Listen to find out how some of the top supply chain consultants around the world are working with their clients to help them deal with rising inflation and interest rates.
In this episode of Interlinks, I am joined again by my colleagues from the Supply Chain Special Interest Group of the Society for the Advancement of Consulting, to talk to them about how they’re helping clients at this time to cope with inflation and higher interest rates, that are affecting companies operating in Europe, America, and Australia alike.
My guests are:
- David Ogilvie, founder and principal consultant at David Ogilvie Associates, in Brisbane, Queensland, Australia.
- Diane Garcia, President of Lorraine Consulting based in Phoenix Arizona
- And Lisa Anderson, President of LMA Consulting, joining us from the Los Angeles metro area in California.
Click here to read transcript
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 have had on our life, our work, and our travel over recent times. In today’s program I’m joined again by my colleagues from the Supply Chain Special Interest Group of the Society for the Advancement of Consulting, to talk to them about how they’re helping clients at this time to cope with inflation and higher interest rates, that are affecting companies operating in Europe, America, and Australia alike. So on Interlinks today, we have, joining me from Brisbane, Australia, David Ogilvie, founder and principal of David Ogilvie Associates. Welcome, David.
David Ogilvie: Hey, Patrick. Nice to be with you again.
Patrick Daly: You’re very welcome. And from Phoenix, Arizona in the USA, we have Diane Garcia, President of Lorraine Consulting. Welcome, Diane.
Diane Garcia: Good morning. Hi, Patrick. Hi, David.
Patrick Daly: So David, I might turn to you first. So rising inflation and higher interest rates than we’ve been used to for a long time are now here. So what kind of challenge does this represent for your clients? And how are these challenges kind of manifesting themselves in day-to-day operations?
David Ogilvie: Well, Patrick, as you know, a lot of the current circumstances is following very quickly after some very large supply chain disruptions. And one of the first knee jerk reactions in many ways for many organizations, was to buy more stock. So the thought process was, if we have it then we can sell it. If we don’t have it, we may not be able to get it. And so there was a large influx of inventory purchased by a lot of companies. And so with the interest rates going up as quickly as they have in the short period of time since they first started to move, I guess there’s a real focus on how companies are utilizing their capital and where they can get their capital from and what’s the best use of that capital. And often having high levels of inventory is not always the best use of their capital. So I think that’s the first thing that’s come to mind.
Patrick Daly: So yeah, I guess if they have high levels of inventory, they’ve got working capital tied up in that inventory, which is not very efficient. And as we know, inefficiency is kind of a manifestation of inflation, or it leads to inflation. So one way to address inflation I guess, I’ll put this to you, Diane, is to improve productivity in our use of labor, our use of energy, and other resource inputs like inventory. So what are you seeing, or what would you suggest to companies out there about identifying, prioritizing, and going after productivity improvements?
Diane Garcia: Well, that’s a great question. Mainly I would say this year the priority or the focus with my clients has been on, like you said, the efficiency and the productivity, especially around how we schedule the backlog and prioritize key customer projects and orders. Because there are quite a bit of clients that I’m seeing that have still a big backlog, they still are trying to manage those high inventories. But how do you prioritize those key accounts and how do you prioritize and schedule all, the way down to the production floor so it supports and you’re not holding inventories that you don’t need at the moment or that you’re not driving things that perhaps may sit?
I was just visiting a client last week, and they have a issue where lots of different processes come together, and some things in the process may finish earlier than others. And so then it ends up sitting and waiting while other things that are needed for that week or that day do not get prioritized. So there’s a lot of activity around how do you make sure things get done at the right time, and how do you effectively manage the backlog. So it’s a huge step. I think the biggest thing that I’m working with clients on around it is the scheduling process and how do you support prioritizing within the details of the shop floor on the schedule?
Patrick Daly: So do you think maybe there was a knee-jerk reaction when the supply chains seized up, there was a knee-jerk reaction to get inventory at all costs? And now there’s a situation where there’s an overhang in inventory of certain types. And because patterns perhaps changed through the pandemic and so on, that what the demand is for now is perhaps different than what it was before. And there’s a mismatch then between the inventories they have and the inventories they ought to have. Is that something you see?
Diane Garcia: Oh yeah, I agree. And I think David brought it out very well at the beginning, is that the focus was, especially during the pandemic and the start of it, whatever you can get, whatever we think we may sell, bring it in, make sure we secure that supply. And now I do see that clients are holding some of that existing and remaining inventory, and I do think that David mentioned, trends are shifting and so now we have to work on how do we manage effectively those inventories.
