needs. Dr. Gattorna suggests adopting a more agile approach to supply chain management, while Vermorel highlights the role of technology, such as data analysis and machine learning, in improving forecasting capabilities.
Dr. Gattorna agrees with Vermorel’s assessment of technology’s impact on supply chain management and stresses the need to invest in talent and develop skills in data analysis and artificial intelligence. Both experts also touch upon the importance of collaboration and information sharing among stakeholders in the supply chain.
Dynamic alignment in supply chains involves understanding customers, developing operational strategies, aligning internal capabilities, and leadership. Gattorna highlights the need to understand customer expectations and adapt to changing behaviors and market conditions. Vermorel discusses the increasing automation in manufacturing and the resulting complexity in supply chains.
The importance of understanding customer behavior for supply chain design and marketing and sales strategies is discussed. Traditional one-size-fits-all approaches to supply chain management are no longer effective, leading to the need for multiple supply chain configurations. Technological advancements have resulted in increased automation, but human involvement in supply chain management remains necessary.
Vermorel criticizes traditional customer segmentation approaches as arbitrary and recommends leveraging technology to develop tailored solutions for each customer and product. In conclusion, the interview emphasizes the importance of dynamic alignment, understanding customers, and embracing technology to manage complex supply chains effectively.
Vermorel highlights the role of automation in increasing market complexity and the challenges of observing customer behavior in e-commerce. Both experts acknowledge the challenges of navigating the complex world of supply chains and emphasize the need for innovative solutions and strategies. The conversation provides valuable insights into technology, data, and customer behavior in supply chain management, despite the discussion being incomplete.
The interview revolves around the relationship between complexity and sophistication, capitalistic investment, and the evolution of supply chains. Dr. Gattorna emphasizes the need for understanding customer values and behavior, which can be complicated, and the importance of strategic sourcing analysis, supplier loyalty, and sustainability. Vermorel brings attention to the accidental complexity that has emerged in supply chains due to misguided approaches and the problem of categorization and siloing. He suggests focusing on creating systems that continuously generate value.
Dr. Gattorna reflects on the shift from a single decision-maker in a company to a more customer-driven approach, which has introduced complexity and requires new ways of thinking about supply chains and customer behavior. The interview emphasizes the need for a better understanding of customers and suppliers and the development of more sophisticated systems to manage modern supply chain complexities.
The conversation covers ongoing disruptions in supply chains and the impact of the pandemic on globalization. Dr. Gattorna predicts an 18-month timeframe for supply chains to settle down and observes a shift towards resilience and local or regional manufacturing. The interview touches on changes in manufacturing locations and the importance of engineering options for agility and resilience.
Both guests agree that capacity management is essential for coping with supply chain volatility. Dr. Gattorna emphasizes the need for capacity at different places in the supply chain, while Vermorel suggests that mental capacity is often the limiting factor. Vermorel also criticizes reliance on traditional software solutions and highlights the success of Amazon’s more organic approach.
The interviewees discuss the importance of company culture and mindset in adapting to supply chain disruptions. Dr. Gattorna notes the struggle to implement new strategies due to internal cultural resistance, while Vermorel emphasizes the need for a more agile and adaptive workforce. The discussion on supply chain bottlenecks includes the importance of company culture, the role of IT in creating silos, and the need for digitization and integration layers. Gattorna emphasizes visibility and quick decision-making, citing the OODA loop as crucial for supply chain success.
The conversation revolves around the main bottlenecks in supply chains, the role of IT and digitalization, and the importance of company culture and decision-making.
Dr. Gattorna emphasizes that he has moved on from discussing traditional IT departments, which he believes are slow and used to working on big projects. Instead, he focuses on digitization and digitalization. He shares an example of helping a Mexican company build a control tower by mapping their data, processes, and identifying disconnects in the system. The goal is to create a digital twin for the entire supply chain, from order receipt to customer delivery and payment, ultimately providing visibility and enabling quick decision-making.
Dr. Gattorna believes that digitization and integration layers are crucial for the future of supply chains, acknowledging that legacy systems like TMS (Transportation Management Systems) and WMS (Warehouse Management Systems) will not be replaced anytime soon. Instead, he suggests feeding them into a digital integration layer that can be mined for data at the transactional level. This allows for real-time monitoring of day-to-day operations and data aggregation for planning and strategic modeling.
The new generation of technology professionals in organizations is starting to understand the importance of digitalization, as it provides visibility without which quick decision-making is impossible. Dr. Gattorna refers to the OODA (Observe, Orient, Decide, Act) loop, a concept developed during the Korean War. He explains that making quicker decisions, even if they are only 80% accurate, can outpace competitors and win over customers.
In summary, the interview highlights the significance of digitalization and integration layers in supply chain optimization. Dr. Gattorna emphasizes the need to adapt to new technology and improve decision-making processes to stay competitive and meet customer expectations.
Full Transcript
Nicole Zint: Welcome to today’s episode, where we will be discussing supply chain strategy, the ITN supply chain, and how in general supply chain development is going. Today, we are very lucky to be joined by Dr. John Gattorna, the author of four supply chain books, whose work has influenced multi-billion dollar national companies. So, John Gattorna, thank you very much for joining us today. Our first question: I really want to ask you about this strategy that you mentioned in one of your books, Dynamic Supply Chain. How important is it that a company’s strategy fully overlaps with its supply chain strategy?
