Opportunity in Times of Adversity with the SAC Supply Chain Special Interest Group

Patrick Daly:                     Hello, this is Patrick Daly and welcome to Interlinks. Interlinks is a program about connections, international business, supply chains, and globalization, and the effects these developments have had in our life, our work and our travel over recent times.

                                           Today, I’m joined by three colleagues of mine [00:00:30] from the supply chain special interest group of the Society for the Advancement of Consulting. So we have David Ogilvie, principal of David Ogilvie Associates in Brisbane, Australia. Welcome David.

David Ogilvie:                   Patrick, it’s easy for you to say.

Patrick Daly:                     Diane Garcia, principal of Lorraine Consulting, Portland, Oregon, soon to be in Phoenix, Arizona I think. Is that right, Diane?

Diane Garcia:                   That is right. [00:01:00] Yep.

Patrick Daly:                     Okay. And Elizabeth Warren joining us from Los Angeles, California, and she is CEO of Dialed In Consultants. Welcome Elizabeth.

Elizabeth Warre…:         Thank you, Patrick. Good to see everyone.

Patrick Daly:                     I was struck today, we have family phone calls here, so we’re an international family here at home. My wife comes from Spain and she has an uncle who lives in France, who [00:01:30] emigrated to France many, many years ago. And for the last three years, maybe three and a half years, we’ve been trying to get together and we haven’t been able to for one reason or another.

                                           So one year it was family illness and then it was COVID and then it was, well, we have the war now. So we’ve made plans to go to France to see them this summer, but we’re kind of tentative and we’re saying, “Well, hopefully everything will work out and we get to see each [00:02:00] other.” And we were talking to him this evening, the uncle in France, and he was saying just some years ago, you could easily make plans for next year or for the year after, maybe a couple of years out. And it seems that today you can’t make plans even for 10 days in the future. So every plan is tentative at this time.

                                           But it also struck me that when things are so turbulent and so [00:02:30] unstable, there’s always a lot of opportunity. And I think there’s a lot of opportunity in the current situation. And on recent episodes, we’ve spoken a lot about problems and we’ve spoken about the threats and what companies are doing and so on, but what are the opportunities? I see there’s two very big countries are embroiled in this big time. So we have Russia that’s embroiled itself in [00:03:00] a war and we have China that has taken an approach to COVID, the zero COVID approach, that is leading to lockdowns, continuous lockdowns. And even now two years after the start of COVID, we have large parts of the Chinese economy shut down.

                                           I’m interested to know what you think about what opportunities does that present. In terms of your own areas of specialization, [00:03:30] so roughly speaking, Diane, in terms of manufacturing, Lisa, maybe in terms of shipping and ports and logistics and David in terms of technology. If I go to you first, David, and maybe talk about China, which is perhaps closer to where you are in Australia, this approach of China to COVID, what kind of opportunities do you see that opening up [00:04:00] in your part of the world and other parts of the world?

David Ogilvie:                   Well, Patrick, they’ve obviously are no longer the reliable supplier that they have been for a long time. Obviously reliability is very important to all of the manufacturers and distributors in the country. I think the opportunity really sits in the country being able to rebuild our manufacturing capability, bring some of those processes back [00:04:30] home and become a more self-reliant country, so to speak.

                                           I think that’s probably the biggest opportunity that’s available. Obviously that opportunity comes with a significant number of challenges that need to be overcome in order for it to be realized. But I think that’s probably our biggest opportunity.

Patrick Daly:                     So Australia over the years as [00:05:00] a commodities’ producer, do you think there’s been a complacency in Australia to focus on that aspect as against maybe being a manufacturing economy? Or does it still have that manufacturing capability that it’s probably going to need now to recover if it doesn’t have it?

David Ogilvie:                   Well, we don’t have it now. We’ve lost a lot of skills over the time and that started particularly when we lost our own [00:05:30] vehicle manufacturing in the country. But yes, we are basically a big quarry in many respects and we don’t do any value added activities around the commodities that we’ve got. With the markets being so strong at the moment, particularly in grain commodities, those sorts of things, there are lots of companies that are doing very well, a lot of the mining companies are doing well. The wheat growers and so forth are getting good money [00:06:00] for their harvest. I can’t see that changing any time soon because both Russia and Ukraine are big wheat producers and so forth.

                                           So we’re really in a box seat in many ways in Australia. They call us the lucky country for a reason. I think we are extraordinarily fortunate in so many ways, but yes, I do believe that it’s built a complacency to some extent in the manufacturing space. We do have [00:06:30] a lot of work to catch up.

Patrick Daly:                     Okay. Diana then opportunity, so you’re west coast US, which is Pacific rim. So you’re very much looking at Asia across the Pacific Ocean and China now has become, as David highlighted, maybe not as reliable as people used to think it was going to be and going to continue to be. What kind of opportunities do you see arising from [00:07:00] this turbulence and instability?

