If Supply Chain Wonks Ruled the World

Although the participants’ viewpoints vary, our board members were united in the understanding that supply chain professionals must play a major role in helping companies not only survive but embrace business volatility.

Before we start, here's who the participants are:

Jim Tompkins, Ph.D., CEO of Tompkins Associates, supply chain consultants;

Tan Miller, director of the global supply chain management program at Rider University;

Alan Will, retired Marine colonel and logistics specialist;

Ron Giuntini, consultant and principal of Giuntini and Co., Inc.

John Hill, director, St Onge Co., supply chain engineering consultants;

Dave Blanchard, MH&L editorial director/associate publisher;

Pat Panchak, group content director of Penton's Manufacturing & Supply Chain Group;

Tom Andel, editor-in-chief, Material Handling & Logistics.

Citing Survey of 600 C-Level Executives

ANDEL: Let’s start by citing a survey of 600 C-level executives that McKinsey & Company did across a range of industries worldwide. Two-thirds of respondents said that supply chain risk has increased over the last three years, and they expect it to increase in the next five years. Some of the specific areas they are concerned about are global competition, complex patterns of customer demand, financial volatility, global markets for labor and talent, exposure to different regulatory requirements and environmental concerns. How do those concerns play out in industrial environments?

TOMPKINS: Supply chain is becoming the major contributor to the strategic path forward for companies. When I began in this field 30-plus years ago distribution was considered a secondary function at best. I would never be in the board room or at C-level. Today I work with the C-level every week. So a lot has changed. In year 2000, executives started seeing supply chain as an opportunity for cost reduction. Then when we got into the great recession, and as it dragged on, they moved from cost reduction to a more profitable growth mindset, and now they have moved from a profitable growth mindset to value creation.

This week I was with two top 50 companies at the C-level, and they were talking adamantly about value creation through the supply chain, so it has become a corporate strategy.

ANDEL: John, is that what you’re seeing in corporate America?

HILL: Three weeks ago in Silicon Valley Hewlett-Packard announced they were going to close a 30,000-person division. Nowhere in that announcement did the word “supply chain” come up except for the fact that that particular division is focused on the supply chain, which I found absolutely astounding. We don’t live in a cocoon any longer. I think we are recognized as an industry, as a set of disciplines that can, indeed, add value to overall corporate growth and profitability. But is it we who sense that, or is it the entire marketplace? I am a little skeptical about that, at least in terms of my interaction with Fortune 1,000 C-level. They are still uncertain and more frightened by the prospects for the global economy, politics, finances, and the like than they are concerned with specific supply chain problems.

Getting back to Hewlett-Packard, they haven’t executed the 30,000 as yet, but the fact that they would even consider that either says they weren’t very successful in developing and promoting their services to corporate America or they don’t see their particular set of offerings as being critical to the future of Hewlett-Packard.

ANDEL: What do we take from that? What’s the lesson?

HILL: That we still have a lot more work to do in terms of supply chain education. For example, as compelling as the value proposition is, I would wager that 50 percent of corporate America has yet to install or deploy automatic data collection technology for gainful purpose.

ANDEL: Tan, is this an economic thing or is it a generational thing? You are educating tomorrow’s supply chain work force. Are they going to be better equipped to deal with these forces than the current people in power?

MILLER: The U.S. has a lot more universities emphasizing a supply chain program today than, say, ten years ago. That means a lot in terms of just the availability of students coming out with a supply chain background. When I was at Pfizer, we would typically hire college graduates, and very rarely did we get a supply chain major. We looked for good students with good technical and analytical skills, and we would teach them supply chain. So despite the fact that supply chain hasn’t reached a zenith in terms of how it is perceived, it is certainly taking on a much more prominent role in the corporation. But we need to bring in more real world experience to our educational system so students coming out can more quickly get into a position where they can contribute.

HILL: I’d agree. We have plenty of people coming out of college today carrying the moniker “supply chain” behind their names, but many of them are having trouble finding jobs.

ANDEL: Ron, you are a numbers guy. Talk a little bit about the economic situation and the pressures CEOs are under. Are they sitting on their wallets and avoiding hiring and making capital investments until better times come?

GIUNTINI: Well, I am always disappointed when I am working with C-level people because when the economy tanks you would hope that they would see it as an opportunity to reengineer their organization. They don’t. Instead they hunker down, and they don’t change their business model. You know, you have opportunities to make some major changes and make some paradigm shifts when things are a little tough. But I have been thrown out of board meetings talking about changes to the multiple business models employed in supply chain management; I am often a threat to the status quo.

