2020 was a year of massive, unprecedented disruption. And now it’s time to prepare for the next phase of disruption: Adjusting to the new normal.
We recently produced a webinar to discuss the domino effect of 2020; where the supply chain broke down, how consumer behaviors shifted, and what the future holds for logistics.
Dr. Yossi Sheffi, Director of MIT Center of Transportation and Logistics and author of The New (Ab)Normal: Reshaping Business and Supply Chain Strategy Beyond Covid-19
Harshad Kanvinde - Leader of Slalom's Global Supply Chain Practice
Moderated by Karl Siebrecht, Co-Founder and CEO at FLEXE
The 60-minute webinar consists of three parts:
- Part 1 - The domino effect of 2020
- Part 2 - Insights on current consumer behaviors
- Part 3 - The future of logistics
The following transcript has been edited for clarity and readability.
McKinsey’s Global Institute ran a survey in mid-2020 around supply chain resiliency. If we think back to May of 2020, where the pandemic was in full swing, there were massive amounts of disruption and uncertainty. Yossi (Dr. Sheffi) wrote at least three books on the topic, and we talked about what the recovery plan was going to look like. Is it V-shaped? Is it U-shaped? And Yossi said it's whack-a-mole. It's going to be up and down.
93% of companies said they are planning to increase their resilience in some way, shape, or form. At the same time, 44%, said they would increase resilience at the expense of at least short-term efficiency.
Take logistics. It's over 8% of the U.S. GDP, a similar number in other economies. For decades, logistics has been managed primarily for efficiency—lean inventory and very efficient interactions with suppliers and distributors. But being efficient has come at the cost of flexibility and agility. This affects inventory levels and the ability to react quickly and adapt to a changing environment. That dynamic has been exacerbated by the pandemic.
We've talked about ways to mitigate disruptions, but there's ongoing uncertainty. For example, are consumers going to demand same-day fulfillment or one-day? And for which products? Which segments are going to value faster, free shipping?
It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.Charles Darwin
We can predict that there will be future disruptions. But more importantly, consumer behavior is continuing to evolve. So how do we manage all of this?
There’s a chapter in Yossi’s book titled “It's About Flexibility.” Yossi quotes Charles Darwin and the quote says, "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change." Yossi goes on to talk about how some of the better companies adapted quickly to the disruption. But the best companies didn’t just respond to what happened. They created a more permanent solution going forward.
What are practical steps that companies can take to build resilience into their supply chains and logistics networks to better manage uncertainty?
Dr. Yossi Sheffi
It’s important to build the infrastructure required for flexibility. Try to find the right balance between owning assets and using somebody else's assets.
Take trucking for example. Companies that have their own trucks can have 1-3 year contracts. Or, they can use the spot and gig markets.
Some companies might say, "We’ll own assets… just in case." That’s fine, but businesses move up and down. You need some assets to cover your bases, but you need the relationships, the software, and the capabilities to put together mini bids if you are in a contract situation. Or go to the spot market. It's all how much you own, what your long-term contracts look like, and what your short-term contracts look like for any asset that you have. It’s important to find a happy place in every part of your network and be able to land on a place that allows you to retreat back your assets if there is no other choice.
But by and large, businesses will go up and down on the day-to-day. And now more than ever, you need to have a “breathing supply chain” that can go up and down with your business. This is very hard to do when you own all of your own assets.
Now more than ever, you need to have a “breathing supply chain” that can go up and down with your business.Dr. Yossi Sheffi Director, MIT Center for Transportation & Logistics
In the next few years, how should businesses plan to optimize technology and infrastructure to keep up with the growth in eCommerce?
Flexibility is a muscle that you need to exercise, regularly. And you need to be purposeful about it. There are two ways to think about it.
One is structural flexibility. Think about the trucks and warehouses and other physical assets that you may need for fulfillment. How can you improve the degrees of freedom there and not own everything but contract in different layers?
Equally important is decision agility. How are you organized internally as an organization? How does decision-making happen? Are you taking too long in making simple decisions and moving ahead? Or is there a mechanism that you have established to take some chances and experiment every now and then?
Both are important. How can you be purposeful and thoughtful to build a mechanism so that you have flexibility no matter the disruption? Today that might be COVID. Tomorrow, it might be something else. No matter what the nature of the disruption is, it’s important to have confidence in your vendor relationships and enough structural flexibility to adapt your supply chain quickly.
Flexibility is a muscle that you need to exercise regularly.Harshad Kanvinde Head of Global Supply Chain Practice, Slalom
One of the big problems that we see is inertia. People have managed their supply chains in a certain way for a long time, and that includes how companies are organized internally. Each functional lead is worried about their own functional matrix. No one is looking at an end-to-end value chain for specific product categories or specific customer segments. But those kinds of initiatives need to be prioritized because you need structural flexibility.