Dr. John Gattorna: The quick answer to that is very important. Of course, the problem with strategy is it means different things to different people, but essentially, a strategy is just a set of intentions that companies have about what they’re going to do in the future. A part of the overall business strategy is the supply chain strategy because it’s the link between the company or the enterprise and its customers.
I think the interesting thing that I’ve realized over the years is that as we redefine supply chain to include more and more things, so my definition of supply chain is really the combination of the front-end finished goods logistics, manufacturing, and back-end procurement and inbound logistics. If you take a company like Schneider Electric, a French company and one of my favorites, two-thirds of the people, or the headcount, in that company are in supply chain. Only commercial, marketing, and sales are outside of that.
The rest of it is defined as being in supply chain, and I think this is important for more companies to realize. If you look at a company like Schneider, a typical manufacturing company, probably 85% of their capital expenditure is in assets that you could say fall within that supply chain definition, like manufacturing locations and distribution centers. About 65% is in operating expenses (OPEX), such as inventory carrying costs and things of that nature.
The more you look at the typical big multinational today, particularly in manufacturing, the supply chain is the business. There’s not much else in the business. I mean, people in marketing and sales would claim that they’re the most important, but effectively, more and more, the supply chain is overlapping completely and becoming a dominant part of the business.
Now, leaving that aside, the big problem over the last 50 years has been that people have been sitting in offices and looking outside at their customers and saying, “Well, this is what we want to do.” They’ve been using people like McKinsey and Boston Consulting Group to help them, God love them. The problem is, it doesn’t matter what you write down on paper as far as your intentions in your strategy, whether it be a supply chain strategy, product strategy, or human resources strategy, which all add up to your business strategy. There’s been a huge misalignment between what people say they’re going to do and what they actually end up doing.
So, back about three or four decades ago, I spent five years in England in the late 70s.
Dr. John Gattorna: In the early 80s, I went to Cranfield for research and worked in consulting. When I came back to Australia, I started developing the concept of dynamic alignment. It’s a business concept, not a supply chain concept. It says that if you want a business to perform well on an ongoing, sustainable basis, there are four things you need to line up.
First, you need to understand your customers. This seems obvious, but 99% of people don’t do the right type of segmentation, so they don’t understand the range of expectations out there.
Secondly, once you’ve understood and performed the special sort of behavioral segmentation which takes into account customers’ expectations for the particular product categories you’re selling, you can then respond with an operational strategy. This seems simple, and any self-respecting consultant will tell you that.
The third level is more interesting. You need to consider the internal business capabilities, the subcultures inside the business, the organization design, the processes, and the KPIs. You need to rearrange these to support and propel the supply chains into the marketplace, like conveyor belts. This goes back to the old idea that one size fits all, which we now know is not true. Customers have different buying behaviors, so there must be a range of different supply chains and configurations.
I’ve spent 30 years figuring this out, working inside companies, and the answer is four plus one. There are four types of supply chain configurations, plus a fifth which you need when you have a major black swan event like we just had. So we have five conveyor belts connected, but they need to be supported with different subcultures and organization designs.
The fourth level is leadership, the single most important component in business today. We see the lack of it in government levels, for example, in Glasgow.
Nicole Zint: We see it in businesses every day, but the point is that we need leadership, like a CEO and a number of direct reports around him, who can look out into the world and take a view of what the marketplace is doing and where it’s shifting. So, if you lock those two endpoints in, the leadership looking at the marketplace, they’re locked in, then you’ve got a good chance of developing appropriate strategies for that sort of marketplace and having a leadership that will shape the cultures to drive those particular strategies into the marketplace.
Dr. John Gattorna: A long way around, everything we do in supply chain is there’s a very fuzzy line now between supply chain and business. I’ll tell you a little bit later about our way of designing supply chains. It’s called “outside-in” and we’ve developed a method of coding customers based on their product categories they’re buying, and then reverse engineering that knowledge back, using that to inform us as to how we design the infrastructure inside our business, where we put our factories, what sort of processes we use, and what sort of technologies we’re going to use. Right now, unfortunately, everyone knows about these variables, but they’re grabbing at them in no particular order, so we end up with a big mess.
Nicole Zint: That’s very interesting. So basically, companies need to look at the customers first and then start creating their strategy based on that, rather than the other way around, sort of inside-out?
Dr. John Gattorna: Yes, and the thing is, of course, when we look at our customers and their expectations, because what we’re interested in understanding is why they want to buy and how they want to buy our product. That information is very important for designing a supply chain that’s going to be able to handle the pressure from customers, but it’s just as important for marketing and sales to design their product and come up with a pricing strategy. It’s all about alignment. The reason we use the word “dynamic” is that what we discovered is these pesky customers, they change their buying behaviors. You know yourself, you might like a brand of clothing or something, and you go into a shop, you’re in a hurry, you’ve got a show to do, they’re not there. You change your buying behavior; you might go upscale to a more expensive piece, or you might go downscale for that particular buy. So, in a sense, what we’ve got is a moving customer base, which is moving around, and in the past, we’ve had a linear central supply chain which, quite frankly, is missing the mark. The only thing that saved us in the post-war period is that growth has outstripped everything else, so all the sins that have been visited upon us in the supply chain have been covered up largely by growth.
Nicole Zint: And you also mentioned how there is no one model to fit them all; we can’t just put all the supply chain under one umbrella.
