Patrick Daly:

Hello, this is Patrick Daly and welcome to Interlinks. Interlinks is a program about connections, international business and globalization, and the effects these developments have had on our life and work and travel over recent times. Today on the show, we will be talking to Alan McKinnon, professor of logistics at [Kuhne] Logistics University in Hamburg, Germany, and professor emeritus at Hariot-Watt University in Edinburgh, Scotland. Alan has been researching and teaching in freight transport and logistics for over or 40 years and has published extensively in journals and books on many different aspects of the subject. And much of his recent research is actually focused on the links between logistics and climate change.

Patrick Daly:

So this is, I think, very apposite right now, given that trade transport in all its guises and warehousing and logistics, terminals, and warehouses, and so on, are among the major contributors to global emissions. And given that the COP26 UN conference on climate change gets underway in Ireland’s native Scotland this very week. So I’m looking, forward, very much, to discussing how the freight transport industry will change in the coming years as it transforms itself to the reality of a low carbon future while continuing to support the modern economies and standards of living that we have all become accustomed to. So welcome, Alan, and thank you very much for being here with us today.

Alan McKinnon:

Thank you for inviting me to take part, Patrick.

Patrick Daly:

You’re very welcome. Maybe to kick off, Alan, would you tell us a little bit about your current academic work and the areas of research interest that you’re currently involved in?

Alan McKinnon:

Yes. Well, most of my research really is on the links between logistics and climate change. Mainly on the mitigation side, how we cut emissions from logistical activity. I’ve also done some work; however, on how we adapt logistic systems and supply chains to all the climate change that is in the pipeline, because I think there’s a general recognition that freight transport is going to be very vulnerable to extreme weather events, for example. So, yes, I’ve just recently finished some work for the World Bank, which has been looking at how we can try to decarbonize logistics in less developed countries, because so much of the research has been done in this field really has focused on the developed world. But there’s going to be an extra challenge, it seems to me, in cutting carbon emissions from these [inaudible] in the developing world.

Patrick Daly:

And in terms of that research that’s ongoing, are you actively looking for PhD candidates who are interested in looking into this space?

Alan McKinnon:

No, I’m not. As you said, I think I’ve been 42 years in academic now. So, I’m nearing the end, really, of my academic career. So I think I have one more PhD to examine and then I will probably complete the process. I’ve not been taking on any new PhDs [inaudible].

Patrick Daly:

Very good. So, in your work on greening logistics, some of the work that I have read, you talk of five strategies. And one, which is perhaps the definitive long-term one, is to change power sources to lower zero-carbon sources. And then you have these other four, which are mitigation strategies that you referred to such as improved efficiency, increase utilization, model shift, and reducing demand. So just coming back to the first one first, which is the definitive long-term solution, what do you think are the most promising technologies for changing power sources for transport and logistics currently on the horizon or in development?

Alan McKinnon:

Yes, that partly depends on the transport mode that we’re talking about. Let’s suppose we’re looking at road freight. So for short distance, road freight movements like great deliveries in urban areas, I think it’s going to be battery/electric power that’s going to be used. We’ve already seen a reduction in the cost of batteries, quite a dramatic reduction. The total cost of ownership now for small vans that are battery powered are broadly comparable with diesel and petrol powered vans. So I think that process is underway.

Alan McKinnon:

We’re also seeing an increase in the charging facilities for these vehicles. But that’s in a sense, the easier part of the logistics system to electrify. Long-haul freight, I think, presents more of a problem for us. For many years, people felt that we would not be able to power long-distance, heavy trucks with batteries because the batteries would simply be too heavy. So the battery might be weighing, say 12 tons in a truck that would have a payload of only maybe 20 or 25 tons, and therefore that would be too heavy a weight penalty.

Alan McKinnon:

However, there have been quite remarkable advances in truck technology and battery technology in recent years. And I think that now in smaller countries like Ireland and Scotland, where the length of haul is probably less than say 300, 400 kilometers, I think ultimately batteries will be able to perform that task, supplemented in some countries, it seems to me, with an electrification of the highway. As you may be aware, Patrick, I mean, currently in Sweden, there are two trials underway. There are three in Germany where the highway is electrified and where we run trolley trucks. [crosstalk]

Patrick Daly:

Okay. So yeah, so this would [crosstalk] look like when we see the trolley buses in some European cities, something similar, but on the highway.

Alan McKinnon:

Exactly, or in railway, I mean, we’ve had many, many decades of electrified railways. So, this is a fairly mature technology that we’re just transferring really from rail or from urban trolley bus systems to road. I mean, to justify the capital cost of doing that you have to have a fairly heavy traffic in trucks. So, it’s going to be in, I think, particular corridors. So I think that’s another option.

Alan McKinnon:

And then, of course, the final option I haven’t mentioned yet is hydrogen. A lot of people are very enthusiastic about using hydrogen to decarbonize long-haul trucking. And there are problems with that. I mean, one is almost all the hydrogen we currently have is essentially a fossil fuel. I mean, it’s made from natural gas with a process called steam-methane reforming. This will only become a decarbonization option once we can produce enough green hydrogen from the use of low-carbon electricity to electrolyze water.

Alan McKinnon:

There are ambitious invest plans to set up what they call [gigastacks], this new generation of plants that will electrolyze large amounts of hydrogen. But the other problem with using hydrogen is the amount of energy you use in the process. If you do the life cycle analysis, going from the low-carbon electricity to the wheel of the vehicle, you can lose as much 70% of the low-carbon electricity. And studies done in Germany and elsewhere have compared the capital costs and the long-term costs of decarbonizing long-haul trucking. And so long as the traffic volumes are sufficient, actually electrifying the highway comes out as one of the most cost-effective ways and hydrogen comes out as the least cost-competitive option.

Alan McKinnon:

But I don’t think there’s any one of these technologies will necessarily dominate. I think they’ll coexist, and there will be some operator, some countries that will tend to adopt one more than the other.

Patrick Daly:

It’s interesting that those technologies, whether it’s batteries in HGVs or whether it’s electrifying the highway or whether it’s using hydrogen, which I assume is with a fuel cell, it means a fleet change, right? Is there any scope for drop-in fuels that would be carbon-neutral, maybe advanced biofuels or e-fuels? Is there any scope there?

Alan McKinnon:

Yes, there is, because I mean the technologies I’ve just described are in such a longer term. We’re not going to have, it seems, to be mass production, mass adoption of hydrogen fuel cell or battery long-haul trucks, probably until the late 2020s, maybe well into the 2030s. And, of course, we have to meet quite ambitious carbon-reduction targets between now in 2030. So there are things we have to do in the short to medium term, and that’s when we have to think about these alternative fuels. So people are portraying some biofuels, particularly things like biomethane or hydro-treated vegetable oil as a way of getting some deep carbon reductions. In the meantime, of course, in Europe and other parts of the world, we have been mixing biodiesel with conventional diesel for many years,

Patrick Daly:

There is a certain percentage, right, in the-

Alan McKinnon:

It’s about 7 to 10%, typically it’s 7% in Europe. The only problem with that is where you source the feedstock for the biodiesel, because if it’s coming from waste material, that’s fine. If we’re getting it from the tropical lands, either from palm oil, we’re in the process. We’re deforesting tropical rainforest. Then when you do the life cycle analysis that biodiesel can have a greenhouse gas footprint three times that of conventional diesel. So, it seems to me there’s a limited amount of what we would define as sustainable biodiesel. But when you do the life cycle analysis, I mean, the two biofuels that really come out strongly, as I said, are, are Biomethane [inaudible] with aerobic digestion of waste material and also hydro-treated vegetable oil, again, which is being essentially recycled. So both of those can give you quite a deep reduction in greenhouse gas emissions from road freight, but again, there’s a limited amount of that available.

Alan McKinnon:

So I think people are seeing these as helping with the transition to lower carbon trucking and helping us until we move to this new generation of low-power train vehicles or battery-powered or powered by hydrogen.

Patrick Daly:

So, if you are, say the fleet manager of a business that’s looking to do its bit here, and you’re looking at fleet renovation over the next five years, what should they be considering?