David Ogilvie: Yes, I had a similar client recently, similar project recently with a client, where they’re having a lot of difficulty getting chassis and so forth and the moving around of the production schedule was creating chaos in many spaces because they needed to be very careful what they moved the production schedule to, because they may not have had the inventory for those particular items because they weren’t originally scheduled. So shifting that schedule can create a lot of issues down downstream. So getting that balance right around the inventory and keeping the turns up and making good use of that capital when it’s deployed in inventory is really important.
Diane Garcia: Actually, Patrick, you mentioned the trends piece. One of the other strategies we’re working on with clients, I’m sure David does this in his day-to-day, is on the trends that you mentioned. So in a process that I work with on clients, the sales inventory and operations process, one of the key pieces, especially in the more recent times that’s been on those mixed changes and product changes and customer demand changes and watching those trends, so that you then will be able to effectively switch gears however you may need to support that.
Patrick Daly: David, I know you do a lot of work with clients helping them with their ERP systems selections and implementations, to better manage their supply chains. So how can companies utilize or leverage their information systems and their capabilities to offset or to mitigate some of the effects of high inflation?
David Ogilvie: Well, it’s really important to make sure that the configuration of the ERP system you’ve got, is going to support at least two fundamental components of my supply chain model. And that is visibility and velocity of information. So it’s really how you configure the system and set up the supporting infrastructure, the enablers behind that around real-time data capture or the integrations that you might have with other suppliers and so forth. So it’s really a delicate mix, if you like, around a recipe, to make sure that all of the components are there in the right quantities.
Patrick Daly: You mentioned spirit and visibility, which is kind of an outcome of how you would configure and utilize the system. Is that something that’s often missed by the people on the company side and the consultants who are helping them to implement the ERP systems?
David Ogilvie: Yes. So for example, with a project where we had the difficulty with the chassis, of course it’s about improving the speed at which the information about the availability of those chassis was getting to the client. And there were often in some cases some very basic things that were stepping out of the way. It can be as simple as the process that you are using to follow up on outstanding orders, whether you can get the ERP system to help automate some of that, rather than having somebody actually making a phone call or sending an email. There are some technological aspects that you can bring to the table to help improve both the visibility and the velocity of that information.
Patrick Daly: Okay. And I guess at the end of the day, visibility and velocity is going to contribute to efficiency and productivity, which is kind of an inflation busting strategy to adopt.
David Ogilvie: Correct. Nothing else, Patrick. It helps with the decision making. The sooner about these things, you can make different decisions based on the information that you do have. So the sooner you can get those things there, the better decisions you can make.
Patrick Daly: Okay. Gives you that little bit of advantage. And I guess if you do make those improvements, it gives you choices that other people don’t necessarily have.
David Ogilvie: Correct,.
Patrick Daly: Which I guess is if everybody’s raising their prices and you have become more efficient, you could either raise your prices as well and take the extra margin, or hold your prices tight and gain maybe market share depending on which way you want to go with it, right?
David Ogilvie: That’s exactly right.
Patrick Daly: So I know from talking to you both together and separately before, and given that you live in kind of quite different parts of the world, that you have slightly different views and take on what’s going on, how long it’s going to last and what the future might hold. So Diane, I know from talking to you and Lisa, and so some of these opinions might be Lisa’s as well as yours or instead of yours. But I get from you guys that you have fairly upbeat view in the longer term with regard to America and its prospects for the future with regard to inflation and interest rates and so on. So what is your view on that? And what are the main considerations that kind of bring you to more of an upbeat assessment of the future?
Diane Garcia: That’s a good question. I think I’m always upbeat and optimistic, Patrick. I think overall the U.S, I’ll talk on the U.S perspective. Lots of companies that we’re working with or within the supply chains of clients that I have, are moving and insourcing or near-shoring their supply chains near the U.S. And there’s a lot of talk about what countries are supporting that kind of movement and that reconfiguration in supply chain. So I do see here in the U.S, they’re bringing, it’s a huge market. So a lot of those companies and supply chains are moving, which is going to not only attract more talent and it’s going to ensure that there’s plenty of innovation and exciting things to come in the future are going to happen here in the U.S. So I think that’s a big contributor is that I see that movement coming into the U.S and near the U.S.