Joannes Vermorel: Just to bounce back on a few things that Dr. Gattorna introduced, coming from a technology perspective, which is typically my approach, I see a few things that are of interest. First, you were mentioning that supply chain is effectively, you know, now…
Nicole Zint: People-wise, supply chain is dominating many companies.
Dr. John Gattorna: I agree, and what I see when I look at the forces at play is that, as far as manufacturing is concerned, the degree of automation is incredible and still progressing. I know some people in France who are just engineers, and they are responsible for about 10 percent of the national production of carrots. They have one super large, three-kilometer-in-diameter field. Automation has progressed tremendously, even in areas that were not so automated like textiles. It is rapidly progressing, so we have now robotic factories that have been around for a long time and they are also becoming very programmable, capable of doing many things.
Joannes Vermorel: If we look at manufacturing, you can see companies like Michelin, which needed an army of workers in their factories 50 years ago. Now, it has dwindled to almost nothing, with gigantic robots producing the tires and very few people involved. On the selling side, e-commerce is essentially a robot that can sell millions of items with very few people. We end up with a lot of people who are connecting all those robots together, creating the supply chain. Productivity is still progressing, but we still need a truck driver, for example, whose productivity hasn’t changed much in the past 20 years. Maybe with autonomous vehicles, this might change, but we are not there yet.
Dr. John Gattorna: That’s the first element. The second element is that there has been a lack of technology in supply chain management. I still see people going through Excel spreadsheets the same way they were doing 20 years ago. Thus, you end up with one category manager for every 1,000 to 1,500 SKUs, resulting in an army of clerks.
Joannes Vermorel: On another angle, I see the explosion of useful complexity. There is accidental complexity, like compliance, which brings tons of complexity you didn’t ask for and can’t do much about, but you have to deal with it. Many clients we serve have catalogs with easily over one million products. My parents started their careers at Procter & Gamble 40 years ago, and at the time, 200 products nationwide were considered complex for an FMCG company. Nowadays, many FMCG companies have easily 100,000 products.
Due to more agile manufacturing capabilities, they can’t 3D print everything, but they can assemble a variety of items, change sizes, materials, and so on. This results in hundreds of thousands of SKUs. They can also source dynamically, with electronic integration with clients and suppliers. This allows them to potentially swap suppliers, adding to the complexity.
Nicole Zint: So, Joannes, what do you think are some of the key aspects of supply chain optimization?
Joannes Vermorel: Well, one of the things that I see, and this is just an observation, is that understanding your customers is crucial. I come from the software industry, and one of the things that the software industry realized two decades ago, and I believe it was people at Microsoft who coined the term, is that managers suddenly realize that reality has a lot of details. For instance, if you look at a product like Excel, if you wanted to have complete documentation, it’s probably something that is as big as the Encyclopedia Britannica of old. If you wanted to print the whole documentation, it would fill this entire room. It’s absolutely massive. So, you end up with a problem: how do you segment plans? Segmentation is like a super low resolution where you just divide things. When you do segmentation, you introduce categories or classes or whatnot. The question is, are we talking about something that is essential or accidental?
Dr. John Gattorna: I think what Joannes is saying is that essential classification is like the periodic table of the elements in chemistry. The universe tells you that there are 94 distinct elements divided by the number of protons. It is not optional. This is an essential categorization. However, when we start with this kind of segmentation division, it’s very arbitrary. And one of the breakthroughs was saying, “Well, if we have computers, why do we need to have this kind of low resolution, slice and dice?” Why shouldn’t we have something that is kind of unique and tailored for every single client, and maybe every single product and every single unit that we have in stock? This may seem extreme, but the reality is that for example, companies like Amazon, in terms of supply chain decisions, it’s driven down to the customer. You’re not going to see the same products on Amazon if you do a search. It’s not going to be the same ranking depending on who you are. If you ask for a refund, it’s not going to be the same policy depending on who you are. It’s more like what should I do now at the lowest granularity level? Every single action, you can re-ask your question, and you might end up with some kind of automated logic. You can call it intelligence or just smart numerical recipes. It doesn’t matter. Some vendors would call it AI. I’m not a fan, but anyway, it’s a …
Joannes Vermorel: So, you see, by that, and I believe that if I want to reconnect with your strategy and know your customers, I believe that if we live in this world of extreme complexity, the capacity to robotize your smartness, your intelligence, your whatever, to an extreme degree, is through the roof. But it’s useful. It’s not bad.
Nicole Zint: It calls for something, you know, strategy needs to be something that is approachable directly. You can’t say I have the solution. It has to be more meta. It’s something like, how do you make a solution emerge? And that’s where I would conclude, you know, going back to the sort of Microsoft situation with bandwidth. Microsoft, until two decades ago, they had realized that if people wanted to have a strategy, the problem is that the assumption was you understand the problem, but you don’t have the bandwidth, so you can’t understand the problem. The point is, it’s so complex you will never understand it, so you need something that is more like a process that generatively makes the solution emerge, even if as a leader, well, you have no clue about what it will look like.
Joannes Vermorel: You’re absolutely right. It’s a 100% technology type of perspective. And the sad thing in this world, and I’m an engineer myself, so you know, I’ve come through a strong technological background, but many years ago, I realized that when I was looking at supply chains and doing my PhD, etc., that actually supply chains, irrespective of the technology out there, are driven by people. They’re driven by the customers’ behaviors and changing behaviors, and the confusion in the marketplace. It’s driven by suppliers’ expectations when they sell their product to someone, and it’s driven by the people inside the business who run the business and make thousands of decisions every day.