Alan McKinnon:

Well, you mentioned the five decarbonization levers. So we’ve only focused on one at the moment. The other one is just to improve the energy efficiency of those vehicles, right? So we reduce the amount of energy they’re consuming before we get to the stage when we’ve got to convert that to renewable sources. So, I mean, one thing that’s encouraging in Europe is that we have fuel economy standards now for new trucks. So, new trucks sold after 2025 will have to be 15% more carbon-efficient than the current ones. By 2030, it’s going to be a 30% improvement in carbon efficiency. So, for the new vehicles, things are going to be improving. But for existing vehicles, you can retrofit devices. You can make sure that they’re properly, aerodynamically profiled. You can put in anti-idling devices onto the vehicles. You can move to low-rolling resistance tires.

Alan McKinnon:

There are a combination of things that you can do. And each of them may reduce emissions by a few percent, but collectively, I mean, that can add up. And then leaving the technology aside. I mean, there are operational improvements. I always say the most cost-effective thing you can do to cut carbon emissions in road freight is train the truck drivers to drive more fuel efficiently and then monitor their behavior. And if necessary, give them further guidance on how to improve their fuel efficiency.

Alan McKinnon:

So, yeah, my worry is there’s currently a lot of discussion about switching to renewable energy. And as you said, in the longer-term, that is how we will completely decarbonize road haulage, but that’s a longer-term option. And we’d really have to do a lot of things in the interim really to get the, [crosstalk].

Patrick Daly:

I’m a fleet manager, there’s an awful lot of stuff I could be getting on with, in that regard, both on the efficiency side, the utilization side, and the operational changes to the way we run the business. And even if I am looking at fleet renewal, there are more efficient vehicles coming down the track, and we may have some biofuels and e-fuels and so on. We can use in the period, say up to 2030, and then we might be into a different scenario thereafter.

Alan McKinnon:

We’re going to see these decarbonization initiatives being time-phased. The beauty is there are many of them. Most of the things you can do to cut carbon emissions, certainly road freight, are mutually reinforcing. The last thing we want to do is simply sit back and wait until a new generation of low-power train trucks becomes available. So we don’t have that luxury, unfortunately.

Patrick Daly:

So getting on with a lot of those mitigation efforts, the challenges might be more managerial than technical actually, because the technical solutions are there, right?

Alan McKinnon:

That’s true, yep, yep. So, but are what I call the MOB` initiatives, managerial, operational, and behavioral. These are things which very often don’t involve much capital investment. They often have a fairly low or even negative carbon mitigation cost, and it can be implemented in the short and medium term. And I think that’s where we should be focusing our attention currently. And one thing that’s going to assist that is the current digitalization of road freight. And I use that term as a collective term for whole suites of computing, IT, artificial intelligence developments. I mean, we’re seeing quite remarkable advances, in fact, online load matching, for example. And things that have been around for a while like online freight exchanges, computerized vehicle routing systems. But with advances in computing, we’re now getting an upgrade in the potential of these things to improve routing of the vehicles, the level of loading and so forth.

Alan McKinnon:

And I think all of that is going to translate into lower carbon emissions. My university with the European Freight and Logistic Leaders Forum last year did a survey of about 90 senior executives in logistics in Europe. And one question we asked them was about the likely effects of digitalization on the decarbonization of logistics, and they were very positive. The vast majority of them said that digitalization would be transformational in this respect. So I think that’s a really good-news story.

Speaker 3:

93.9 Dublin South FM.

Patrick Daly:

Som we’ve looked at changing energy sources. We’ve looked at efficiency and utilization improvement. The other two strategies you speak about are model shift in just reducing demands. So, we’ve seen this supply chain redesign that’s already been underway as a result of COVID and other disruptions like Brexit and natural disasters, accidents, and geopolitical tensions and so on. So do you think that shift in supply chain structure that’s already underway will accelerate this reduction in demand and model shift, or will it make it more challenging? What’s your take on it?

Alan McKinnon:

Well on model shift and, and I think we’re probably talking here predominantly about shifting for road to rail, is that right?

Patrick Daly:

Yeah, road to rail and maybe to water, short-sea shipping and so on.

Alan McKinnon:

That’s right. There is a feeling that rail freight operations, certainly in Europe, actually benefited from COVID because the lockdowns in various countries reduced rail passenger movements to greater extent than rail freight movements, right?

Patrick Daly:

Mm-hmm (affirmative).

Alan McKinnon:

So, therefore, there was a lot more available capacity in real infrastructure in Europe to move freight. And so the transit times improved, their liability improved, the overall service improved, and that also demonstrated to companies just what the potential was for using rail. Of course, we rebounded from there and traffic has returned, not to the level it was before, but the feeling is people get talking about building back greener. And I think that does apply to logistics as much as it does to other sectors of the economy. And I think it will probably help to tilt the balance away from road towards rail, but that’s got to be put into context. Because there are major policy initiatives now, certainly in Europe, to get much more freight onto rail. Some of the European Commissions Smart and Sustainable Rail Mobility Strategy that was published in December last year, said they want to increase the amount of freight moved by rail in Europe by 50% by 2030, and doubling it by 2050.

Alan McKinnon:

And now that’s going to be really difficult to do. I mean, but at least there’s the policy dynamic in place there to try to get as much freight off road and onto rail. And the reasons for that, I think, are quite obvious because if you compare the carbon intensity of roads, typically in Ireland or the UK or elsewhere, you’re looking at an average, I think of 90 grams of CO2 per [inaudible] road, as opposed to maybe 20 to 30 for rail. And again, with rail it depends if it’s diesel-powered or if it’s an electrified service. And if it’s an electrified service in France or Sweden with electricity, it’s got very low carbon, then you get an even bigger differential between [inaudible].

Patrick Daly:

So, I’ve been reading a lot about this space and in recent times. Bill Gates and Mark Carney and some of your own work and so on, and I get the distinct impression that the challenge here right now is not so much technological. Though there are still technological challenges, but the bigger challenges are actually economic and political. So have we been moving politically in the right direction over the last 20 years, do you think? And what would you consider as a good outcome from COP26 in this regard?

Alan McKinnon:

Yes, that’s a very good question. So if you asked yourself the question, to what extent have policy initiatives over the past 10 or 20 years helped us decarbonize freight transport, some things have certainly helped. One thing we haven’t mentioned at all is the relaxation of truck size and weight, moving to what we call high capacity transport which has been well established for decades now in Scandinavia, since 2013 in Europe. We’ve seen more countries relaxing the restriction and truck size and weight. And the analysis that’s been done suggests that does create greater consolidation of loads, reduces vehicle kilometers, cuts fuel, and therefore, reduces CO2 emissions. So, that’s been one policy initiative where it seemed to.

Alan McKinnon:

And there has been a lot of policy effort, as I said, to try to get more freight onto rail. That’s not been so successful. The EU in its 2011 white paper on transport came up with this target that by 2030 they wanted 30% of all freight moving more than 300 kilometers to either be on rail or on inland waterways. And if you look at what has happened since then, there has been hardly any movement in that direction. The freight model split in Europe has been pretty static over the past decade. So, it looks very unlikely that target will actually be achieved.

Alan McKinnon:

So there are other policies. I mentioned the fuel economy standards, which are now imposed on trucking, which won’t happen overnight but through time, aa companies replace their truck plates with this new generation of lower-carbon vehicles within these fuel economy regulations, I think that will help as well. So it’s a mixed mixture.

Alan McKinnon:

There is one policy initiative which, I think, was introduced prematurely and that has not delivered the greenhouse gas savings that were expected. And it’s something we spoke about a moment ago, mixing biodiesel with conventional diesel. The renewable fuel directives that were introduced, what about 12, 14 years ago. Because that was done, I think, before we did the fuel life cycle analysis, before we looked at the amounts of biodiesel we would require, and where the feedstocks would have sourced, but now we realize there are a lot of the biodiesel were mixing with this actually has a pretty high carbon footprint. So, that was a policy initiative that misfired, it seems to me.

Patrick Daly:

Coming out of COP26, if you said, “Okay, that’s a result.” What would that be?

