Decision science to build resilient supply chains

Transcript

Karen: Welcome to Pragmatism in Practice, a podcast from Thoughtworks, where we share stories of practical approaches to becoming a modern digital business. Sustainability is working its way up as a business priority, but it's fair to say that companies may struggle with where to start. The supply chain is a foundational area for companies seeking to get the full picture. With such complex systems, the options are endless and many organizations may find themselves overwhelmed to make change.

How can you eliminate trial and error and avoid compromising the bottom line? When it comes to sorting out decisions to maximize your environmental profile and your profitability, our guest today has some practical advice.

[00:00:45] Karen: I'm your host, Karen Dumville, and I'm here with George Earle, Global Commercial Director office of the chief commercial officer at Thoughtworks. Welcome, George.

[00:00:55] George: Thank you.

[00:00:56] Karen: George, can you start by giving us a brief bio and your credentials in the topic we are discussing today?

[00:01:02] George: Sure. I've been at Thoughtworks for over five years. I have about a 25-year enterprise systems background. That includes architecture development, machine learning, technology application, and internet technology innovation. As far as supply chain, I've been leading development and demand forecasting, just-in-time logistics in an international setting, and continuous manufacturing solutions at a few companies, including Thoughtworks, Right Hemisphere, Non-stop Logistics, and Triple Navigation.

[00:01:36] Karen: Great. Sounds like you're well prepared to discuss this topic today. The supply chain's been getting a lot of attention recently with the impact of the pandemic. Besides checking off the ESG box, why is now a good time to look at the supply chain with an eye on environmental impact?

[00:01:53] George: Thank you, Karen. Well, this is a very interesting time right now in the world. There are quite a few factors that are coming to head this year and this decade. We have economic and political globalization. Unfortunately, we have some armed conflict. We have pandemics, we have climate change that are causing lots of impact to the supply chains of many industries and companies.

Now, on the positive side, political globalization is forcing a lot of governments around the world to adopt global institutions. Over the long term, these governments are somewhat becoming more accountable and it forces them to pay attention to ESG commitments like the new Paris Accord, meaning that they just had in the last six months.

Now, we can see that governments are pushing back but economic globalization also has immense trade and debt leverage. For example, the world environment is very concerned about certain nuclear facilities that are being threatened and they have a lot of pressure that they can apply even with the tensions that are ongoing right now. In a globalized economy, countries are specializing where they have a competitive advantage. We've been taking advantage of that, different parts of the world are specialized and have high volume output.

Those prices should be lower. The economic growth is becoming more widespread and these countries can benefit from that. Now, this is the ideal. These are assumed in an environment where countries are transparent, they develop and practice free trade and they adhere to international law. What is the issue?

If we think that's a good idea, and what's happening at the exec staff level, well, interestingly, we have some new heroes because of sustainability and the procurement and the supply chain executives, they're now looking at re-engineering, rebalancing their supply chain and using the international and logistical challenges as ways to help their companies understand that the status quo isn't good enough for what we've been doing over the last 20 years.

They're now being forced, in a lot of ways, to look at alternatives. While they're looking at these alternatives, they're also saying to themselves, "Well, let's include sustainability as a requirement for these new vendor contracts and our logistical network re-engineering." And in fact, there are competitive advantages, not just resiliency in doing so.

[00:04:47] Karen: Right. You mentioned one of these heroes perhaps being the tech leader in an organization. Thinking about that particular role, how can tech leaders develop sustainability strategies  across the full tech lifecycle covering procurement operations and IT equipment retirement?

[00:05:06] George: Well, as we know in a globalized economy, money, products, materials, information, people can flow more swiftly across borders. The supply chain executives and procurement executives are trying to re-engineer or re-balance their supply chain, but they need their IT and their digital peers to engage with them as a team. Now, they should use digital business and decision science strategies that align their supply chain with their IT lifecycle, things such as logistical topology, technology modernization, sustainability adoption, business interruption resiliency so they can handle things such as what's going on right now that are events that are beyond their control.

Now, if they incorporate a strategy that includes these things, the risk of more frequent events that, historically, we were calling black swan events, and therefore being viewed as not very frequent. They can deal with these because, well, how come we're having black swan events every year, every 18 months? Part of that is because we're more connected. The countries, individually, might have these events, but now that we're connected to all of the countries and a lot more tied away, these events are showing up one country this year, another country next year.

When we're connecting to these heterogeneous supply sources, we need to be taking into account the policies and politics that go along with it.

[00:06:43] Karen: What are some challenges or key considerations for businesses to look at across the supply chain?

[00:06:49] George: Well, there are quite a number of challenges and considerations right now. There's hope right now that the post-pandemic supply chain was going to start smoothing out in 2022, and then yes, we had yet another political event happening in 2022. Even though in the last couple of years supply chain stakeholders have been trying to become more resilient, new virus variants, extreme weather, political conflagrations, and more unpredictable disruptions are interrupting this recovery effort, having fits and starts with this, trying to reboot what's going on, and they're occurring without any warning.