I think overall that, like you mentioned, the word was long term, there’s still a lot to weather. And I know that we’re kind of recession, nearing recession, we’ll be in a recession. But I do think that in the long term there’s a lot of opportunity. And I think the word that I mainly have been using or just mentioned was innovation, because I do think that there’s going to be quite a bit of changes. There have been a lot of changes in the technologies that support the supply chain. So whether that be ERP or BI or analytical tools, I think that we’re going to gain more insights around the supply chains. I just see that there’s a lot of excitement that all of these disruptions and things that we’ve had to navigate have brought on and I think it’ll continue to bring that on.
Patrick Daly: Yeah. That’s interesting as well. People talk about the regionalization of supply chains and maybe the center of gravity of the global economies kind of fragmenting. So you’re going to have kind of an American cluster, kind of European cluster, far eastern cluster. So you can see countries like Mexico and Canada, Dominican Republic, Costa Rica, becoming kind of a cluster around United States and kind of a regional supply chain in that region growing and becoming stronger. Do you see that?
Diane Garcia: Yes. Yeah. I think the countries you just named is a very good example. And I think that there’s places like a Canada that maybe weren’t as looked at in the same light, and now we’re I think clients and it’s recommendations on places that are just nearby or close or that we have good relationships with. So yeah, I do see that happening. I don’t think it’s quite as regionalized as it could be, but I do think that, that trend or that supply chain reconfiguration is happening.
Speaker 4: 93.9, Dublin South FM.
Patrick Daly: So David, I know that you see the tensions between the U.S and China over Taiwan as kind of a major potential risk for Australia. So how do you assess that risk and what do you think would be the consequences say of a shooting war over Taiwan? And what should Australian and indeed other companies and other parts of the world be thinking about by way of preventive and mitigating actions if there was an issue there with China?
David Ogilvie: Well, it’s interesting you say that, Patrick, because that’s part of the reason why I’m not quite so optimistic as Diane. I’m not pessimistic. I’m hopeful, but not quite as optimistic. If we do get a shooting war, I think we are in big trouble. And I said this at one of my business owner and CEO lunches recently. And I was asking them the question, “What happens to your business if China does invade Taiwan and we are involved in a war, what does that do for your business?” And in most cases, China will just simply stop supplying and that will be quite devastating for many, many businesses. And that ability to near shore or re-shore like it’s happening in the U.S, I’m not quite sure is quite as much of an option here.
While we have a new government here and they are changing many things and they are talking about trying to bring manufacturing back to this country, I’m still not as sanguine I guess around what the cost of energy is going to do to that and whether that’s going to be able to help facilitate that or whether it’s going to be an inhibitor to that. But more on the government in our space too. They are a more left-leaning government now and there is industrial legislation before our parliament as we speak. And there is a high concern here that, that’s going to bring our industrial landscape back to the 1970s where we have massive strikes and multi-industry strikes and you’ll be able to take work workforces out in other industries even though that they’re not related to the industry where the dispute is involved. So that is quite concerning for businesses in this country and that is certainly something that executives are going to have to start to plan around and have some contingent actions in place should that happen.
Patrick Daly: Yeah. I would think as well, Australian businesses should be looking a lot at your neighboring countries. There are ways, if you like, that you’re similar to the U.S and then different. The sense perhaps your economy is more advanced say than the likes of some of your neighbors, Indonesia, Philippines, Malaysia.
David Ogilvie: Yeah.
Patrick Daly: The population wise, you’re much smaller than they are, which makes you different. But I guess it has to be a factor for the future, that area, right?
David Ogilvie: Yeah, absolutely. And we are a part of Asia. We’re probably the only Caucasian country in the area in many respects, as multicultural as we are. But the reality is we are a part of Asia and that is probably our first step, is to go to places like Indonesia, Malaysia, Vietnam, those sorts of places as an option. But having said that, I’m still keeping an eye on those Latin American countries that you just mentioned before, because there’s nothing stopping Australia because it’s only Pacific Ocean between us, and those trade routes could be utilized. So I think we are well placed in that space because we do have other options available to us if we just want to look.
Patrick Daly: Actually facing you on that Pacific Coast of America are some of the, maybe not so well known, but more dynamic economies in the South American continent, which are from the top to the bottom would be Columbia, Peru, and Chile. And they’re all looking at you across the specific ocean. And those economies are quite dynamic, albeit they’re still developing economies, but there’s probably a lot of opportunity there as well.
David Ogilvie: I would agree entirely. I just don’t think people are looking east, they just keep looking west.