Dr. John Gattorna: There is a principle here, or a law, which will go some way to describing what you’ve just said, and that’s called Ashby’s Law of Requisite Variety. And what Ashby said, and this goes back about 30-40 years, he said, basically, the world is a struggle between complexity and sophistication. Even in our parents’ and grandparents’ time, they struggled with complexity. It wasn’t the sort of complexity we have, but they didn’t have electric light, or something, and they couldn’t just switch on. They had to go out and get generators and have wood stoves and cut the wood and all that. So, down through history, what we see is that complexity gets ahead of sophistication for a while, and life gets hard. And then, along comes some fantastic new thinking, software, whatever, scientific, and the solution or the sophistication gets ahead of the complexity for a while, and life seems to be easier. And then, again, it goes like this.
So, you know, I’ve followed these principles for years, trying to understand where we are and what we can do to reduce complexity. And one of the things that I’ve discovered is, you can do what you like internally. You can apply technology, you can do what the New York journalist talks about, you can go down the technology curve. But, at the end of the day, you’ve got to take a much closer look at your customers. And the fascinating thing about human behavior, this is what I’m getting at, is it’s actually limited. We all think the French are different from the Chinese or Australians, and we’re actually not that different. We’ve got a lot of common traits amongst us, and there’s been a lot of good research done around this.
And yes, country cultures sort of modify things a bit, there’s no question. But just to give you an example, we did some work up in Singapore a few years ago for Changi, the Changi Airport people, who really probably have the best airport in the world. They manage 65 airlines that go through there, all the catering
Nicole Zint: So, how many segments did you identify in your research?
Dr. John Gattorna: They initially thought there were 16 institutional segments, but when we actually went in and did the research using trade-off analysis to study people’s buying behaviors, we found only four. These four segments cut right across all those institutions. So, when you came back into the business, you only had to prepare four different combinations to present to the marketplace.
Nicole Zint: Can you give some examples of these segments?
Dr. John Gattorna: Sure. It doesn’t matter what the product category is or the service, be it buying holiday trips or insurance services. We found that in almost all cases, you could get an 80% fit to the market with four different supply chains. First, you have those who are brand loyal, repeat buyers, and share information. They’re not price sensitive and are willing to pay a premium. Second, there’s a large percentage of transactional buyers who go for the lowest price and aren’t interested in brand or relationships.
The third one is the opportunistic buyer who jumps on deals occasionally and doesn’t share data with the supplier. They have unpredictable demands and expect low prices. The fourth segment consists of project market buyers, who purchase large, lumpy tenders like defense work and infrastructure projects. These four segments represent what I call “business as usual.” Identifying the proportions of these four in your target market allows you to get a fairly good fit and remove over and under servicing, which occurs if you’re trying to do a one-size-fits-all approach.
Nicole Zint: Are there any other types of buyers you’ve come across?
Dr. John Gattorna: The fifth one is what we call innovative solutions, but it’s a small part of the marketplace and quite expensive. These buyers might be looking for a solution to a significant problem, like finding a vaccine during a pandemic, or they could be special forces that require expensive maintenance year-round in case of a terrorist attack. This segment also includes innovations aimed at launching new products and being successful in the market.
Nicole Zint: It doesn’t happen very often, and I’m afraid your forecasting techniques wouldn’t be able to handle these situations. So, my approach is, if you at least start off on the ground with three or four configurations that you know work, then if a customer moves up and down, you can still satisfy their needs. What are your thoughts on this?
Dr. John Gattorna: I agree. If a customer moves around between different configurations because they can’t find the product they need, it doesn’t matter if they move around because we’ve pre-configured pathways through our business to satisfy that type of customer. It doesn’t matter whether that customer was there yesterday but here today, as they tend to return because we all tend to flip back to our old habits. We should think about this qualitatively and then consider the digital world where you can start seeing the data, harmonizing it, and identifying patterns. By using a coefficient of variation, you can see fluctuations and patterns that represent different types of customers. You can then start bringing different methodologies to bear, combining research, data, AI, and machine learning to separate the routine from the volatility. This gives you a better chance of managing your market in a real-time visibility way.
Joannes Vermorel: I would like to add my own perspective. I agree with your statement that ultimately it’s about people – inside your company, your customers, and your suppliers. We don’t have Skynet or Terminators. However, there are several things to consider. For example, we serve clients in B2B where the entire process is programmatic. They have APIs, and orders are placed electronically. It’s vast, complex, and done by algorithms on both ends. This also applies to B2C e-commerce, where we want to understand the clients. The reality is that we can’t really observe clients directly. We can do interviews and surveys, but the bottom line is that we can only observe a tiny fraction of them.
Even if we can relate to them, as soon as you start playing with prices, the situation changes. For example, in e-commerce, if you increase prices, there should be fewer customers, and vice versa.
Nicole Zint: So, it depends on the price of my competitors. Okay, I can get the prices of my competitors. Let’s assume that we have Euro products that are very comparable. I’m not going to go into this detail yet, so we have very comparable products to the competition. It might be several of our competitors have prices, and I have prices now.