ANDEL: They were looking for an easier fix?

GIUNTINI: Well, it’s a lot of work to change a business model, and there are risks involved. Most CEOs have been successful because they followed one specific business model. When you change the elements of a business model, you take risk, and you could fall flat on your face. So most of these guys stay in what they are comfortable with. Logistics is 8 to 10 percent of GDP. So if you make a change that improves supply chain, let’s say 10 percent in the big picture, it is immaterial to the bottom line in regards to process costs. But it could have a major impact on your ability to enter markets. The question becomes, how do you quantify that? It’s like telling someone “you should lose 30 pounds.” Alright, but that’s going to take a change in lifestyle, right? So a lot of people just wait until they get a quicker fix.

BLANCHARD: There seems to be a corporate ambivalence towards supply chain that says, “Why don’t you just stay back there in your little room and run the logistics and let us adults run the show.” Do any of you see anything like that going on?

TOMPKINS: Oh, yeah. Some of the largest retailers in the world really got supply chain, but they were so in love with their success that they continued to ride that same wave, and that wave is now three inches of water. There is not much of a ride left there, and so it gets back to the problem of not changing. If I still did what I got my Ph.D. for I would be serving coffee here.

ANDEL: It sounds like this is one of those problems that will take care of itself, through natural selection. The strongest players will survive.

TOMPKINS: Absolutely, yes. And the smart ape is going to have a chief supply chain hat on.

ANDEL: So supply chain is going to rise in the organization and reside at the C-level?

TOMPKINS: Supply chain is going to drive success. It has moved from an opportunity for cost reduction to an enabler of achieving corporate strategy and thus value creation. I was talking to a chief supply chain officer of a very well respected retailer the other day, and I said, “What are you going to do about Amazon?” He said, “Amazon is not a threat to us.” I got online and typed in his category on Amazon. There were over 100,000 hits. Amazon is carrying more than 100,000 of this guy’s products—and this chief supply chain officer is saying they are not a threat.

MILLER: There are some sharp iconic companies out there that are very cognizant of supply chain. Some decide they don’t need to be a leader in supply chain innovation. Their products are their core business and they don’t want to make the investment necessary to put them right at the top because they don’t think that investment will pay off. As long as they stay in the middle of the pack and their products are terrific and other aspects of marketing are terrific, then they are where they want to be. That incremental investment to get them to the top of the supply chain along with other functional areas is not perceived as a good investment. So it’s not just all ignorance or indifference. That explains the growth of third parties over the last 10, 20, 30 years in the U.S. and worldwide. That’s a strategy too.

ANDEL: We have been talking about supply chain and the economy but there are places where supply chain is literally life and death. Al, that was your world as a logistics specialist in the Marines. You were putting warehouses out in the theater of battle and making sure that the forces were supplied. Can some of that urgency filter into the private sector?

WILL: Just-in-time in the private sector means making sure you have a supply chain that supports it. The military, because of life and death, tends to put more redundancy in its supply chain in terms of the capacity and the contents. In the last 20, 30 years the value of logistics has picked up more. A general once said, “Amateurs talk about tactics, professionals talk about logistics in terms of the leadership.” You have to be able to feed your force. Being life and death, there is a pucker factor there that makes you take it seriously. Some companies think they are very good. They have a great widget, and they market the widget well, so everything will fall into place because they are the only ones that build that widget and market it well. They assume the demand will be there and somehow they will fill it. On the military side, you aren’t going to fight a war without supply chain or logistics. You won’t be able to move the personnel. You won’t be able to synchronize. You won’t know where they are.

Transportation Infrastructure

ANDEL: In the latest State of Logistics Report, Rosalyn Wilson, senior business analyst with Delcan Inc. and president of her own supply chain consulting firm, said, “If you secured trucking services on a transactional basis, you can be assured that sometime soon you will not be able to get a truck.” So you really have to be tied in through contracts with carriers to ensure transportation. Part of it is that nobody wants to sit behind the wheel of a truck for a living.

MILLER: There is some thought that, as the economy comes back, and construction starts to take off, that some of the work force that is currently buffering the transportation industry will slide over to housing and construction, and the driver shortage will get worse.

ANDEL: Jim, your company has a presence in China. Do you see this as putting the U.S. at a severe disadvantage to them? Where are they in developing their infrastructure?