Diane Garcia:                   Well, I think innovation and continued innovation. I see that, like you were mentioning, we can’t even plan out 10 days I think was the timeframe that you were dealing with. And yeah, we’re seeing the same thing here in the US and with my manufacturing clients trying to plan their operations and rely on labor that perhaps it’s no longer the same. Perhaps [00:07:30] you thought you would have a full crew for the week or the month and plans continuously change.

                                           I think it’s innovating, new ways of doing things, and how do we work with this new landscape that kind of has unfolded very, very quickly in front of us. But I would say that’s probably the biggest opportunity that I’m seeing. And like David mentioned, opportunity to bring manufacturing suppliers closer to customers. So here in North America, [00:08:00] we have lots and lots of customer demand here, so I see opportunity for bringing in supply chains to support that.

Patrick Daly:                     Okay. Does that mean we’ll start to see things that are manufactured in Asia actually being manufactured in the United States, maybe with automation or what?

Diane Garcia:                   I was going to say, I think when you combine that with other actions [00:08:30] here, so it’s not just as simple as saying bring it back. It has to be combined with automation and innovation and new ways of doing things. But yeah, I see that potential and I also see potential for not within the US, but perhaps Mexico, things that are closer and given prices that have increased along the supply chain, it’s starting to make more sense to bring that closer.

Patrick Daly:                     Yeah, it was interesting, I saw an article recently in McKinsey and they were [00:09:00] talking about the apparel supply chain and the possibility of there being a kind of reconfiguration of an apparel supply chain to supply North America, but from Latin America. And they were talking about countries such as Honduras and El Salvador as being places where garment manufacturer might repatriate itself from Asia. So that’s an interesting [00:09:30] development. Have you-

David Ogilvie:                   Those countries need to invest in infrastructure and those sorts of things then Patrick, because that’s generally the biggest hurdle to that happening.

Patrick Daly:                     It’s true. Also I guess the security situation in some of those countries. I know my own son traveled to Central America a couple of years ago and some of the countries are more stable than others. He went from Mexico, [00:10:00] Honduras, El Salvador, Guatemala, Nicaragua, and some of those countries are quite unstable and not particularly safe. I guess that’s another aspect they need to work on

Speaker 5:                        93.9 Dublin South FM.

Patrick Daly:                     You guys in California, what are you seeing in that respect with regard to Latin America and US trade? Is that something that’s [00:10:30] increasing, that business people are looking at more carefully now?

Elizabeth Warre…:         I can’t speak about the Latin American trade market at this time, but you asked about the opportunities and some of the opportunities that I see coming up are developing platforms for data sharing, because that is something that we have struggled with in the supply chain industry is to [00:11:00] find ways to share that data in a way that all the partners trust each other in a way that the different parties are willing to put information out there and not develop their own internal proprietary systems. I think that having a platform developed, it’s going to be long term. We don’t see anything like this [00:11:30] happening immediately, although there are a few platforms out there currently being used. I’ve spoken about the port of Los Angeles’s platform on previous podcasts, but there are others that are in the works. And certainly other regions are considering that as well.

                                           So data sharing is in order to have further collaboration is important. And I think that developing talent [00:12:00] is something that we desperately need to do here in the US. We have a lot of vacancies in employment. We have a lot of labor shortages that throughout different segments of the supply chain. I think that developing that talent is an opportunity for us as well. One of the things I’m a little more bearish on versus bullish is manufacturing coming back to the US, [00:12:30] only for the reason of the energy and the environmental components of that. I’ve worked for the past few decades on collaborations with the environmental groups versus the industry, and trying to find that common ground is it kind of comes and goes.

                                           So right now, our administration has a supply chain resilience [00:13:00] initiative, and trying to find ways to bring that domestic production. However, we don’t have enough energy and we are not finding enough energy sources to replace fossil fuels in a reliable manner. And then as David said, we need to build the infrastructure to support that. One of the challenges that we’ve [00:13:30] had with the war in Ukraine is that they are one of the major suppliers of nickel, which is used in batteries. And we’ve had a lot of manufacturing hiccups with cars and the automotive and other technical industries because of the shortage of batteries and nickel and other precious metals like [00:14:00] that. If we can find a way to replace those, if we can find a way to get more energy and we can get that talent, then I think there’s a lot of opportunities out there.

David Ogilvie:                   I would add one other thing too there Patrick is the cost of that energy, not only the availability, but the cost of that energy. I think that’s probably the biggest impediment to any near shoring or reshoring.