Alan McKinnon:

I just wonder in the core COP26 negotiation, if they’ll be drilling down to look at transport initiatives. I think the main inter-country negotiation there will be focusing on more general issues, which then will have an impact on all sectors, right? So, and it would then be for individual governments, it seems to me, to translate these wider policy commitments into things that will impact on the transport sector. In July this year, for example, in anticipation of COP, the UK government published its transport decarbonization strategy. And, in fact, uses an illustration of what other countries might do. It involves phasing out diesel-powered cars, for example, diesel-powered trucks. Or they want to stop the sale of diesel-powered trucks by 2040, for example, in the UK. Again, they want to get as much freight off the road network onto rail and onto waterways as well, if that is possible.

Alan McKinnon:

But there’s some things that I would like to see emerging from COP. I mean, I believe that we need to monetize CO2 emissions, right? We need to get that into the balance sheets of companies, because it seems to me, that would be a game-changer. And therefore we need a lot more work and commitment to introduce carbon pricing and emissions trading and so forth. And that will affect all sectors. I mean, at the moment, logistics is not covered by many carbon-pricing schemes worldwide, but through time I think it will. And I think then the price mechanism will be the thing that will drive logistics decarbonization.

Patrick Daly:

Either the economics or the politics of the topic shifts rapidly at some point where we get a paradigm shift to get us out of this. We’ve been going through this tortuous, slow process. And you can see maybe at some point either the politics or the economics, or both are going to shift at some point quite rapidly. Would you concur with that?

Alan McKinnon:

Yeah, it might be wishful thinking that will happen. I mean, it needs to happen because we’re getting so close to exhausting our carbon budget. I mean, we do need radical shifts of that sort. If you take a global perspective on this, the problem is that the fossil fuels are still heavily subsidized around the world.

Patrick Daly:

Yes, it’s quite ironic, yes.

Alan McKinnon:

Exactly, so it’s not that we have an increase in carbon pricing. In fact, we’re doing the opposite. We actually-

Patrick Daly:

Carbon discounting, right?

Alan McKinnon:

We’re promoting demand for fossil fuel, but by offering subsidies. So, I think the first step is to get those countries which are still subsidizing fossil fuel to phase that out ASAP. And then really moving to internalization of the environmental costs of freight transport. And the key part of that then would be the price that you then attach to carbon-related externalities.

Patrick Daly:

One financial aspect of this or economic aspect that we don’t hear a lot about is the issue of stranded assets, which could destabilize the financial system. So, if you’ve got companies that have oil reserves or countries with oil reserves under balance sheet, and suddenly these reserves are worth nothing because the paradigm shift, that could cause disruptions in the finance system, right?

Alan McKinnon:

Yes, [inaudible] and I mean this has been researched and in big banks, for example, in their stress testing, they’re seeing the effect this could have on their balance sheets and their survival. One rather worrying scenario, which hopefully we’ll never materialize, is one where the owners of those fossil fuel assets realize that the future demand is going to collapse, right? There are going to be radical climate change policies put into place which will phase out fossil fuel probably faster than people are expecting.

Alan McKinnon:

Because what will happen then is the owners of those assets will want to offload them as quickly as possible while they still have value. And we might then have a fossil fuel binge. That will drive down cost of the fossil fuel, right? And it’ll make it harder for companies to justify investing in renewables because the cost of the fossil fuel alternative is so low.

Alan McKinnon:

So one would hope that there’ll be policy initiatives put in place really to minimize the risk of that for happening. Because, as you know, there’s still a lot of coal, oil, and gas in the ground, and there’s no way we can burn all of that. And we really have to stop consuming it as quickly as we can.

Patrick Daly:

So, I have lots of clients who are SME logistics operators, owners of transportation fleets and warehouses are concerned about the economics of this transformation. They’re fearful of both, maybe being victimized in the media on the one hand, or hung out to dry economically. And they’re also getting pressure then from their own clients who, a lot of them, are multinational corporations who are quite sensitive and keen to be seen to be green as well. So, what would you advise the owners and managers of these types of businesses to consider now for their future strategies in terms of, well, we spoke about fleet renewal, but say energy sources, people skills, collaboration with supply chain partners and so on? How should they be thinking about that 5 years, 10 years in the future?

Alan McKinnon:

One thing they can do, and an increasing number of companies are doing that, is shadow pricing. Their businesses aren’t necessarily subject to that at the moment, but almost certainly in the short term, but in the medium to long term, they will really have to factor that into their calculations. And, so if they’re having to make an investment decision, then factor into your investment appraisal, some future estimate of what the carbon price might be. And I mean, I understand financial institutions these days and the stress testing they have to do to satisfy the needs of national banks. They’re being asked to say, “What would happen if the carbon price was £300 a ton or €1,000 just to see how vulnerable their operations would be, not just to the impact in a physical sense, but in a financial sense, if we move into a world where carbon is priced at a relatively high level?”

Patrick Daly:

Yeah. I think that’s the reality. And it’s worthwhile looking into. Inevitably, I think, there are going to be casualties, but if you have the wherewithal, you start looking at that. Because I guess if you don’t, some of the choice business you’re not going to get, because these multinational corporations are not going to contract your services, right?

Alan McKinnon:

Yeah. I think the good news on this is that there’s still a lot of low-hanging fruit around.

Patrick Daly:

That’s true.

Alan McKinnon:

Because we looked at the five decarbonization levers. The one where you make better use of the assets, fuel the vehicles better, and also improve the energy efficiency, a lot of the things you do there give you a fairly rapid payback and are self-financing in the short to medium term. So a lot of this is simply good business practice that the gratis, the harvesting of all the low-hanging fruit, isn’t going to deliver the really deep production innovations that we will require, but at least it gets us started in the process. Right?

Patrick Daly:

Yeah.

Alan McKinnon:

And then there’s a diagram I often use in my presentation. So the first part of it is where we’re sliding down this low-hanging fruit curve, if you like, where we’re cutting costs, as well as cutting carbon. Eventually, we will exhaust all of that low-hanging fruit, and there’ll be a rebound when the carbon mitigation costs start to rise again. And it may be to get to net-zero by 2040, 2050, we really have to then start to do some fairly draconian things. And that’s when it’s going to get tough and where companies may have to sacrifice mobility. And their investment returns may decline and so forth. But that could be 10, 15, 20 years away. In the meantime, there are things that we can do that, as I say, will be self-financing.

Patrick Daly:

So, we have our work cut out for us. So, as we come into the last couple of minutes, we might just change gears. And maybe I’ll just ask you a question or two about yourself. So, when you’re not thinking about decarbonizing the logistics industry, what kind of things do you like to do in your spare time?

Alan McKinnon:

My main recreation is playing the piano.

Patrick Daly:

Really? Interesting.

Alan McKinnon:

I’ve been playing the piano since I was eight.

Patrick Daly:

Okay, excellent.

Alan McKinnon:

And I find that so relaxing and creative. So that’s-

Patrick Daly:

I often think that about people who are musicians, that it must be a great kind of solace for them, a great kind of comfort. Because you see when they’re doing it, they’re almost in trance, right?

Alan McKinnon:

[inaudible] And when I’m working, because my home is in Edinburgh here, when I go to KLU, I’ve actually got an electronic keyboard in my office there, sitting right beside my desk. So, when I get to relax, I put the headphones on and just play away and that’s a wonderful distraction.

Patrick Daly:

Excellent. So to finish then, how can listeners find out more about you, more about your work and your research online or bookshops or so on?

Alan McKinnon:

So I have my own personal website, which is www.alanmckinnon.co.uk. So, all my life’s work is on that website, including some of my piano playing as well.

Patrick Daly:

Excellent.

Alan McKinnon:

But also my university, KLU, klu.org. Again, I’ve got a personal page here, which is has got my publication listed, and I always plug my book, Decarbonizing Logistics.

Patrick Daly:

Decarbonizing Logistics by Alan McKinnon.

Alan McKinnon:

That’s right.

Patrick Daly:

And then you’ve got klu.org, which is the university website.

Alan McKinnon:

That’s correct.

Patrick Daly:

And then’s, alanmckinnon.co.uk which is your personal websites.

Alan McKinnon:

That’s right. [crosstalk].

Patrick Daly:

That’s about-

Alan McKinnon:

The university is, I think, the-klu.org. So it’s www.the-klu.org.

Patrick Daly:

Yeah. www.the-klu.org. And that’s the university in Hamburg, which is a private university, dedicated to logistics.