TOMPKINS: China’s infrastructure is nowhere as good as ours, and then it goes downhill from there. You go to India, and they don’t have any infrastructure to speak of. The U.S. infrastructure is aging, certainly, but you always can get a load moved. It is just a matter of cost. It makes sense for us to do some mode shifting. As the cost of one mode becomes higher, then you shift to a more efficient mode. And that is why Warren Buffet bought railroads. This forces companies to take a more professional approach to transportation bidding and establish long-term relationships with quality 3PLs or 4PLs. China is way behind the U.S. in transportation. There is still a lot of funny business going on. There are huge opportunities to improve the supply chain in China especially when we are transitioning from China for export to China for China.

ANDEL: But the U.S. still has critical infrastructure issues to address.

GIUNTINI: In United States, we have dealt with it through technology. In trucking we’ll see more autonomous controls. I was working with the Marine Corps and the Army in putting this technology on trucks, so when you are in a convoy, you have ten trucks, but you only need one driver. Each truck will be linked to another. Maybe that’s a way to deal with the driver shortage in the future. We could have multiple vehicles that are GPS driven.

ANDEL: In addition to roads there’s concern about our ports and their ability to handle bigger ships. The newly expanded Panama Canal will certainly create new opportunities, but the question is, are we ready to take advantage of those opportunities? Many of our ports need to be dredged to accommodate bigger ships.

WILL: Dredging is an issue that is fixable. In Norfolk, we have a 55-foot deep channel, so we can already accommodate those ships and that drives our economic growth there and the infrastructure to move the containers from the port of Norfolk to the Rickenbacker Intermodal Park is now done. So I think we’re going to see more competition among the ports and it’s just a matter of time before those infrastructure issues are repaired.

TOMPKINS: The Panama Canal will substantially reduce the challenge of truck travel and, therefore, the problems with moving containers. From New Orleans, you can hit 33 states coming up the Mississippi and through the tributaries.

ANDEL: Let’s talk about what’s coming into those ports. How is the cost of labor in other countries affecting sourcing strategies on a global basis?

HILL: Sourcing overseas will probably continue for the foreseeable future in the apparel industry. We still cannot meet the labor cost challenge in that industry in this country.

TOMPKINS: You know, the thing that bothers me on this topic is that groups put out numbers that have no foundation in fact, and then the politicians add gasoline to that fire. The reality is that through creative destruction we’ll destroy low paying jobs and create high paying jobs, and that’s what allows the standard of living in an economy to go up. Wages in China are going up, but anyone who says they are going to be on a par in the year 2015 simply doesn’t know China. I don’t know of a single company that outsources solely on labor costs. Higher paying jobs in China will result in some reshoring. That’s why Cambodia, Laos, Indonesia, Malaysia and India are evolving, but where it’s not going is to the United States. You may see some reshoring to Mexico.

GIUNTINI: The United States is still the largest manufacturer in the world. We manufacture four times more than we did in 1960 with the same number of people. China makes up a tiny fraction of our industrial base.

TOMPKINS: According to the Department of Commerce, it is 11.2 percent. That’s nothing, but you talk to most Americans, they think, oh, we are dead. But American productivity is so high in our manufacturing plants, no one can beat us.

Supply Chain Security

ANDEL: Let’s address the security of our supply chains. Is the U.S. at a disadvantage where that’s concerned?

Giuntini: Theft of intellectual property is a big security issue. Look how much U.S. companies lose in fake products on a continuous basis, and some of that is state sponsored. North Korea and Iran know that IP is of the greatest value.

ANDEL: In the United States a bigger danger may be acts of stupidity rather than acts of sabotage. That’s why traceability in the supply chain is so important. The ability to find out what happened and where.

MILLER: The amount of time and dollars spent on security now compared to pre-911 is night and day. The efforts of C-TPAT [the Customs-Trade Partnership Against Terrorism program] have made a big difference. Still, a major portion of your organization is going to be spending a very significant portion of their overall time working on C-TPAT compliance. That’s what it takes to ensure the integrity of your supply chain.

BLANCHARD: That’s what it takes domestically, but for a large part of the world, bribery is a best practice. That’s how you ensure delivery and security. Do you agree?

HILL: I spent some time years ago in Chile with the Ministry of Transport, a group called the Center for Innovation, looking at what they could do to overhaul their entire supply chain infrastructure, including roads, bridges, ports, railroads as well as what they could do to assure overseas customers of the integrity of the products being shipped from Chile to the United States and other parts of the world. They are moving quicker, unfortunately, than the FDA has moved in the last 15 years in this country, although they are still not there.