Joannes Vermorel: Now, what if, and this is not actually some theoretical thing, what if I can actually game my website so that the price that is perceived by my competitors is not the real one, you see? So when, because obviously, competitors are going to use some kind of a robot, so it’s called a scrapper to get the prices. So, the thing is that it’s not a person who takes notes of the price, it’s a robot. And again, you can cheat so that real people see the real price, but the robot that collects the price sees a different one because there is some kind of pricing strategy, and those people apply some kind of logic and rules. If you can reverse engineer what they are kind of doing, then you can take advantage of that to actually get your competitor who has some kind of logic either software or people wear to react the way you would predict, just because you kind of gave them the incorrect input. You messed up with their perception, and literally, you can even mess up with not even that they are, but just directly their perception because if you want to game the IP address, you can take the headquarters or the VPN and even do that. If people actually type the website in, they are going to see something that is not the right thing. You would say, “Oh, it’s kind of weird, but you know what? It’s a game that people play, super fair, super nice.” So where I’m getting at, where I’m getting at is that…
Dr. John Gattorna: I really like your competition with between complexity and sophistication, and circling back to its people, I can’t agree. Now I would say, how as a company can you make sure that when those people who are working for you are doing something for supply chain, how can you make sure that it’s a capitalistic investment? You see, indeed we have all this mess, and there are plenty of games being played. It’s very, very complex, and there are so many exceptions, and here you see I’m just giving on purpose some weird examples. How do we make sure, because what I see and I would like to have your opinion on that, what I see in supply chains right now is that those staff are essentially… You see those extensive two-digit percentages of the companies doing that, they are essentially treated as consumable, you know? They are doing over and over the exact same thing, and my thinking is that how is it really bringing some capitalistic value to companies? It’s basically, if I have an army of people that are doing over and over, and on the manufacturing side, people really understand that. They say, “Okay, if people are doing the same thing over and over, robotize. You know, don’t let people like Charlie Chaplin’s, you know, Modern Times, you have one guy just doing the same movement over and over.” You would say, “No, bring a machine in and deal with that.” So, I don’t know what is your perception on that.
Dr. John Gattorna: I think that the trouble now is that we’ve got a two-speed world, I think we’re facing. We’re facing a world where there’s what I call business as usual volatility that you know, plus or minus 20-
Nicole Zint: So, Joannes, what do you think about pricing strategies and how people react to different prices?
Joannes Vermorel: Definitely, absolutely right, you can run price sensitivity analysis and do these little experiments and put different prices there and see how people react, etc. But at the end of the day, you know, we’re all hardwired with values. The complicated thing about humans is that we have different approaches. We have different values, which drive our behavior. It’s like a hidden iceberg; the values are deeply rooted in us from the age of three or four or five, and we’re 90% hardwired by then. We have a range of different buying behaviors, depending on the product or service category we’re buying. That is the thing that’s confusing marketing people because they look at the psychographic data and put you in a single pigeon hole. Humans are not like that.
Dr. John Gattorna: Yes, and the complicated thing about people is that I have a different value when I’m buying a car. For me, I love BMW, so I don’t care about the price. I like the brand and I like its design. Whereas someone else is buying a car may buy a cheap, you know, Mitsubishi or something. Yet, when I go to buy groceries, my values may be for groceries totally different. So what I’m saying is that we have a range of different buying behaviors, depending on the product category or service category we’re buying.
Nicole Zint: That’s really interesting. So, how does this apply to suppliers, Dr. Gattorna?
Dr. John Gattorna: We have done no heavy thinking about suppliers. If you go to Accenture or people like this, all they do is go and do a strategic sourcing analysis and try to extract a bit of money from what we’re doing. You know, rationalize the number of products, rationalize the number of people you’re selling to. But we should look at our suppliers, work out which ones are loyal that we want to stick with through thick and thin, who can give us our price. Look at the other ones over here who can give us real low, low cost unit value time and time again, but they’re not the people we go to when we want to repeat by because we sold out of some product here, and we want a replenishment in two weeks. We go to a different supplier who’s got capacity and it’s going to charge a sport or you know. And on top of that, we’ve got to start in the day of sustainability. There’s a colleague of mine who started a global um accreditation platform; it’s got 500,000 businesses on it now. And he’s got the ability real-time to tell someone like Schneider Electric that supply that you’re thinking about buying from doesn’t actually have a current ISO 50,000 sustainability or an ESG policy. So why are you buying from him because they’re not in line with the values that you have as a company trying to reduce the environmental emissions?
Joannes Vermorel: Yes, that’s a good point, and the one thing that sort of sums all this up is that we’re dealing with supply chains as socio-technical systems. You know, I think that you’re absolutely right with all the technology side. Our social understanding is much less developed than the technology side, and we’ve got to get a better understanding of how they blend together. I think that’s the challenge.
Nicole Zint: And so this idea that complexity and sophistication they kind of go hand in hand throughout history. How would you say…
Nicole Zint: Supply chain has evolved in the last years or decades. Joannes, what’s your take on this?