Patrick Daly: Yeah. Yeah. I’m going to give you both the kind a view that I have, and maybe you can ask me questions or pick some holes in it if you wish. But some of the things I’m thinking about is that one view of interest rates. So interest rates are rising, but then again they’ve been abnormally low for a long time. So really they’re probably normalizing. So we’ll see where they settle, but they might settle around three or 4% or something like that, which is kind of normal in the long run. And that’s probably better and healthier in terms of the allocation of capital to worthwhile projects. Because when money’s very cheap, it gets sprayed all over the place and often not to great effect. So that’s one thing. And kind of my view of inflation, although it’s quite acute and it seems to be kind of getting embedded a little bit, but really it is due mostly to short term shock.
So one short term shock, and when I say short term, I mean things that are happening over periods of months to a few years. So Covid would be a short term shock, and the after effect of covid on the supply chain’s a short term shop, which will work itself out and indeed is working itself out. And then the war, we don’t know how long it’s going to go on, but it’s not going to go on forever. So I don’t know, maybe a year, maybe more, we don’t know. But again, in the big scheme of things, it’s the short term shock that’s introduced inflation in economies. But there are kind of overarching trends. And I think some of our big overarching trends are deflationary. And these are trends that happen over several years to decades and they don’t really change. It doesn’t matter if you have some head banger elected to president in some country, or you have a war kicking off somewhere else, or you have a pandemic, another pandemic. These things kind of just keep going. So for example, one is demographics.
So not withstanding the fact that we hit 8 billion as a world population this week, populations are already declining in lots of developed countries and they’re even going to start declining in China. And we may even see sooner than people think the actual world population begin to decline, maybe within a couple of decades. It may never get to 10 billion, it may kind of stabilize around nine and than start to come down. So that I think is inherently deflationary, declining population and an aging population. I think also the technological advances that we’re looking at that we’re really only scratching the surface in terms of even what’s there that we don’t know how to use yet and what’s coming. And I think that’s going to give rise a huge efficiency and productivity, that’s probably deflationary. And then we have climate change, it’s happening and that’s pushing a move to renewables. And some renewables now are becoming cheaper and less prone to these shocks than fossil fuels, which invariably are produced by countries that have head bangers at the head of them, like Venezuela and Russia and so on.
So those things kind of make me think that five years time we might be looking at deflation as a problem rather than inflation. And we have declining populations or will have declining populations and I think that’s going to bring a unique set of challenges. Because they’re quite the opposite to what we’re going through now. Nobody’s really ever managed an economy with declining and aging populations before. Maybe Japan is kind of in the Vanguard and we can look to Japan as a pattern. You know in Japan they actually sell more incontinence products for adults than they do diapers for babies, or nappies as we would call them. So what do you think of that particular view that I’ve just said out there? What do you think?
David Ogilvie: Well, I think there’s a lot of logic to what you’re talking about there, Patrick, particularly around the population. There’s not a lot we can do about that in the short term. And let’s be honest, we’ve got a talent problem at the moment in most countries. Australia’s population growth is very small, naturally. We are very reliant on immigration to help grow our population and bring our talent pool in. I think every country is looking for talent at the moment. And so as a country, we need to become more attractive to immigrants to come here because they have a broad choice at the moment, lots of countries are looking for qualified people. So I think you’re 100% right. I don’t think that’s going to necessarily fix itself overnight.
Patrick Daly: And Dian, any comments?
Diane Garcia: Well, I think like David said, I wouldn’t disagree with what you’re seeing conjured up here. We do have quite a bit of challenges very long term with the talent pool and how do we bridge this talent gap that we’re in? And I think that innovation is a piece of it, but I don’t think it solves it in the short term or maybe even the medium term, is another one I’ll throw out there. So I guess, Patrick, I was going to ask you, how do you see for the long term or five years on the European end of things? Is there a regional supply chain that’s forming there and this will be something they have to navigate as well?
Patrick Daly: Yeah. I’ve seen evidence of here in Ireland, we have lots of multinational companies who’ve set up here to service the EMEA area, as they call it, Europe, Middle East, and Africa. And those guys, we have pharmaceuticals with medical devices, tech and so on. A lot of those guys would be bringing materials and ingredients from far and wide to here, to manufacture their products. And I have noticed some of them changing, introducing dual supply and having it closer to home supply. So say they have something coming from China or from India, they’ll also have another, they’re putting in place another one maybe in Slovenia, maybe in Turkey, maybe in Morocco. So that regionalization is happening in Europe as well. And I think the invasion of Ukraine has driven Europe together. There were problems with unity and the internal squabbles and so on in the European Union.