Alan McKinnon:

It is, exactly, which I’ve spoken about. So it was founded in 2010. It’s in its 11th year, and it’s a university. We think it’s the only one in the world, really, which focuses very much on logistics operations.

Patrick Daly:

Well, thank you, Alan. It’s been an absolute pleasure talking to you, and I wish you every success both personally and professionally.

Alan McKinnon:

Well, thank you, Patrick. That’s great.

Patrick Daly:

And thanks also to our listeners for tuning in. Any comments or questions, just drop me a line on pdaly@albalogistics.com. So keep well, and stay safe until next time.

Patrick:

Hello, this is Patrick Daly and welcome to Interlinks. Interlinks is a program about connections, international business, supply chain, and globalization. The effects these have had on our life, our work and our travel over recent times. Today on the show we’ll be talking to Xavi Sanz, branch manager of the Huangzhou China office of Across Logistics. Xavi is originally from Barcelona in Spain, and through his career has lived, studied, or worked in several countries including the US, Denmark, Singapore, and China. Likewise, Across Logistics, a Spanish logistics company providing services in air freight, sea freight, road freight, and rail freight, as well as customs brokerage, warehousing and distribution, is truly international. With offices or joint ventures in Europe and Asia and countries such as the Netherlands, China, Cambodia, India, Indonesia, Malaysia, South Korea, Taiwan, Thailand, and Vietnam.

Patrick:

So given the challenges that both manufacturing and distribution companies have been experiencing in Europe over the last year or so, with their inbound logistics, I’m looking forward very much to finding out from Xavi what the latest developments are in this area, and what businesses should be considering as they plan for 2022. So welcome Xavi, and thank you very for being here with us today.

Xavi Sanz:

Thank you, Patrick. The pleasure is mine.

Patrick:

You’re very welcome. So to kick off Xavi, could you tell me a little bit about your career to date? How did you go from studying economics at the University of Barcelona to running the branch office of an international logistics company in Huangzhou, China?

Xavi Sanz:

Yes, of course Patrick. Well, as you said, I did my economics degree in the University of Barcelona. Previously I had the chance to study my last year of high school in the US where I could learn my English when I was 17. Then, while doing my economics degree, I had the opportunity also to do an [Erasmus] in Berlin in Germany for one year to learn German. Then, also a six months in Switzerland in Fribourg on the French side of Switzerland. Well, after finishing my economics degree, I just landed, I don’t know how into the logistics field. Which I had completely no idea about it, right? So I landed in one of the leading logistics companies by the time 12, 13 years ago in Barcelona. Where I worked there for one year.

Xavi Sanz:

After that, I got some scholarship from the Spanish government [Effix]. I had the chance to study six months in Madrid, and work on the Spanish embassy in Denmark for one year. Then also moved to Singapore to work for one year, which was one of my dreams by the time to work and live in Asia. But this is back in… Yeah, more than 12 years ago. After that period, Patrick, in 2010, I had the pleasure to join Across Logistics. What I’m working right now. A company made by three people, only three people, by the time in 2010. Since then, the idea was to open the office already in China. That was my duty to come from Singapore to Spain to open later in China. But it wasn’t possible for the next six years, because we couldn’t find the right partner to open in China. It wasn’t until 2016 that we could open. Then 2017 I came to Huangzhou, the city between Shanghai and Ningbo, to open the branch by myself. Here I am fighting against everyone.

Patrick:

Excellent. Tell me then, a little bit about the business of Across Logistics. What are the main activities of the business in general, and there at the Huangzhou office in China? What kind of clients do you have?

Xavi Sanz:

Yes, Patrick, we are what it’s called the freight for water. We are a logistics company that what we do is, we ship cargo by sea and by air. When it goes by sea it’s by containers, usually. We do also breakbulk, and other type of movements, but by sea and then by air. It’s a very traditional old style business to transport things from point A to point B, there is no secret on that. Well our customers, mainly our customers, are small and medium companies. Small, medium companies. At the end of the day, I come… I’m Spanish, our headquarters are in Spain, and as you know very well. So Spain, and I would say 98 to 99% of the companies in Spain are small and medium enterprises.

Xavi Sanz:

Our company, our customers are also small companies. Although, during the last, I would say, the last two years, more and more bigger companies that are not finding the right solutions or the right alternatives into the logistics industry with our competitors. They knock on our doors and they come to us to find if there is an option. Nowadays I’m proud to say that we work with the small companies, but also with some big companies.

Patrick:

Where did the motivation or ambition come from, in Across, to go to Asia and actually have an office in China?

Xavi Sanz:

That’s a good one, Patrick. Actually, we started in Spain and most of our business comes from China. Most of our customers, they import from China. There was… China has been here for a while already, but it has been always very, very important. I would say that China… There is a busy road in Barcelona called Passeig de Gràcia. It’s a commercial street in Barcelona. Let’s say like a [Spanish]. Okay. Where it’s a very busy commercial street. If you put a store in Passeig de Gràcia you put a store or restaurant in [Spanish] I don’t know if you will make business or no. But, I can guarantee you that you will have a few low of potential customers going through your door.

Xavi Sanz:

So as a logistics company that we are, having an office in China, it brings a huge potential to increase your services. For us, it was not an option. It was mandatory that the logistics company like us, with a very international view, we had to open to China. We had to open to China to be present in China to know what’s going on in China from firsthand. To help our customers in Spain, and then from here also offer other services. Because while you open here in China, you can expand and extend your services, and not focus only on Spain.

Patrick:

I see. So then, as someone from Spain, what kind of cultural differences and similarities have you encountered while working in Asia? What have you had to do yourself in order to adapt to those differences?

Xavi Sanz:

Yes. I’m still on my process to adapting, Patrick. I’m still on my process to adapting. Okay. Since I arrived to this wonderful country and I think I will be adapting here for the rest of my life. China and Europe… Let’s say China and Spain, okay? But I would say China and Europe, or Asia. There are huge differences on terms of cultural, and I think that this is one of the key points why some foreign managers, like myself, comes from headquarters to overseas. One of the points of course, is to [inaudible] also to reduce this cultural impact. One of the examples always I say we receive an order, for example, we receive an order in Spain, “Please contact this supplier. He has some cargo, blah, blah.” So our team in Across China, immediately they would contact the supplier and check the status of the cargo and everything. Right? But for example, the supplier, it might take maybe one day or two days sometimes to reply. Or we might take one or two days to get the full information. Right?

Xavi Sanz:

From the Chinese point of view, if we don’t have information to give, they would not reply the customers in the overseas because, we have no information to give. So because we have no new information to give, we don’t reply. While our Spanish office, or our customers in Spain, due to the big time zone difference they wake up at seven o’clock, eight o’clock in the morning expecting some news from us. Like, “Well, let’s see if Across Logistics contact or not contact.” So, I’ve noticed that at the beginning, maybe we wouldn’t reply on time because there was no news, so we have been working towards this direction. Although there is no news, people likes to know that there is no news. That’s one of the big cultural gaps we had here.

Patrick:

Yeah. There’s lots of tricky differences that are sometimes difficult to process isn’t that right?

Xavi Sanz:

Yes.

Patrick:

In Europe then, over the last year or so, we’ve seen rates for 40 foot containers coming from China jumping from maybe a thousand, $2,000 to anything between, I don’t know, 14, $20,000. How did this situation come about? What do you think are the main contributing factors?

Xavi Sanz:

Yes. It’s right, Patrick. We saw in 2018, rates around 1,000 per container every thing started during the pandemia. I would say everything started in March, April, and May, 2020, I think or ’19, I don’t remember when all the outbreak. When all the people was at home and couldn’t go out, couldn’t travel. Couldn’t go to the restaurant. You know, couldn’t spend money on services. What people did with all my respects, a part of suffering, of course, because it has been hard for all of us. It’s sitting at home and spending money online. In Amazon and all those things. Many people also had to move office and to work at home. So, because they work at home, they buy a new chair, they buy a new table.