Patrick Daly:                     Yeah, it’s a strange thing. This energy [00:14:30] crunch is really being felt here in Europe at the moment because as you know, certain countries, particularly Germany, Italy, to a certain extent Hungary, and some of the Eastern European countries are very, very reliant on Russian oil and gas. And there are moves of thought now to impose an embargo on Russian oil and Russian gas.

                                           So [00:15:00] in some ways the energy transition may be threatened by that because that will drive people to put their hand on easily accessible, other sources of fossil fuels, maybe out of the US and Canada with shale oil and so on and gas. But on the other hand, it may accelerate the transition to renewables. So what would be your own thoughts on whether [00:15:30] that’s an opportunity or a threat to the economy? Has it kind of thrown a spanner in the works of the energy transition, or is it going to be an actual catalyst for the energy transition? What do you think Diane, what’s your opinion?

Diane Garcia:                   Well, I think either way prices will remain high no matter how we go through the next year, two years, three years, 10 years, we’ll see prices remain high. And [00:16:00] especially if we have the US having to dip in or share as countries, like you said, try to change course here. But I think that it will somewhat become a catalyst for change. I think there’s a lot of hurdles like Elizabeth was listing out labor and talent and infrastructure, we have a lot of things that would have to align and take place. I think it’s easier said than done, [00:16:30] but I think it will help push it in that direction. It takes the innovation, it takes the motivation for it to move forward.

Patrick Daly:                     Yeah. But what I’m often struck by, and perhaps you guys see this with clients as well, is how much inefficiency there actually is. And when you’re working with a client, obviously you have to focus on what the particular issue at hand is, but [00:17:00] there’s lots of other things going on around the place. I wonder whether this expensive energy may be an opportunity in driving some of the inefficiencies out of business that people have been overlooking because they’re kind of going “Well, it’s not really a big issue right now.” Do you think there’s something in that David?

David Ogilvie:                   Yes and no, Patrick. [00:17:30] Often I’ve said on our podcasts that sometimes I think the principles of business 101 apply, and there are a lot of companies around who don’t even do the basics correctly. And if there hasn’t been an incentive for them to fix that before, what is going to change to make them do that now? There’s been a lot of talk about the zombie companies being protected over COVID because the governments have put forward all of this money to help businesses [00:18:00] stay afloat and keep people employed and all that sort of businesses, when in fact from a very harsh economic point of view, potentially they should have failed. I just don’t know that the motivation is there to be quite frank.

Patrick Daly:                     Okay. Yeah. Another aspect of this and an interesting article I read recently, again in McKinsey, they are forecasting that there’s going to be the mother of all capital [00:18:30] investment tsunamis coming at us. And part of that is to do with the energy transition that the global economy is going to go through. They’re talking about an investment wave of something in the order of $130 trillion over the next number of years. That’s massive. I don’t know, the US GDP is something like, I don’t know, is it [00:19:00] some 14, 15, $16 trillion per annum, imagine an investment wave of $130 trillion. What do you think of the opportunities and threats associated with a development like that? What do you think Elizabeth, the ports need some upgrading, right?

Elizabeth Warre…:         Well, certainly that is an issue that we’ve been dealing with here in California for quite some time. And [00:19:30] recently our Governor Gavin Newsom had an executive order that said in California by 2035, all vehicles sold will be zero emission vehicles. And when you look at the population of California, I don’t have the number of new vehicles that are bought in California each year, but we have well over 30 million residents. So there’s [00:20:00] quite a large number of cars in California. When you look at by 2035, that’s only 13 years from now. In order to have all of the vehicles in California to be zero emission, plus the infrastructure in place and the energy to power all of those cars, that is a very steep hill to climb. [00:20:30] I think it will be doable, but certainly the investment is going to be huge.

                                           And also the technology to ramp up to that level is going to have to be huge as well. Some of the other issues that we are looking at is how to electrify our ports. And that is something that we’ve been discussing also for probably more than 15 years. [00:21:00] And when you look at the power grid that’s needed for that, it’s massive. We’re already having brownouts around the country in the US, so now when you start adding that level of energy requirement and electricity requirement on top of that, where is it going to come from? How is it going to be reliable? And where is that cost going to come from? And who’s going to pay for [00:21:30] it? We’re all going to pay for it, the end user. But that just means more and more cost. Prices will keep going up. There’s a lot of opportunities, but then there’s also a lot of challenges.

Patrick Daly:                     Yeah, yeah. It is an unusual time. Some people compare and some of us are old enough to remember the 1970s, which was a terrible time as I remember it, where we had high inflation, high unemployment, [00:22:00] high costs, and it seemed we were stuck in a vicious circle that we couldn’t get out of. And now we have high inflation again, but we have all of this technology that makes it much more flexible and we have all of these things to get done, but it seems that the problem that’s driving the inflation is perhaps the shortage of resources. So we don’t have the skills to get it done, we maybe [00:22:30] don’t yet have the technology to get it done. It’s a kind of a strange period, and it’s not quite clear whether it’s a period of great opportunity or a period of great threat or the two things at the one time. What’s your perspective on it, Diane?