How can companies get into the right mindset to take on the challenge of adding more flexibility to their supply chain strategy?
It's a big topic. It’s about corporate culture that leaders need to cultivate.
Companies can routinely prepare for multiple futures, rather than building on forecasts. It’s about building an entire plan that involves multiple organizations (finance, HR, etc.) to plan for future scenarios. This helps a company move quickly if a scenario actually happens. If these plans are socialized across the organization, then teams can stop and think deterministically.
At the end of the day, stuff can happen. And we don’t know what the next disruption will be. But it’s important to let your team think about multiple futures and give a level of authority to your lowest level organization.
If you think about the front end of eCommerce—websites, shopping carts, catalogs, etc.—20 years ago, the companies that had websites built and designed them themselves. You would either hire developers and build your own website or you would go to an agency / technology firm that could build a custom website. Some of those websites were better than others. But a lot of them had a shared characteristic of not being flexible. They were relatively rigid.
What happened over time is software companies started to build platform aspects of websites that could be modified and made your own. That created a lot more flexibility. And over the last 20 years, companies have been experimenting with their website experience. They’ve been able to test different messaging, different price points, different colors, different picture angles. Everything is tested. Testing, experimenting, and adjusting on the fly is always happening. That is part of the muscle that you've built to optimize your consumer flow.
Contrast that with supply chain or logistics networks. You might decide which transportation company to use, which contracts should be negotiated, or where warehouses should be located. It's completely different.
To develop the flexibility muscle and have a breathing supply chain, it’s important to have a flexible platform that allows for ongoing testing and learning. Because nobody knows exactly what consumers are going to value or demand next year.
To develop the flexibility muscle and have a breathing supply chain, it’s important to have a flexible platform that allows for ongoing testing and learning.Karl Siebrecht Co-founder and CEO, FLEXE
The logistics industry has moved from an asset-first industry (trucks, warehouses, inventory, atoms), that is supported by software, to something different. Thinking back to this idea that “software is eating the world,” by Marc Andreesen of The Wall Street Journal. We’ve heard a lot about the digitization of logistics. We’ve seen FinTech, EdTech, Health Tech become “things.”
Why should the industry move to a “software-first, supported by assets” approach vs. “asset-first, supported by software”? And what can we learn from the other tech sectors?
Logistics tech is a thing. To put the customer first and to deliver orchestration among all of your assets that are available, leads to the digitalization of logistics. Once you move your information out of assets and model it into the digital world, you’re able to move pieces around and make the right decisions, easier. And that is a necessity.
Agility is important. Having agility in infrastructure is one thing, but decision agility is also important in orchestrating effectively. Logistics technology is necessary software. It's happening. And it's going to continue in that direction.
Logistics technology is necessary software. It's happening. And it's going to continue in that direction.Harshad Kanvinde
Good forecasts reduce the need for lots of inventory. If you have standards, you can move a lot faster and optimization reduces costs. Software helps to speed things up and helps mitigate disruption quickly. There are software companies out there that can help predict how disruption will affect your business. Software can tell you if you’re able to build X products and serve X customers, etc.
Physical assets still need to be prepared ahead of time. But software is leading everything.
To close, there’s just fundamental uncertainty here. So it’s important to know what mechanisms you can put in place to best manage disruptions and compete in changing environments.
Thank you, everybody.
We hope you enjoyed the final part of Hindsight is 2020 and the Future of Logistics.
MEET THE PANELISTS:
Dr. Yossi Sheffi - Director, MIT Center for Transportation & Logistics
Dr. Sheffi is an expert in systems optimization, risk analysis, & supply chain management and the author of five award-winning books. He founded LogiCorp, Logistics.com, e-Chemicals, PTCG, and Syncra Systems—which were acquired between 1994-2004.
Don’t miss Dr. Sheffi’s latest book, The New (Ab)Normal: Reshaping Business and Supply Chain Strategy Beyond Covid-19, (October 2020).
Harshad Kanvinde - Head of Global Supply Chain Practice, Slalom
Harshad helps clients in several industry sectors, including CPG, Aerospace, Automotive, and Technology, address their thorniest Supply Chain problems through strategy development, business model innovation, and digital transformation.
Karl Siebrecht - Co-Founder and CEO FLEXE
Karl is a seasoned technology executive with leadership experience in both startups and large, global corporations. His previous roles include the CEO of AdReady, which pioneered adtech, the President of Atlas at aQuantive before its $6B acquisition by Microsoft, and earlier in his career, he was a Manager at Bain & Company in Boston.