Joannes Vermorel: A lot has happened over the last couple of decades, and a very accidental amount of complexity has emerged due to, I would say, misguided divide and conquer approaches. You see, to get back to the points of what was said earlier, we need to understand customers better. What a company does is divide and conquer the problem by saying, “Okay, we are going to segment people who analyze the price, and they are going to have like a pricing elasticity analysis team. Then we are going to say, ‘Oh, loyalty,’ okay, we have like a loyalty team. And then supplier, oh, we are going to divide and conquer and silo it.” And where it’s really bringing fuel onto the fire is software because then those teams, they develop their pile of software, and so we end up with something that is just incredibly complex. Not only do we have teams that look at problems with an incredibly narrow perspective, but we also end up with a super complex piece of software just for that one specific issue.
Dr. John Gattorna: I agree with you, Joannes. Forecasting is the same thing. You can go super far into doing super advanced forecasting, trying to factor in terms of covariates, unemployment, GDP growth, and whatever. And supplier-wise, you can do the same thing. You can go into tons of complexity, have like supplier penalties with tons of super sophisticated rules to try to gain the whole things right.
Joannes Vermorel: Exactly, and what I see is that the typical response to that has been to categorize, and that’s where I was kind of nudging you on this categorization thing and saying, is it essential or accidental? The problem that I see is that very frequently, companies jump on those categorizations which are great to gain understanding, but then the problem is that when people start thinking to go into, okay, now I can actually take those slices that are fairly arbitrary, you know, the limitations are not that crystal clear, there are tons of edge cases, and just say, “I’m going to divide my companies according to that, create software products that are going to reify those boundaries.” So far, they were kind of in the realm of just the mind, but if I decide to have a piece of software that implements that, suddenly I have something that is very real, almost physical, you know, with a piece of software.
Dr. John Gattorna: Yes, and we can argue whether software is physical or not, but you know, you will have a piece of software, a piece of computing hardware doing that, etcetera, etcetera.
Joannes Vermorel: And so, if I go back with the sort of, do we make people do things that are wise capitalistic investments or do we consume time, what I see emerging is that through all those complexities, we end up with some kind of tech-driven bureaucracies, and I say tech-driven because if we start producing software that embodies those boundaries, then those boundaries become more and more real.
Nicole Zint: So, Joannes, can you talk a bit about the current state of supply chain optimization? How complex is it and how does it compare to the past?
Joannes Vermorel: In a bad sense here, where it’s very complex. It is literally tons of made-up processes that are even more complex because there are tons of software in the middle, and you lose this kind of common sense. When my parents started their career practicing gamble, back to your strategic alignment for them, the strategic alignment was kind of obvious. At proclaiming above 40 years ago, marketing was king. So basically, the marketing person was deciding the client. He was negotiating directly with the retail chains. The world was simple. No e-commerce. This person would decide, try to negotiate how much space you would have in the stores. He would decide this. The same person would decide how much we’d spend on TV for the product. They would decide how big the factory would be and directly negotiate with suppliers. So, it would be like a one-man show where the person, for one product against 200 products, would basically decide for the entire thing, and it was fairly consistent as a line as it can be. With this person trying to kind of understand as best as he can, you know, what are my clients for coffee? What are my clients keeping track of everything? Again, very simple. So, you have, like, trying to have an alignment that is as best as the human mind can provide. But now we have moved into this world of complexity, and suddenly we have a lot of friction. And I think if I go circle back, we end up in a situation that is very painful, where companies are spending a lot on all those topics all the time. But I feel that their employees, you know, that are doing things, most of it is completely non-capitalistic. So, it’s like it doesn’t bring value to the game, no. Now again, if you can have something that brings value, but it’s just a one-time shot, then to bring value again, you have to repeat the question. And that’s again suffering. A mindset of the software industry is, can you do something that will keep creating value even if you do nothing for the next three decades? Before, I would say, the software industry people would say, “It’s not possible.” I would say, if you look at it at different angles, you would say, “Why not?” I think you can certainly do that. If you are living in a world, even in today, there’s underlying what we call base load patterns of behavior where people buy the same things every day irrespective. So, you know, in a company like Unilever, you know, in certain products, we’ve shown that 30 to 40 percent of their products have this sort of baseline type of behavior because people are buying it that way. But there’s still another 60 on top of that that’s going up and down in terms of the volatility.
Dr. John Gattorna: I think what you described earlier, though, Joannes, is really what I call channel strategy. Back in the days that you described in Procter & Gamble, where the single person was making all the decisions, they had the power to do it. They had the power in the channel to virtually make those decisions. They weren’t necessarily customer-driven decisions. They were just making judgments on that. And that’s changed. I think the thing that’s changed isn’t it, and it changed in about 2000, going back to your original question, I think, dear Nicole, and that is that the supply chain was
Nicole Zint: So, John, the pandemic has created quite a supply chain disruption. What do you think is the reason behind this and how long will it take to settle down?
Dr. John Gattorna: Last year, consumer buying behavior got out of control and got misaligned with the capability to supply. So, we are short of everything around the world. We’ve got ships jammed in Los Angeles and Shanghai, and containers are all jammed up with nowhere to go. I think we’re living with this for at least the next year, 18 months to settle it down, assuming we don’t have any more serious volatility beyond the kind of volatility we’ve experienced. But the good thing that’s come out of all this stretching of our minds is that people are turning away from so-called globalization, where you go to the furthest ends of the earth to get the cheapest product. People are starting to reconfigure and reset their whole mindset, saying resilience is important. We might have to pay a bit more, but we’ll manufacture some of these things locally or have a manufacturing location in the region.
Joannes Vermorel: I have noticed that some companies have moved their production from Asia to Europe. Has the complexity of supply chains increased with the pandemic?