Diane Garcia:                   Well, I read about the 1970s and my history book, so.

Patrick Daly:                     You’re young not to remember.

Diane Garcia:                   No, it’s an interesting question. I do think [00:23:00] Patrick you’re right. What is the real cause? And do we see hope in a short period since this came on so quickly or things have just been layered on top of each other in the last two years, two and a half years it seems like. I think it’s probably here to stay for a while. We’re going to be dealing with this turbulence. I think there’s more turbulence to come, which unfortunately we’re, as supply [00:23:30] chain professionals, we all have been using the word disruption over and over and over recently. I think there’s still more disruption here to come. And like you mentioned, the skills gap, that’s a huge, huge gap to overcome. And I don’t think that companies are still doing enough to help fill that gap. I think we’re going to continue to see this problem.

Patrick Daly:                     Yeah, it’s a strange one because my recollection of the 1970s was massive unemployment [00:24:00] here in Ireland. And we had a wave of immigration where young people would go to college and literally leave the country the day They graduated. But today it’s different. Everybody’s got signs up, everybody’s hiring, everybody’s looking for people. So it’s a different challenge this time around. David, we’re coming to the end now so I’ll leave the last word with you. How do you think this period of inflation we’re [00:24:30] in compares to the period in the 1970s and what opportunities do you see now that didn’t exist back then?

David Ogilvie:                   Patrick, I’m upset that you think that I was old enough to remember the 1970s.

Patrick Daly:                     I think we’re maybe of a, I don’t know, maybe a slightly younger vintage, but there’s not much in [inaudible 00:24:52].

David Ogilvie:                   So obviously my background comes from family business and my folks were in a business [00:25:00] back in the 70s. And I do recall one of the benefits that my dad got from the inflation of the 70s was repaying his loan with inflated money.

Patrick Daly:                     I remember that, yeah.

David Ogilvie:                   Yeah. And that was a huge, and it’s actually something that he used either cleverly or by default. But he used that to his advantage. And I still think there are opportunities there in an inflationary environments. I think you’re a hundred [00:25:30] percent right, there’s a lot of talk that we may be in for some stagflation like we had in the 70s, but I just think the mechanics or the ingredients are different. You quite rightly say the demand is there. This is a supply driven inflationary period.

                                           If we didn’t have COVID and we didn’t have factories closing down and we didn’t have ports that were closed, we would’ve been continuing. So you’re right. I think [00:26:00] the fundamentals are different this time around. Looking into my crystal ball, that’s something I’m not really prepared to do. I really honestly can’t make an assessment about what’s going to happen.

Patrick Daly:                     Yeah. Yeah, it is a kind of time for keeping your investments open, keeping yourself agile and able to kind of turn on a dime as [00:26:30] the situation changes. But I guess as you say, and you say it again and again, the fundamentals of business don’t change.

David Ogilvie:                   Correct. Correct. Hundred percent. It’s just the outside, it’s like a sailor, I guess, the wind changes and you got to use your boat and your sail in different ways to navigate the different winds that are blowing. And running a business is no different in many respects. It just gives us again, Elizabeth [00:27:00] mentioned it before, great opportunities to get digital platforms and systems working together to help improve the velocity and the visibility of information. If we can improve how visible information is and the speed at which it travels through the supply chain, we are significantly better off than we were if that wasn’t occurring.

Patrick Daly:                     Yeah. It’s a good analogy, maybe the one of the navigator of the sail ship, you have to be looking at everything [00:27:30] that’s going on minute to minute and making your decisions in response to that. You may have a strategy and that you’re going to a certain port, but on your way to that port, you’re going to have to use different tactics all along the way to get there.

David Ogilvie:                   Let me ask you this, Patrick, when was the last time any of your clients did a cost of serve analysis on their customers?

Patrick Daly:                     Yeah. Maybe never in many cases, maybe never.

David Ogilvie:                   And I think in this current environment, that’s going to become critical, understanding who your profitable [00:28:00] companies are.

Patrick Daly:                     Yeah. Yeah. Good point. Good point. So guys, we could, as always, we could go on and on forever and ever, but the clock has beaten us yet again. So thank you all for being here. Thank you, David. Thank you, Diane.

David Ogilvie:                   Thank you, Patrick.

Patrick Daly:                     Thank you, Elizabeth. It’s been a pleasure and look forward to speaking to you all again soon next time.

                                           Thanks also to our listeners for tuning in and any comments [00:28:30] or questions, just drop me a line on pdaly, P-D-A-L-Y@albalogistics.com. So keep well and stay safe until next time.