ANDEL: What are you hearing from clients in the food industry about this issue?

HILL: Well, in the food industry, the leaders and early adopters are moving with or without FDA. They are paying attention to the standards for traceability that have been promulgated thus far, trying to anticipate what may happen eighteen months from now. It is called recall protection.

TOMPKINS: There is a huge marketplace for American products in China. Most of the Chinese people will not put anything in or on their body that is not American. They want American product. They want American standards. Chinese who can now afford it will pay more for the American brand made in a Chinese factory than they will pay for the non American brand made in that same factory. On the more macro level, they have endured over the last couple of years floods and tsunamis and although those have been horrific experiences, the supply chains have pretty much withstood them. So supply chain contingency planning and supply chain awareness is at an all time high. Although the U.S. Government can’t quite get its act together, companies are. They are policing it, and they are building integrity into their supply chains, and that’s a feather in their cap. I am not saying we are done, but I think terrorists trying to use our supply chain would need to know how to invent tsunamis because you can’t get a bigger terrorist attack than that. The Japanese tsunami had a bigger impact than 9/11.

ANDEL: Of course supply chain technology is an enabler of security and productivity, but only if applied correctly. John, you made a comment to me about the naive pursuit of supply chain excellence leading to some pretty disappointing deployments.

Hill: I suggested earlier that at best 50 percent of American corporate entities are using bar coding and related systems properly. Why? Because you cannot deploy bar coding in a vacuum. To the point, I’ve seen a few companies who suddenly got religion and tried to jump into supply chain optimization somewhere in the middle as opposed to starting their initiatives in measured fashion, assessing their infrastructure through a network analysis and using that as a foundation for fine-tuning operations and then deploying new technology and systems. Instead, they intuitively selected locations and modes of transportation and then stumbled forward with clean-up – with disastrous results for overall supply chain performance. The rush to closure sub-optimized the end results and hurt the companies.

The Talent Supply

ANDEL: That leads us into a discussion of the talent challenge, and the need to find and cultivate people who can make best use of technology. Tan, are you seeing the corporate world cooperating with the academic world to bring that about?

MILLER: Most large companies I see have co-op programs. It is actually required in our supply chain programs that students participate. The students can spend six months at a company in the supply chain function doing a particular sort of job, and it’s becoming a standard business practice for companies to offer co-ops and internships. These students can get out there by junior year as an undergrad and contribute. The way to get hired out of college into a supply chain organization is typically to complete a co-op, do a good job, and that leads to an offer. If you haven’t done a co-op or internship with a company, it can be very difficult to even get in the front door.

HILL: Formed in 1951, the College Industry Council on Material Handling Education has more than 20 schools as members, and is funded by the members of MHI to tighten connections between academia, users and suppliers. Some CICMHE members are sounding the death knell for material handling and an increasing number of schools are no longer teaching a full complement of courses in that set of disciplines. Why? Because academicians are not garnering the level of funding for material handling research that they enjoyed 20 years ago. If they are not being funded, they turn their focus to other areas that are. And so, academic attention to the technical side of the material handling component of the supply chain equation is diminishing. High-level concepts are great, but knowing how to execute is equally important in my world.

ANDEL: That leaves it up to companies to train and to educate people on the finer points of material handling practices and technology. But then the challenge is that after a company puts all that money into training and development they can lose that person to a competitor.

TOMPKINS: We need to talk about developing, not development. The moment we think we have trained or developed anybody, including everyone around this table, is the beginning of demise. So companies need to create an environment where people want to grow and stay.

ANDEL: The current generation of job seekers seems to have been branded as job hoppers. They like to go into different areas. Will they say, “I think I will stay here because this place looks like it will offer a good career path for me?”

WILL: Part of that comes down to mentoring, and in the military, as you become more senior and big picture, you need to mentor your subordinates in these issues. This is especially the case in wartime because if you get shot and killed, then the subordinates understand what you are trying to do in the big picture and can continue on.

GIUNTINI: Here is the dilemma with turnover. As we automate more and more processes with modeling, compared to laying out a warehouse 30 years ago, you don’t need four or seven industrial engineers to do that anymore. One person can do it like that, as well as simulation. So in the big picture, we may not need that many supply chain people.

WILL: What we need is trained, entry level personnel. The economic development guys in our area are telling potential distribution companies, hey, we will be able to fill your needs. Baloney. At the academic level they’re working on management skills, but the entry level is where the community college level could fill a gap. Unfortunately they’re falling short. There’s a wonderful opportunity to create regional training centers incorporating community colleges, and combine a tractor trailer driving courses as well. Where material handling is concerned, you have to go out and do it. You need a physical lab to understand how a forklift works.