Dr. John Gattorna: Yes, some companies are doing that, but the very smart companies are actually engineering their options. So, it’s not about either Asia or Europe. For example, textile brands that operate in Europe will manufacture in Italy, Spain, Morocco, Turkey, Poland, Ukraine, and Asia. Suddenly you have a lot more options, and you can even have some extra capacity that you don’t use. If you want to produce cheap, you can have a factory that is only used, say, 60% of the time. If something bad happens, you can almost overnight ramp up production.
Nicole Zint: So, Joannes, when you talk about disruption, what do you see as the main challenge for supply chains?
Joannes Vermorel: Overnight with a lot of planning ahead, so it’s not like, but what I’m saying is that what I see is, again, um, I see this sort of situation where first we are going to have a lot of useful, you know, options on the table, but that will take, again, that will…the complexity will go through the roof compared to what we had before. And, again, it goes back to when you have those sorts of high-level disruption.
Dr. John Gattorna: Um, if I go back to this sort of capitalistic statement, I would say I have no illusion that you can’t have somebody who is going to do work that entirely survives three decades, including things like pandemics. Extra, you know, there are things that are really hard to think that how you can have a super capitalistic contribution against a world that is going to undergo dramatic changes, but there are some ver-
Joannes Vermorel: So, but the thing is, if we look at the percentage of the workforce in those supply chains, most people are dealing with very, very mundane day-to-day things. Yes, there might be people, you know, high up the year, kids that do strategy and that do the macro adjustment, but exactly, what I see is that the overwhelming majority of the workforce is actually doing things that are extremely mundane. And thus, you know, that circles back to, uh, I think, yes, disruption would we see would continue, but the way I see that is that it’s um, it kind of in my way amplified the need to have something where the uh, the mundane is out of the way because you see the problem is that I see that those companies, one of the reasons why they have so much, at least from our clients, they’re so much they’re struggling so much to cope with you know, disruption is that just operating as usual is already keeping everybody busy.
Nicole Zint: So, what you’re saying is that even for businesses where it’s just business as usual, it still takes an army of people to run, and when there is a small disruption, then they don’t even have the bandwidth to cope with it because just dealing with the stuff is already too much.
Dr. John Gattorna: I think that’s right. I think the other word for describing all this is capacity management because if you have enough capacity at different places along the supply chain in your manufacturing locations or in inventory or in labor or in finance, you can pretty much cope with anything. The trouble is capacity carrying capacity actually costs money. It’s inefficient. But if you look at a company like um, like um, Zara, they really changed all the rules, it was fast fashion because I went and saw them and spent some time with them a couple of years ago. Their value is in all their designs and in the speed of their rhythm of their organization, which turns over every three weeks. But the point is they do outsource a lot of mundane stuff to cottage industries to make things. But they do all the design and cutting, but the interesting thing is in their big DC’s, whereas in the past the conventional wisdom was if you don’t have your DC’s 90% full of product, then that’s bad. Well now, they work on a one or two-week cycle. At some point during that three-week cycle, their DC’s, they’re huge, are empty. Why are they empty? Because they’ve got to empty and to get
Nicole Zint: So, we have with us today Joannes Vermorel, the founder of Lokad, a software company that specializes in supply chain optimization, and Dr. John Gattorna, one of the most respected supply chain thought leaders in the world. Joannes, I want to start with you. What do you think is the biggest challenge that companies face when it comes to managing their supply chain capacity?
Joannes Vermorel: Coming in from, you know, from all these locations, etc., to be sorted and then shipped out to the 3,000 stores, so, I think we really have to think about capacity management. People like Musk, I’ve been talking to in Copenhagen, you know, they just ordered six new container ships. Trouble is, they won’t be around for two or three years yet, you know, because the shipyards are full of orders. Where do you create capacity in your supply chain so that you can cope with this volatility? That’s the question.
Dr. John Gattorna: Yes, and just to bounce back because I agree with you with the capacity, but I would give it a completely different twist and spin. If you want my observation, it is that very frequently, the capacity problem is literally a problem, again, I go back to this bandwidth, a capacity in terms of mental capacity to cope with the change. And physics have limits, but very frequently, it’s actually a fairly small limitation. Just to give you an example, we have clients with a surge of e-commerce who obviously had to ramp up their capacity for the sales. But what sort of problem do they face? Is it that they miss square meters, they don’t? Do they miss machining or equipment? They don’t. They have all the equipment that they want to do it. Do they lack manpower? This is Europe, so we are not lacking manpower. We have a healthy buffer of unemployment, so that takes care of that. But the problem was literally the software running the warehouse that could not cope with it. And, by the way, this is not a joke. This is a very major brand, multi-billion, and literally they have a massive plan that has been going on for over two years. And what I see very frequently in terms of capacity is that right now, if you want to move physically goods from one warehouse to another one that is let’s say 50 kilometers down the road with trucks and people physically, it can be done in 48 hours. In terms of organization, it takes two years to kind of reinvent all the stuff it takes to actually have the second one ready and working, to update all the systems.