Supply chain operations that can focus on resilience in spite of recoveries will find themselves being able to mitigate future surprises better. Let's take a look at some of these challenges in the going-forward business environment. We all know that consumers have made a massive shift towards online shopping because of COVID. What we are realizing now is, even though people are going back into the stores, they're not going to give up their e-commerce.

E-commerce, the share of online shopping in a lot of companies, that market share is not going to slow down. It's going to continue to gain. Stores are having to be more creative in how they handle both of these different channels right now. B2B, business-to-business, has also made a massive shift towards digital business because of the pandemic and stay-at-home issues.

Platforms and networks and digital e-commerce have become very important between businesses. [unintelligible 00:08:40] is not going to be dismantled but will continue to be a challenge though to the legacy inventory of IT systems. This big modernization effort, a lot of it is being driven by being caught by surprise by the acceleration of digital e-commerce and business-to-business networks.

Another consideration is the renewed environmental and policy pressure that is simultaneously demanding new forms of digital accounting of greenhouse gases so we can make progress to carbon neutrality across companies' operations, across their extended supply chain and the IT infrastructure.

Another consideration is something we call decision science. You can use it to understand and provide decision authority, which is a fancy way of saying not using scientific while blank guessing to choose between different sustainability options across the supply chain.

Another practice that has been widely adopted over the last 25 years has now been shown to have a lot of holes in it. That means you will need to challenge it just in time. Oh my goodness, yes, just in time is the best practice. Why has it become a challenge now? Well, the hyper-focus on cost efficiency and lean processes has left the supply chain extremely vulnerable to disruption from events such as COVID. If people are staying home and manufacturers shut down, now the supply chain has been choking, there's no stock in the warehouses, no stock for the trucks to ship to the port. There's no stock for the ships to move across the ocean, and then all of those processes that are based on just in time have now no inventory that just continues to move down the food chain when you have this issue.

Another thing businesses need to consider is to move, to focus on metrics beyond the very typical ones that they have been using lately, such as total shareholder value and case fill rate. Now they're laudable but they are missing the high operational risk of these necessary but not-sufficient metrics. They have missed the high operational risk of these necessary, but not-sufficient metrics. How do we and should we start maintaining our service levels beyond these two metrics? We need to consider more transparency to supply chain signals that up until now were unknown or ignored.

The last consideration we should think about is very popular as well, nearshoring or reshoring. Business leaders hope to avoid the above problems, but these new initiatives themselves will take time to implement. If we start moving logistics and procurement and production activities close to the customers, that's actually going to take a lot more time. You have to find new vendors, you have to find new transportation channels, there's new systems you may need to integrate to, and that's something to start considering in our current environment.

[00:12:01] Karen: That's great context, George, in terms of what's happening in the industry. Probably in your role, you see and hear a lot in terms of what's happening on the ground. What changes are we seeing our clients and partners make across the supply chain?

[00:12:19] George: Our customers and the supply chain leaders within them are starting to seek improving their resiliency by using redundant suppliers in local regions to avoid complete dependence on the international delivery we talked about. That way, suppliers in other regions step up production to fill the shortage. However, these systems are designed as centralized hub and spoke.

Now the problem with that, as we see, is very centralized hub and spoke systems are completely dependent on their spokes, if you will. If the spokes breakdown, then there's nothing in the hub, then the hub has nothing to distribute. If you start localizing things, well, now we're going to have a more distributed hub and spoke system.

Now, the retail world has started to deal with this first. We may know these as online purchasing and shipping from store instead of from DDCs, digital distribution centers.

Another area that we're seeing changes in is that IT and digital execs are taking advantages of advantages in what's called event-based systems and control tower systems. These are dashboards that look at a lot of signals, understand the process and the flow of goods and information, in some cases, finance, through their systems and through their suppliers.

Another area's business process analytics. Again, focused on these change networks of logistics. I mentioned already decision science is an area that people are starting to take advantage of. Lastly, IOT technology, because that's where a lot of the signals are coming from trucks and ships and warehouse, robots and other things that are in the process, in the logistics network that people can start listening to.

Now, they need to balance all of these ideas and changes with complicated and risky interconnections that they're created in dependencies. Now, we have two customers that specifically are making some changes. One is in the pharmaceutical manufacturing area, one is in retail. We can mention them for a second.

The first one, in pharma, specifically came to us on top of their basic ERP system challenges, and they wanted to implement, again, this distributed hub and spoke system because they were buying up other sub-manufacturing companies. They were distributed in multiple countries, therefore adding more distributed logistics, inventory and planning and distribution. Once we're finished doing this and they're finishing their business operation integration, this will provide them a lot higher level of distributed resiliency and growth, while lowering transportation costs and event disruptions because they won't be sending all of their inventory across the oceans.