Xavi Sanz:

They buy a new laptop. They buy a new computer. Also, people spending more time at home, they see the bathroom, they see this toilet is not good. So they start to fix the house. All these small things that you didn’t do that you expect to do it on the summer. Right? And now you’re sitting there every day, you see this dirty wall, this hole in your wall. You want to fix it, right? So, during that period, Patrick, the demand increase a lot on the products. This demand was shifted to the production in Asia. Don’t forget also, Patrick, that during that time of pandemic, March, April, May, the shipping lines, who are making lots of money right now, I’m hoping to say that. They suffer a lot also.

Xavi Sanz:

They suffer a lot because the international trade dropped down dramatically. I mean, it was amazing. It went down and the shipping lines, they had to take out the vessels. They had to take out the vessel, just park it in the ports because there was too much vessels on that. When the businesses start to recover after a couple of months, let’s say June, July, August, some of the vessels they were out. So imagine that you are a shipping line, Patrick, you have some vessels and you are making money. You’re making money with the existing vessels that you have, and you have 20% of your fleet, or 30% of your fleet it just parked in the port. You see that the prices starts going up, and up, and up. Not because there is increase on demand.

Xavi Sanz:

There is a shortage of supply, right? You, Patrick, as a shipping line owner, you have no incentive at all. You have no incentive at all, Patrick, to bring out those vessels who are not working to bring them on the sea. You have no motivation at all, because if you bring more vessels, what you do is to increase the supply. If you increase the supply of the space the price of the containers goes down. So at the end, I would say, it’s a mix of things what happened. The demand, the international demand, increased a lot. The COVID 19, it’s true that it’s hitting hard. There are a lot of restrictions on the ports. There are some ports are working at 50% of the capacity.

Xavi Sanz:

The vessels they take, I don’t know, they take maybe 10 days, 15 days to unload, Patrick. So why should you take vessels out in the sea? While you see that to unload in Rotterdam, or south Hampton, or Felixstowe you need to wait for 15 days. You have no motivation to do that. So at the end, it’s a mix of things of happen. I think there are some forces in the market that do not want the prices to go back what it was in 2018.

Radio announcer:

93.9 Dublin, South FM.

Patrick:

So yeah, this doesn’t really auger very well for the future. What do you think will happen with ocean freight rates through 2022 and beyond?

Xavi Sanz:

I would be a bit pessimistic on that Patrick. Or, realistic on the same time. I think that it probably will be hard to see those 20,000 euros, or 20,000 US dollars per container that we sold to Felixstowe in this year. I think it would be hard to see again. Or, 25,000 we see from China to some parts of the US. But on the same time, I think it will be impossible to see those rates drop to 2,000.

Xavi Sanz:

I think that rates might go down a little bit still, but will keep high. We saw an increase of the prices went 10 times up. I think that for these 2022 the prices will still be like five times up what it was in 2018. I think Pat, because I was commenting to you, there are many interests in the international trade, and not only shipping lines. There are many interests that the prices do not go down, and on the moment that they go down, the market will readjust maybe. It’s very easy to bring them up again, you know?

Patrick:

Yeah. I’ve seen some clients here shifting their sourcing decisions, say from different parts of Asia, maybe to closer to home, to Russia, to Ukraine, to Turkey, to Morocco. Or, maybe some of my American clients looking at Mexico. That’s a trend, I think, that we is underway before COVID due to environmental, technological, and geopolitical factors. A sort of regional reconfiguration of supply chains. Is this a trend that you have noticed from your vantage point in China? Where do you see this going in the future?

Xavi Sanz:

Yes, Patrick. I’ve seen this, and I think that this topic has been, as you said, it was previous, pre COVID. This topic has been for many years, Patrick. But, it’s like all of us, “Oh, we should do this. We should do this.” But we never do it, right? I think the globalization is a present right now. Of course, it’s normal that many companies, they suffer a lot about that, and they’re suffering a lot. It’s normal. It’s normal that many companies, they look for an alternative, for suppliers who are near their headquarters. I think that for some companies it can be good.

Xavi Sanz:

Of course, it can be good. It can be feasible. It can be workable. It’s true. But you know, all the industrial areas and everything that they’re not born from one day to another. Right? As we move on, China is so far, it’s going in a so high speed. They have been growing so much lately, and we have seen many, for example in Europe. We have seen many companies in Europe that they closed. Or in Morocco also, right? There are many factories also that they left Morocco. So, it’s difficult that now you want, all of a sudden, to find a supplier in Morocco.

Xavi Sanz:

Well, you didn’t buy to Morocco for the last 10 years. Now you expect that to find this same product that you want in Morocco. While maybe that area is no longer there. So what I want to say is that it can be workable for some companies, Patrick, but I think it’s a bit difficult. On top of that, I’m seeing here in China that China has the capacity of production. One thing is, if you can find the same product in another place, which it can be, the other thing is, are they able to produce the quantities that you want? Do they have the production levels that you request? That’s another point, right? It’s not only finding a new supplier, but it’s also making sure that they can produce and they can deliver the product that you want.

Patrick:

Yeah. It’s not a simple question. There’s lots of factors to consider. So, what do you think should be the main factors to consider for company owners, and managers, when developing their logistic strategies for the future? Say, for next year, and for beyond?

Xavi Sanz:

I would… Well, this is my humble advice, Patrick, because I’m not one to give advices to too many managers. But, I would say just to focus on two things. The first thing is to work more closely with the suppliers. To work more closely with the suppliers. I think that all of us are suffering. I think it’s very important to work with your suppliers. Sometimes, we look for different, “Oh, I’m going to buy this in this supplier. I’m going to buy this in another supplier.” It’s good to diversify the risk. It’s good. It’s good not to have all the eggs in the same basket. I agree on that. I think it’s important, for example, not to have all the supply, for example, in China.

Xavi Sanz:

For example. And this point could be good that you mentioned, to look for an alternative. But saying that, I think it’s important to work closely with your suppliers, talk to them and listen to them and tell them what is your forecast and everything. So work good with your suppliers, because most of us, we depend on them. The second thing, Patrick, is the price of the logistics. As I commented to you before, I think the price of the logistics will keep up already. People know that. I think that by the time, right now, I think that all companies should have updated their selling prices because the logistics went up. I think that at the first stage, many companies, they absorbed this. They absorbed this increase in the logistics because they were not able to increase the price.

Xavi Sanz:

But come on Patrick, 2022, it’s a new year, it’s a moment to update the prices. In this increase in the logistics, you should put it on your P&L and put it on your product, on your cost forecast. Once you put this cost and this cost is part of your cost of the product, and the market can accept it, then just forget about logistics, because logistic will be high anyways. So, just focus on what you do best.

Patrick:

Yeah. So it could be a case of, as you say, in Spain, “New Year, new life.” Right?

Xavi Sanz:

Yes, exactly. New year, new life. Ha ha!

Patrick:

So as we come to the end of the interview, Xavi, it has been really interesting. I think we’ll change gears here a little and maybe just ask you some questions about yourself. Living in Huangzhou as you do, what kind of things do you like to do in your spare time when you’re not working?

Xavi Sanz:

Yes. When I’m not working, which is unfortunately it’s not that much time, Patrick. Because, we work in logistics and people are expecting… Working globally you have customers in Europe, you have customers in Latin America. When customers in Latin America, they wake up, it’s already eight o’clock, nine o’clock at night here. They expect to reply something. I would say I’m a gentle guy, you know? So, I think it’s always nice to reply sometimes. So anyways, jokes aside, I’m a very familiar guy, Patrick. I’m a father of three kids, wonderful kids. I’m here with my wife who is also working. Well my time, my free time, is spent with my kids. I try to do some sports, but I do it on my lunch time so I can take advantage. My free time, I spend it with my kids, Patrick.

Patrick:

Excellent. Are you reading or listening to anything at the moment? You know audiobooks, podcasts, and so on that are inspiring you and that you would recommend to listeners?

Xavi Sanz:

Yes. I’m trying always to be updated. Basically I like a lot, all those topics about sales. I like it. I also like the topic about China, and related to that, I’m reading right now one of the guides from Daniel Disney. He’s a sales guy in LinkedIn. The book he’s called the Ultimate LinkedIn Sales. It’s a book about, I don’t know if you heard, it’s a book about sales. How to take advantage of LinkedIn. I think LinkedIn is a very good platform nowadays. It’s very professional. I think it’s very useful right now on this online. So I’m trying to learn a little bit more, be more present on the net, and be there.