Joannes Vermorel: Yeah, unfortunately, systems are also something where you say it’s a software problem. And that goes back to, you know, my problem, is that beware of saying that the software should change. Maybe you should have much more an organic thing. If I look at the way Amazon is thinking, it’s that if the way we do things create a software nightmare, then maybe we should change the way we do things so that it doesn’t create a software nightmare. You see, again, that’s a problem of saying, if I go back, you know, to this of things that okay, we have planning, forecasting, blah, blah, blah. Let’s have one software product for all those things, and etc. Then you have integration problems all over the place. You see a warehouse, frankly speaking, in terms, just taking this example, in terms of software, it is very, very simple, managistics, and I.
Nicole Zint: So, Joannes, you mentioned earlier that supply chain optimization is a problem that has already been solved. Can you expand on that?
Joannes Vermorel: I had a lot of admiration for this product, was already doing a very good job 30 years ago, so it’s a solved problem. You know, it’s not only a solved problem, it’s a problem that was solved for a very long time. It was solved with probably 0.1% of the processing power and the computing resources that we have nowadays. So literally, it’s not only a solved problem, it is a solved problem that was sold three decades ago with like 0.1% of the processing power that we’re willing to afford for a modern warehouse. So this is an exceedingly solved problem, and yet we have all those problems.
Joannes Vermorel: When I see this sort of capacity problem again, I see that as, for example, looking at textile companies. Most of them are doing two collections a year, and they are saying we want to move to four collections, but we have a problem of capacity, and everybody is so busy. And then I see other clients of ours that are very smart and aggressive, and they can actually release new garment products almost on a daily basis. No problem. I mean, again for the factories and everything, it’s actually easier to have a little bit of change every single day in your production shift and everything in your flows, as opposed to do those big gaps. But the problem is a limited capacity in terms of the mind of people, and again that goes back to all this workforce that is doing all those white-collar jobs because most of the supply chain is white-collar jobs nowadays.
Nicole Zint: Dr. Gattorna, what do you think of what Joannes just said?
Dr. John Gattorna: I look, you know, you didn’t use the word, but it’s the next biggest problem from trying to understand what customers are telling us is inside the business, trying to get a map of our culture inside our business because, you know, when we hire people, we hire them based on their technical skills and everything else. But some people come in there with a different mindset who are pulling against our strategy. So you get a huge… I tried to work for a big American company. I won’t say the name of it, well, brand, and a hundred-year-old company, and we told them exactly what they need to do in terms of strategy, but they couldn’t get it done because the internal cultural drag inside the business wouldn’t let them do it.
Dr. John Gattorna: Now, people like, if it’s no accident that the best companies in the world, except for a few high-tech companies like Apple and Cisco and people like that that didn’t exist 30 years ago, and you know why? Why that’s an advantage? Because when they started those businesses, Steve Jobs, they had a blank sheet of paper. They didn’t have a hundred years of tradition and company culture to obstruct that drag. Company culture can be a strength and it can be a weakness, and the problem that you’ve implied, you didn’t use the term, but a lot of the problems that you talk about in there and companies not been able to behave fast enough and take advantage of the technology is really down to the organization design, the type of people they’re hiring, the KPIs which are conflicting, all these things, and it just adds up to what Charles Fine called a slow clock speed. Whereas if you look at the companies that are doing well in the apparel business, their clock speed
Nicole Zint: You say it would still be the main bottleneck in the supply chain today between the hands of consumers and the assembly lines. So, where the key problem is? The company culture, is it that we have completely siloed people? Is it the crisis in transportation?
Dr. John Gattorna: Well, I’ve sort of moved on a bit, and I’ve got tired of talking about those things because people’s eyes just glaze over. I’m a great, I don’t talk about IT so much. You know, conventional IT departments are very slow and used to doing big projects. And if you want to change, you’ve got to wait three months. I prefer to talk about digitization or digitalisation. You know, we’ve just done a piece of work for a big company in Mexico and basically helped them build a control tower. And it involved just sitting down and mapping where their data is, where their processes are, what’s not connecting, and building a digital twin between when an order is received, how it’s processed through the business, what happens when it’s dispatched, track and trace right through to the receiver, the customer, and preferably with some contactless point of delivery. And also, payment. So, you know, I’m thinking these days more about digitization and integration layers. I think, Joannes, I’m thinking all the TMS’s and WMS’s and all the legacy systems. We’re not going to get rid of them in my lifetime or anyone’s lifetime. So, what we need to do is to be able to feed them into some sort of digital integration layer that we can then mine for data that the things we want at right down to that transactional level. And we can see things happening real-time for that day-to-day operation. But we can also aggregate the data when we want to use it for planning or even very strategic stuff like modeling, building network models.
Joannes Vermorel: So, but I think the new breed of technology person inside organizations are starting to get this message. The digitalization is the key because without it, we don’t have visibility, and without visibility, we can’t make quick decisions. And the important thing in my view, we were talking about this before you came on your answers is it’s a bit like the OODA loop that during the Korean War, and when the Americans discovered that their planes were being shot down by less superior Chinese planes, and the reason was the Chinese have been trained to make quicker decisions. So observe, orient, observe, decide, and act, the OODA loop. And if you can get information to make a quicker decision, even if it’s an 80% decision, it’s still a quicker decision. You can out-cycle your competitor, and you can win with your customer. That’s what I think is the really big challenge going forward.
Nicole Zint: Dr. Gattorna, I have to say thank you so so much for joining us today. It was indeed, on behalf of Joannes and me, a really interesting discussion. Thank you, guys, for tuning in, and we’ll see you on the next episode of Lokad TV.