HILL: MHI’s Technical Continuing Education Program is having some success. MHI developed a variety of training materials and then received a major grant from Don Frazier, one of the industry’s legends, to set up a technical training program at a vo-tech high school in Rock Hill, South Carolina with equipment donated by MHI member companies. Importantly, through the development of solid relationships with industry, Rock Hill has begun to place some of its program graduates with local employers. Indeed, the school has become the go-to resource for employers in the greater Charlotte area.

The program has gone so well that some 14 or 15 secondary and vo-tech schools in other parts of the country are now replicating it. What’s needed, of course, is on-going funding. We must work at the grass roots level and with local employers to build enthusiasm.

ANDEL: John does technology help make up for the poor supply of talent coming into warehousing and distribution?

HILL: Properly deployed, technology could certainly address the deficit in skilled staff. There are still sales people and applications engineers touting technology who don’t know a warehouse from an outhouse. And that diminishes the prospects for rapid growth in automatic identification, automated handling and related information systems. It is critical that suppliers make sure that the people they are putting out front for business development know what they are talking about.

ANDEL: The late Bert Moore told me the pioneers in this industry did almost too good a job setting the stage with standards and we have gotten to a point where the basics that were established have been forgotten due to the advances in technology. People have forgotten about basic label placement. If you don’t put a bar coded label in the right place on a package, it could screw up an automated system.

MILLER: There was an interesting article on GE a couple months ago in the Wall Street Journal about the change in GE in terms of who is eligible to become a CEO or group chairman and they are moving away from requiring experience as a group vice president in three or four different businesses of GE. I can tell you, as an employee, you can feel the difference when you are in a company where fancy PowerPoint presentations and being decisive looking get you promoted versus a company that recognizes and rewards employees who have a lot of knowledge in an area. In the long run, I would argue that lack of functional expertise will come back to bite you.

PANCHAK: I was just talking with a fellow who left GE. The reason he did is you are on a schedule. You have to achieve this and be at this place in two years, and anything extraneous to achieving these leading edge things just sets you back and actually probably pushes you out rather than up.

ANDEL: Let’s conclude with a summary from each of you about where we’re headed, and whether you’re optimistic about that direction.

TOMPKINS: I am extremely optimistic about the role of supply chain in global commerce. There are companies that will get it, and some that won’t. Those that won’t will be gone. And I think the year 2014 we will have more bankruptcies than we have had any time in the history of mankind. Most of those that are going bankrupt are the ones that have not really understood the strategy they are trying to accomplish through supply chain.

ANDEL: So that’s a good thing? A survival of the fittest in 2014?

TOMPKINS: Yes. Look at in the grocery industry. In the year 2000, 66 percent of all groceries in the United States were bought in grocery stores. Last year in 2011 it was only 51 percent. There will be a lot of grocery stores in bankruptcy. Big box retailers too. Wal-Mart has woken up to the challenge because they are scared to death that Amazon could eat their lunch. I would much rather be a pretty good company with a great supply chain than I would want to be a great company with a pretty good supply chain.

HILL: I think we are on the cusp of some exciting refinement of data capture and information technologies that we can’t even define today. This will have a profound impact on the supply chain, not by 2014 perhaps, but by 2024 or 2030. Hopefully, these concepts, tools and technologies will enable us to attract a work force that will really want to work in whatever a warehouse becomes.

MILLER: Ten years ago a really small to moderate size company couldn’t think about doing transportation planning using some commercial package because those packages cost a million dollars or two. Now with software as a service and other technology that’s coming down the road on the IT side, the technology will be more available to a much greater population. This technology will continue to improve as will education on both the corporate and supply sides, so I’m optimistic about the future.”

WILL: I’m optimistic, but my caveat is that the nation better start taking some issues more seriously because we are like a boat on the high end of Niagara Falls about to go over. I am referring to regulations. There is a continual push towards more restrictive regulations that stifle initiative. That, combined with deficit spending, is dangerous. However I am optimistic in terms of what we have to solve, including skills training.

GIUNTINI: I am enthusiastic. There will be some disruptive technologies like 3D printing. Our whole manufacturing base will be impacted. Before they could only use this process to make prototypes. Now they can make things that are product strength. So we may be living in the supply chain revolution, but we won’t know it until someone 50 years from now says we were. So I am very optimistic.

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