Xavi Sanz:

Then one other book I’m also reading, but I’m taking this more [inaudible]. It’s called The Governance of China from Xi Jinping. It’s a book about some of the talks of Xi Jinping, the president of China. While reading the book, can see, and you can imagine what will be China in the next year. Because in China, China is a country where they plan things. It’s so huge country that they need to plan things. They don’t plan things from one year to another, like it’s in Spain, for example, or the Western countries. These guys, they’re doing like a 10 to 30 years planned. So, they have a really long term view. A long term vision on the country and everything. I’s a very interesting book that it’s teaching you what will happen on the next years.

Patrick:

Okay. How can listeners find out more about Across Logistics and the services that you provide? Whether in Europe or in Asia?

Xavi Sanz:

You can always reach me also always in LinkedIn Patrick, as you know, Xavi Sanz. Also in our website, www.AcrossLogistics.com, or my email, Xavier, X-A-V-I-E-R @AcrossLogistics.com. Or if not, Patrick, they can always contact you right?

Patrick:

Sure.

Xavi Sanz:

Feel free to connect me.

Patrick:

Exactly. Thank you very much, Xavi, it’s been an absolute pleasure. Wish you every success personally and professionally in the future.

Xavi Sanz:

Thank you. Thank you very much, Patrick pleasure was mine. Thank you.

Patrick:

Thanks to our listeners also for tuning in. With any comments or questions, drop me a line on pdaly@albalogistics.com. So, keep well and stay safe until next time.

Patrick Daly (00:09):

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

Patrick Daly (00:23):

Today on the show, we will be talking to John Gattorna, founder and principal of Gattorna Alignment, a boutique advisory firm based in Sydney, Australia that works with selected clients around the world to help them develop customer focused and innovative supply chain strategies.

Patrick Daly (00:39):

John is one of the most respected supply chain thought leaders in the world today. So never has this mission to develop and implement innovative solutions been so important for everybody as it is today as our supply chains emerge reeling from the impact of COVID, and must now phase into doing a lot of the heavy lifting on the road to decarbonize our global economies in the coming years.

Patrick Daly (01:01):

So welcome, John, and thank you very much for being here with us today.

John Gattorna (01:04):

Thanks, Patrick. And nice to be with you.

Patrick Daly (01:07):

You’re very welcome. So John, your career stretches back over several decades and includes executive [crosstalk 00:01:13] corporate sector, academic research, university professorships, authoring several books, and now thought leadership through your boutique advisory firm. Could you tell us a little bit about your career milestones and how they came to shape your view and conceptualization of supply chains today?

John Gattorna (01:29):

Mm-hmm (affirmative), well, I started off as an engineer, did an engineering degree at Melbourne University and worked as an engineer for about nine years. And in that time, I worked for a public works type of road construction authority, and two American companies. I worked for Vickers Detroit Hydraulics and also another company called FMC Corporation, both of them American. It was a good experience for me, but towards the end of that, I was getting a bit fed up of engineering and did my MBA at Monash University, also in Melbourne.

John Gattorna (01:58):

Now it was during that time I met Mark Doctoroff. Mark Doctoroff was a Fulbright scholar, he was out from Canada, and he was the one that brought the idea of teaching physical distribution, what was that called in those days, in the mid-70s, to Australian Universities. And I did it, and I got sort of hooked on it, and I got to the stage where the interest or the hobby became greater than the career, as it were. I decided, “Boy, I think I might get into this.” Looking back on that it was an amazing preconception because four decades later, if I could have imagined that everyone would be talking about supply chain, and yet back in those days, no one even knew what logistics was, it was just a very lucky break.

John Gattorna (02:46):

Anyhow, make a long story short, I decided to go and do my PhD to leapfrog into the field and looked around and decided to go to Cranfield. I knew Martin Christopher, I knew Gordon Wills, David Walters. There was a whole group of them that’d come down from Bradford to start the new business school at Cranfield. I arrived about three years later in ’75 there and started to do my PhD. And really, we stayed there for five years, I almost got to the point where we just decided we were going to stay in UK, to tell you the truth, but we had two young boys and the weather was getting us down, so we decided to come back to Australia and we came back here.

Patrick Daly (03:28):

The [crosstalk 00:03:28].

John Gattorna (03:28):

And when I came back, the only way I could get back in was to take an academic job at University of South Wales, teaching marketing and logistics. But to answer your real question there, I guess my mindset was really framed at Cranfield because they are unique, there Martin Christopher’s approach to logistics was very much the marketing logistics. In other words, it wasn’t an operational field, it was very much a field that focused on the customer and that’s the way it was researched and taught.

John Gattorna (03:57):

So when I came back to Australia, I taught it that way. And then after a few years, I got fed up with the academic scene here because it was not a shade of what it was at Cranfield. So I started my own consultancy in the mid-80s and built it up over 10 years and to the point where Anderson consulting approached me, and eventually became Accenture, and bought my business and I went and started there. And that was a break for me because I was getting to a stage where I needed a bigger pond to swim in, as it were, and that gave me a lot more resources. And I built the whole Asia-Pacific practice up over seven or eight years and retired from that in 2003-4.

John Gattorna (04:36):

Now for a couple of years, I sort of recovered, but then there were people calling and wanting to do stuff, and then that’s when I got the idea, “Why don’t I get a small group of us and just work solely on, not ordinary stuff consultants do, but wicked problems, and try and develop a theory.” Because the big problem in all through this was that logistics and then what became supply chain, it was very operational and it didn’t have a lot of underpinning conceptual strength. And so, a big part of my life then was to concentrate on developing frameworks and templates which would guide us in the design and operation of our contemporary supply chains, and that’s what happened.

Patrick Daly (05:18):

And one of the key ideas I think that possibly came out of that was this idea of dynamic alignment.

John Gattorna (05:24):

Yes.

Patrick Daly (05:24):

So, what is the essence of this idea and what does it look like in practical implementation?

John Gattorna (05:29):

Well, it’s funny because I was very fortunate when I first got back in my consulting I was joined by a guy who came from South Africa, who had a PhD, and his strength was very much looking at… In fact, his PhD had been all around this idea of aligning internal culture with a strategy. And his hypothesis is that if you don’t actually align the internal subcultures in the business with the strategies that you write down, you get a lot of spinning of wheels and you end up not delivering the strategies you said you were going to deliver. Now that, we all know this has been a problem for years, implementations are never as good as we thought.

John Gattorna (06:10):

And he joined me in the business early on and we started talking about this concept of alignment, but extending it. We said, “Well, why don’t we go further out and look at the marketplace and say, ‘What is the marketplace telling us?'” And then we had the strategy bit in the second level, and we had the cultural bit at third level, and the fourth level we added was leadership. And we came up this idea, and we wanted to test it. It was a business model, it wasn’t a supply chain model in first instance, it basically said, if you want to run a business, and make money, and do well, or it could be a not for profit, there’s four things you’ve got to line up. You’ve got to understand your customer’s expectations, align and come up with value positions which beat those, and the third level is create subcultures in the business that can propel these value propositions into the appropriate segments.

John Gattorna (07:09):

And finally, you need a leadership at the top that understands what’s happening in the marketplace and therefore knows how to shape the cultures to drive the strategies. And the fascinating thing was that we had all this conceptually, and then people started asking us, “I’m sick of this one size fits all supply chain…” You know, the big question then became, well, if one size fits all is flawed because it implies that all customers are the same, and therefore we have one supply chain meeting them. The question then becomes, if one size fits all is flawed, how many supply chains running through the business, or pathways, do you need impractical terms to actually get about an 80% fit to the marketplace? Because in a lot of companies, the one size fits all was creating about a 10% fit, and everyone else, and then creating too many exceptions.

John Gattorna (07:58):

And so we spent years, and I mean decades, researching and working with companies, until we found the answer. And the answer, was 4+1. The +1 is the extreme situation, which you’ve just seen with COVID, where you do something incredible, you forget about costs, you just have to be creative in overcoming disruption. But the four, sort of business as usual type supply chains really came from us understanding that there were four major behavioral segments that we found for most products and services, out of a possible 16, but there were four that we saw a lot of, and that was the segment that tended to buy on loyalty, and would share things and be collaborative. The segment that was just looking for lowest price reliable, people call that the lean segment. The agile demanding segment, that’s sort of opportunistic and won’t share.