And the threat from Russia has kind of cleared the slate a bit in that sense. So we’re seeing more unity and we’re seeing a big shift away from dependence on Russian energy, particularly gas, but also oil and a big push towards renewables. So countries like UK and Germany are really looking to other alternatives, particularly Germany. So yeah, Europe is going through a major change and because we don’t really have, apart from the North Sea where there’s gas and oil that Norway and the United Kingdom are basically the extractors there. We don’t really have a lot in terms of energy production here, fossil fuels. And frackings very problematic in places are very highly densely populated and so on. So it’s not so easy as it is in America or Canada.
So I think we’re going to see a big push towards alternative energy in Europe. And some of that energy is quite cheap once you get the infrastructure in place and makes you quite self-sufficient in the long run. So we may see that. That’s something I’m looking to in the next 5, 10, 15 years. So yeah, I think we’re for major change. But we are extremely demographically challenged, particularly in the eastern and southern part of the continent. The countries to the west and the north, like the UK, like France, like here in Ireland where I am, populations are still growing, not fast, but they’re still growing, but they’re already declining in Eastern Europe and southern Europe. So that’s going to be a major challenge.
David Ogilvie: Patrick, what about Africa?
Patrick Daly: Africa is where most of the population growth is going to be in the future. So I think Africa could have a population of 4 billion in a few decades. So it will be a major player in terms of population. Will it develop economically? Well, the promise is there and there are signs of it. And you can see, even though the population is growing, family size is declining in Africa because affluence is increasing, because healthcare is increasing. So I think there’s a lot of potential in certain countries in Africa, East Africa and West Africa, countries like Ghana, countries like Nigeria, Kenya, Tanzania. So yeah, I think there’s a, I won’t say a bright future, because you never really can tell. But there’s certainly the potential for huge changes in Africa.
David Ogilvie: Yeah.
Patrick Daly: I think as well, they might jump a lot of the legacy technologies in the same way that they jumped the terrestrial telephony straight into mobile telephony. They may do the same with energy. They’ve done the same with banking. They’ve gone straight from no banking to electronic banking. So yeah, Africa I think is a place where there’s going to be a lot of people interested. The Chinese are very interested, the Europeans have a long tradition of involvement in Africa. The Americans are looking to Africa as well.
David Ogilvie: That’s the thing with China, right? They’ve got a lot of investment in lots of these places, like in Cambodia for example, they’ve got very high investment in Cambodia as does Russia. But the political environment in Africa is probably not as stable as it needs to be. Would that be fair?
Patrick Daly: Yes. A lot of those countries are very problematic and of course they’re very different. We talk about Africa as if it was one thing, it’s probably the most diverse continent on earth. It’s also because of the way of the world maps work, the scaling and world maps, it looks a lot smaller relative to the other parts of the world and it really is. But it’s so big that it’s kind of hard to get your head around it. Europe would literally fit into a corner of Africa, all of Europe. So yeah, I don’t think we quite appreciate the impact that Africa’s going to have in the future.
David Ogilvie: And there’s also a belief that India is not going to be the competitor to China that people thought it might have been because it’s a democracy. Have you got a view on that?
Patrick Daly: Well, I read recently that China’s population has about just peaked now, is going to decline. And India is just overtaking China in its population and India’s population is going to continue to grow. So India’s going to become the most populous country in the world. China’s population going to decline quite fast. I think China’s going to have difficulty maintaining its growth rates. And I think those kind of command economies have problems and they’re going to have problems getting beyond being a middle income economy. India is very, very messy. So it is a democracy and it’s very, very messy. So it’s very hard to predict where they’re going to go. They have lots of challenges, but infrastructure, they’re not good at delivering infrastructure, but they’re very good at delivering technology and innovation. So I would think India may beat China in some aspects of the economy and vice versa. But I think China’s hitting headwinds and we’ll see that over the next 5, 10, 15 years.
David Ogilvie: Interesting.
Patrick Daly: Okay. So again, the clock is against us, so we’ll have to give it a wrap here. So delighted to have both of you on again. It was a pleasure as always, and look forward to talking to you again next month on this and other topics.
David Ogilvie: Thank you, Patrick.
Diane Garcia: Thank you, Patrick. Thanks, David.
Patrick Daly: All the best. So thanks again to David and Diane. Thanks also to our listeners for tuning in once again. And until next time, keep well and stay safe.