Our second client is the retail client. We have supported their sustainability goals with a framework we call the Cloud Carbon Footprint. The purpose of this is to tackle the very opaque issue of IT carbon production. While all our data centers and our algorithms are operating, they're using up electricity, and if that electricity isn't 100% green, it's generating carbon.

Our framework allows for multiple cloud environments, multiple hyper scalers, to actually measure what this cloud footprint is. In some cases, we have made their IT more transparent in the production of this carbon and lowered their operational costs, because they've been able to identify what algorithms are causing these issues and the improvement in lowering the carbon output is also improving the performance and they run faster.

[00:16:14] Karen: Some great practical examples of things that you're seeing in real life there, George. What is the most impactful for our listeners to share with other functional leaders and board members, perhaps when they're reviewing options and adjustments to the supply chain?

[00:16:32] George: As we talk of prospects and implement these ideas with customers, we're starting to ask them to bake into future thinking changes that are occurring, as we've talked about in the world such as chronic understaffing, potential but hopefully not new pandemic variants, new political instability, and that all of these things can be continued supply chain operational impairments.

They must find ways to do more with fewer people. Another idea that we ask them to consider is that they'd be more determined in their logistic operations to strive for resiliency.

We've been focused a lot on cost efficiency, again just-in-time and low inventory, things like that, but those were operating in an environment where the whole world was operating in a transparent way. We've seen that just can't be depended upon.

Another area is to commit to the adoption of sustainability and to view it not as a policy requirement but as a competitive advantage. We will share some ideas around how to make it a competitive advantage. Now, the last item we would mention is that there are high-return solutions available. There's three of them that we can think of.

One is to augment the capabilities of your warehouse associates with warehouse automation. The second one we've mentioned a couple of times is decision science, to support carbon reduction purchases that are profitable, as well as helping to improve logistical resilience and customer reputation. The third idea we'd like them to start socializing is this idea of supply chain control towers. The purpose of those things is a dashboard in signaling reception solution that acquires and analyses deeper signals into supply chain, things that are being ignored or are hidden to them.

Those signals are coming from transportation, they're coming from inventory, they're coming from manufacturing. They're used to alert and inform safety stock and failures in just-in-time.

[00:18:52] Karen: To make such complex decisions, what is the successful roadmap you've seen for companies looking to optimize their supply chain for both profits and sustainability?

[00:19:04] George: Obviously, roadmaps are the production of a detailed assessment process, a process we call discovery. To simplify it for our podcast, I would say you could call it plan, decide, ideate. Now, interestingly, you might think about, did he mean the order that he said? Yes, it's the ready-fire-aim process. The purpose of this is to get one off the duff in solving problems. It's an agile way of doing business process change, where you don't have this waterfall optimization process where you're trying to boil all the problems, all the ocean of problems and challenges all at once. We have a customer where they use the decision science to help with this boiling of the ocean issue, where you identify the opportunity, you implement some of them and then you reevaluate afterwards. We would say that the successful roadmap would be plan, decide to do something and then ideate again and then start back over at the planning and ideate again.

[00:20:11] Karen: Right. We know responsibility for sustainability spans the organization. What are procurement departments now looking for in their partners with consideration for carbon footprint? How is this helping with profits?

[00:20:28] George: There's a lot of learning going on on these carbon processes. One of them is called Scope 3. Those are all the indirect emissions of activities of the organization carrying from sources that they don't own or control, so all your vendors. In reality, they are actually the greatest share of the carbon footprint of your company. They cover emissions with business travel, procurement, waste production, and water. What we want them to be looking for, and that we socialize a lot on is, again, sustainability decision science, again, talking about our carbon cloud footprint analysis.

How it can help with profits is picking the right sustainability solutions will not only save you money, they can increase your revenue. You can socialize that more with your customers and with your businesses. You may become a preferred vendor because you're doing this and be able to get greater market share with your customers.

[00:21:38] Karen: And I know, George, we have a lot of initiatives here at Thoughtworks around sustainability. How are we reducing our tech carbon footprint and setting new sustainability standards for the tech industry?

[00:21:52] George: We've started to eat our own dog food, as the saying goes. We have a preliminary science-based report. They're in the process of being validated, and so we can't report anything right now, but we are actually looking at it and have already started to measure it across our whole organization.

Karen: A lot of information for consideration there for our listeners. That's all we have time for today. Thank you so much, George, for joining us to discuss this topic, and thanks to our listeners for joining this episode of Pragmatism in Practice. If you'd like to listen to similar podcasts, please visit us at thoughtworks.com/podcasts. If you've enjoyed the show, help spread the word by rating us on your podcast platform.

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