John Gattorna (08:50):

And one that we found later on, we called it the project segment, or campaign segment, where in a major construction, you need a different supply chain than you do an FMCG. And so we started testing all these in depth with companies like Venture Challenge in New Zealand, Schneider Electric, globally. Shell, Unilever, and everywhere we went and everything we did with it, it just got better and better. And it just proved our point that supply chains are actually driven from outside in, and we’ve got to get away from just designing them from inside out, as it were. And that was our big thing, and practical breakthrough.

Patrick Daly (09:28):

Sounds like a systems approach, a whole of business approach to thinking about the supply chain.

John Gattorna (09:33):

Yeah.

Patrick Daly (09:34):

So, you know how in companies you get siloed disciplines, so how are the best companies managing this? Is it through having maybe a supply chain supremo in the business, or educating all the departmental heads in supply chain, no matter what their specialization? So how is that done in practice?

John Gattorna (09:49):

Well, in practice, the best companies have CEOs that have a vision, that meeting customer expectations and improving customer satisfaction is the way to go. The question is, well, how to do it? And say, in the case of Schneider Electric, the chief exec there, they had a very good company running, they’d made great product. And they initially started to try and re-badge some of their production people as to become supply chain people, and it just didn’t work. So the CEO went out and he head hunted and found Annette Clayton who’d come through General Motors and was working for Michael Dell in the high tech industry at that time. And she came across, and I had met her early on when she arrived.

John Gattorna (10:34):

And she brought into this whole idea that the verticals are fine, we need specialisms in production and finance, and marketing and so on. But actually, the customers buy horizontally. And because, particularly when you got to around 2000, and customers started using the internet, and things started moving very much faster. It was impossible for a functional head to run a vertical and also be part of a horizontal. And that’s when companies like Zara recognizing that they’re in the fast fashion business and they had to do something different. They started, and others like Adidas tried it as well, and a number, they [inaudible 00:11:18] people out of those functions and put them together in a multidisciplinary team, and then focused them on particular segments in the market. Which, like cross-functional flows, that went across those functions. But they had contacts with those people because they had informal contacts with people inside their own team contacting and being in touch with the people.

John Gattorna (11:37):

And that’s really, I can’t think of a better model. It’s not a matrix model, it’s a dual model where they both, the vertical and the horizontal, work in sync, help each other, with both of them having KPIs, which contribute to get getting maximum custom satisfaction and doing it quickly. And that’s really what the strength of Zara is, and people like that because they’ve been able to increase the clock speed of their business to roughly about, I don’t know 15 days, against the nearest competitor 30 days, or a department store might be 120 days. So the organization design is crucial to tell you the truths, yeah.

Patrick Daly (12:16):

You mentioned there along the way, this concept of outside in thinking, so what is this? And what are the implications of it?

John Gattorna (12:23):

Look, the problem is that for the first 50 years, from about ’67, when supply chain was first written about in the Harvard Business Review for the first 50 years, we had people sitting in businesses with all the right intention saying, “I think the customers want this.” Most marketing departments or commercial departments weren’t really telling or helping the logistics arm of the business. They just expected them to, from virtually a standing start, to do a good job. You can’t do that.

John Gattorna (12:56):

So the idea of outside in is to say, how do we, as a supply chain group, get a direct link and understanding of the customer’s expectations? And in the case of Schneider Electric, we didn’t just ask marketing Annette Clayton had such credence with her chief executive that she had our own budget and we went and did our own research. So, it’s about segmentation really it’s about segmenting customers. Don’t segment them along institutional, industry lines, or big or small, or profitable, those things. You’ve got to segment them based on what expectations do they have as they look back towards their supplier. Is it they’re looking for a safe sort of relationship for which they’ll pay a premium? Or, is it they’re looking for the lowest cost, leanest sort of supply? Or, are they looking for something quick response from time to time?

John Gattorna (13:51):

And the real complication is that the same customer can have different buying behaviors depending on the situation they’re in, so they could be lean one day and then suddenly they’ve forgotten something. They want a quick response, so they want an agile response. And that’s why the word dynamic has crept into this, that you have to design a range of processes inside your business so that you can switch a bit. It’s a bit like switching train tracks, a product can switch across and be delivered in different ways depending on how the customer wants to be serviced. And it could mean different pricing, different time schedule, different packaging, even different branding.

John Gattorna (14:31):

And that’s the bit that’s really stumped it’s made it very difficult to do because many marketing people thought that you could segment customers and put them in a box and just assume that that’s what they were at forever and that they would stay there. But the answer is, the customer’s moving. So if we have a static supply chain and the customer’s moving, we’re always having to follow the customer. And it becomes a question of exceptions, whereas if you’ve got four or five guns pointing out the window and the customer’s moving, you just start to pull the levers depending on what approach the customer is requesting. So that’s the way it is.

Radio Announcer (15:08):

93.9 Dublin South FM.

Patrick Daly (15:11):

Yeah. In your latest book, Transforming Supply Chains, published just in 2020, of which I have a copy here on my desk. You speak about this and you set out these five main supply chain types, which I think are the collaborative supply chain, lean, agile, campaign, and fully flexible. So could you just set out briefly the key distinctions between those types?

John Gattorna (15:32):

Yeah, basically they’re the mirror image of the segments that they’re serving. So the collaborative supply chain is very much servicing that group of customers that we know as generally collaborative. I know, this word collaborative has been overworked a lot, but in every market, every product market situation we’ve found, is that there is some percentage of collaborative customers who… And the best way to gauge whether customers are generally collaborative is if they will share their data with you. So if you’ve got people who will share with you what their forecasts are, or sit down with you and therefore that makes life very easy. The cost of producing for those people is a lot less because you’re not having to use a lot of capacity, you know exactly what you want for them, and everything’s scheduled, and they pay a premium and they’re risk averse, and that’s great.

John Gattorna (16:22):

The next group is the transactional customers that probably are 40 to 50% in some markets, and that’s the lean supply chain. And basically they don’t want any of this relationship stuff. The great thing about them is they tend to buy the same thing all the time, so if you look at your data, you can sort of see what people are buying and you can forecast. So for both collaborative and lean supply chains there’s a fair bit you can do around forecasting and getting it pretty right.

John Gattorna (16:51):

But then you move beyond that to what we call the dynamic customer, or the demanding customer, who’s opportunistic, they don’t share anything, they turn up on your doorstep and you haven’t seen them for three years. Yet, they want this, they want that. You can’t see them coming. And so to service them, you need to carry a lot of redundant capacity in your system. And that’s the fashion market for you to some extent. If you go to look at Zara’s outfits, it’s amazing, though they control it to some extent because a lot of their fashion is going into their own stores, they still have surges of product coming from their suppliers, and some of their own factories, into their DCs and out again. And if their DCs weren’t empty, then they wouldn’t be able to absorb them, on top of sort them out and send them out. So, the big problem with the agile supply chain is it does require capacity, redundant capacity, and that costs some money and the big problem is people want agile response for lean price, if you like, right?

Patrick Daly (18:00):

Yeah, yeah.

John Gattorna (18:00):

And then there’s what we call the campaign supply chain, which is big projects like London Airport it takes several years, a lot planning involved, putting assemblies together, everything. It’s not just like making baked beans in a factory and shipping it to a wholesaler, there’s a lot of design work, a lot of assembly, a lot of crane lifts, and putting things together, it’s a different sort of supply chain. We call that the campaign supply chain, and it’s all about grouping things together and making sure that the products that you’re going to use in putting these assemblies together are not stolen by another part of the company and shipped out somewhere, and suddenly you end up on site with something that’s short and you’ve got to expedite it. So they’re the four main ones.

John Gattorna (18:44):

And then the final one is the fully flexible supply chain, which is a positive and negative if it could be used in a time of great disruption, like a volcano like we saw in Iceland years ago, or the floods in Thailand, where it creates havoc with production. You need to have thought through what you do in advance. Have you got alliances? Have you got other sorts of substitute suppliers that you could pull in? And at a national level a very good example of it is the bush fires. You know, the Bush fires in Australia, or the bush fires in Southern Europe, none of those governments have got enough equipment to fight them. So whole governments take equipment, they help each other. They bring in air tankers, and send people across, it’s the same at the company level, you’ve got to do a lot of thinking so that when the (beep) hits the fan you can’t just start thinking about what you’re going to do, you’ve set it all up.

John Gattorna (19:37):

The positive side of fully flexible, another example of that is chocolate, Easter eggs if you like, you spend a year building up and then you release them on the day, so there’s a massive sort of distribution if you like throughout the country in a very short time, that takes a bit of creativity. So they’re the five that tend to pretty much cover, but there’s some variations around those because in behavioral terms, there’s about 16 if you talk to the psychologists, there’s about 16 different mindsets that we in human race have.

Patrick Daly (20:11):

And I, as a business person then, how would I find out from my customer profile who’s who? Would I be going into my data, my order data records, and doing analysis to find out?

John Gattorna (20:25):

Yeah. Yes, you can.

Patrick Daly (20:26):

And is the implication of that then that most businesses will have to be able to work on under five? Or, would it tend to be one principle, and then maybe two or three of the others? How does that pan out?

John Gattorna (20:38):

You can make some choices, yet there may be you’ll find that those five will be present, but four of them, the last one is something that happens only in extreme conditions. But of the four you’ll find that the only thing that differs from country to country, or product to product is the different proportions. You know, in some country products you may have more lean. Or, if you go to South America, they may be more collaborative.

John Gattorna (21:00):

But to come back to your original question, a lot of it’s in the data. That’s why I say to people, frankly, if you’re a billion dollar firm and you haven’t got a bunch of data analysts culling through your data, conducting analysis, like coefficient of variation, where you look at the fluctuations in the actual demand data, you can actually see the base load type data, which is largely repeat buying, which is that collaborative demand pattern, or even some of the lean shows a very sort of shallow…

John Gattorna (21:34):

But when you see big spikes like that, it’s clearly you’ve got some agile thrown in. One thing, one analytical approach won’t help you. The other sort of corresponding thing you do is, from time to time, and you don’t have to do this very often, but every maybe five years, you go out into your marketplace and you do some sampling and you use conjoint analysis, or trade off analysis techniques that they use in marketing all the time, and marketing people have been using this conjoint analysis for years, where you just don’t go to people and say, “What would you like?” Because they’ll say, “I’ll have everything.” You give them a number of choices and you force them to trade one thing or another. And the combination of those techniques and the data you start to see broadly what…

John Gattorna (22:19):

And it doesn’t have to be accurate. You might see that roughly 10% of my market is collaborative, 40% transactional, 30 or 40% is agile, and 15% is a campaign, and 1% is fully flexible. Once you know that you can do some reverse engineering to make sure you’ve got those sorts of things covered.

Patrick Daly (22:39):

And you’ve got to be updating that I guess, because next year it might be different, or in five years-

John Gattorna (22:42):

Yeah, well the good news is that it doesn’t change rapidly unless something really desperate happens, which is what’s happened just recently with COVID, it has actually changed the buying behavior hugely because what it, by having people isolated at home, there’s been a big shift away from spending money on services, and restaurants, and traveling and all that stuff. And what are people doing? They’ve embraced e-commerce.

John Gattorna (23:09):

And so you’ve seen the amount of e-commerce has gone up, I can’t remember the figures now, but it was something like… the growth has been about 20 or 30% per annum in the last few years. And then in the last year or so, it’s been about a 40% increase in e-commerce over just standard sort of purchases. So, the big trick here of course is when things flatten down again in another year, or 18 months, after COVID settles down, will people go back completely to where they are? Or, will they stick with a lot of this e-commerce, which is very demanding because it’s very much the expectation of short lead times.

Patrick Daly (23:52):

At, Gattorna Alignment, your firm, you a run supply chain retreat series each year-

John Gattorna (23:58):

Yep.

Patrick Daly (23:58):

… in different venues around the world. And for 2022, the theme of the series is resetting global, regional, national supply chains for a post-COVID world. So what are the major factors and trends that you’ll be examining then in this next series?

John Gattorna (24:12):

Well, I think what we’re going to try to do is bring to people’s direct attention that we are now in a post-COVID, now in a sort of two tier world, if I could call it that. We reckon business as usual volatility is probably going to be greater than we’ve seen before, so we could be looking at 30 or 40% fluctuation in supply side and demand side. Because supply side is also a problem with components, and things coming in, and raw materials. And we want to talk about what sort of supply chain configurations can cover that type of fluctuation. And then on top of that, we’ve got to be prepared with the fully flexible supply chain to cope with a once in 10 year, or once in 20 year extreme fluctuation, which may happen at the regional level, it may be a flood, or it may be something like that. Or, it could be another virus getting out of China and creating havoc across the globe.

John Gattorna (25:09):

And the major part of it is we are trying to get people a way… we’re looking at this idea of de-globalization, if I could use that term. I think globalization has gone too far, driven by procurement people who have had KPIs to reduce cost of all costs, sort of thing. And so they’ve extended our supply chains to extreme lengths. What we want to do is reduce the length of our supply chains. So look for regional and local sources of supply, so that if things go wrong, we’re not extended so far. And we want people to start changing their priorities around, from again lowest cost at any cost to resilience. And saying, “Look, we want to be able to survive the volatility of the future. Yes, we may have to pay a bit more, but isn’t it better to be around than forced out of the business?” So that’s really what reset is, trying to get that balance right, Patrick.

Patrick Daly (26:07):

Sounds like we, maybe after the 2022 series there might be another book in the pipeline after…

John Gattorna (26:11):

I think there is. Every four or five years, the blood rushes to the head and we’ve got enough content in our heads to get it down on paper and get it out there. We love doing that because that’s part of our whole vision, if you like, is to develop our thinking and then put it out there for people to use and interpret.

Patrick Daly (26:29):

Okay. So as we come to the end, now how can listeners find out more about you, about your work, your thinking, your writing, and of course the supply chain retreat series?

John Gattorna (26:37):

Well, look, I think Patrick, the best thing is to go on our website. Everything I do, my blogs, articles, books, et cetera, they’re all on www.GattornaAlignment.com, or www.JohnGattorna.com, either one. And there they’ll also see some details around the forthcoming series of global retreats. Which by the way, another forum for us to take a small group of senior people and explore some of these things that we’ve been working on over… in this case, we’ve missed the last two years, so we’ve got quite a buildup of material to discuss, and we love doing it because we get back into that interactive mode. Zoom’s been useful, but it’s not the same as having a good pow wow locked in a room with 30 very motivated people.

Patrick Daly (27:25):

Sure. So that’s GattornaAlignment.com?

John Gattorna (27:27):

Alignment. Yeah, just one word. GattornaAlignment, one word www.GattornaAlignment.com.

Patrick Daly (27:33):

And Gattorna has got two Ts.

John Gattorna (27:35):

Yeah.

Patrick Daly (27:35):

Is Gattorna is that Maltese, Italian I think?

John Gattorna (27:39):

No, it’s Italian. It’s got two Ts, G-A-T-T-O-R-N-A Alignment, just the normal word alignment. And that’s the whole idea that everything we do, we’re trying to… We started out business to business alignment, then we realized that within businesses, there’s a whole lot of strands running through a business and we’ve got to make sure they’re lined up. And in many ways the analogy I’ll make, we use the sort of term it’s the supply chains now are very much the central nervous system of our business and our enterprise. So yeah, it’s Italian descent out Genoa a long time ago, but we’re here in Australia now. And in fact, I’m going to write a book about the family when I get a chance, but I haven’t got time at moment.

Patrick Daly (28:18):

Okay. Excellent, very interesting. I look forward to that. So thank you, John, it’s been an absolute pleasure, and wish you the very best for the upcoming series in 2022.

John Gattorna (28:26):

Thank you. And we’ll make sure… Well, you’re coming to one of them anyhow, so you’ll get a firsthand view of it Patrick.

Patrick Daly (28:33):

Yes, I’m looking forward to it very much.

John Gattorna (28:34):

Okay.

Patrick Daly (28:35):

So thanks also to our listeners for tuning in. Any comments or questions, just drop me a line on Pdaly@AlbaLogistics.com. Keep well and stay safe, until next time.