Disruption and Sustainability in Logistics: a Masterclass

- Hello, everybody, and welcome to our master class, disruption and sustainability in logistics and supply chain management with the Hull Online program of the same name here at the University of Hull. This is the first of what I hope will become a regular series, where we're drawing upon the expertise of our online tutors, the first of those being Dr. Xavier Pierron. In a moment, I will ask him to introduce himself.

First of all, thank you very much for joining us, Xavier.

DR. XAVIER PIERRON: Thank you very much, Richard, for having me.

- You've had a fascinating career in industry and in academia, of course. And those of us who have stalked you online know about your publications in areas, including the circular economy. It's a subject close to my heart, and I'm very glad to have you here. So perhaps you can tell us a little bit about your background.

DR. XAVIER PIERRON: Yes, certainly. Thank you, Richard. So before joining us online and being a full fledged academic, I used to work in Asia, most specifically in Hong Kong. So it was a long time ago, 2005-2006, although for me it sounds like yesterday.

I used to work as a supply chain manager, and that was a typical role in these days that the headquarters were in Hong Kong and the factory was in Guangzhou, an hour and a half away from Hong Kong. And the rule was a product of globalization.

As a supply chain manager, I was working for a Chinese company that was manufacturing white goods, you know, household items. And my role was to make sure that everything would be synchronized from the orders from the customers overseas to ordering and procuring all the elements to assemble everything, and there's a lot of deal of synchronization across different suppliers.

So it was a great opportunity to experience globalization. And now also taking a step back, a step away as a researcher in the circular economy, I'm able to see the differences that have occurred over the last 15 years, and maybe during that conversation that we're going to have to maybe highlight what will be the future of supply chains.

- All right. Thank you very much for that. That's certainly very interesting. I would suggest that perhaps academia is a nice place to be given the disruptions that we've seen in the supply chain. We'll talk about those in a moment.

So first of all, just to introduce myself to the audience as the other speaker, I'm the program director for the Hull online program in logistics. My experience in supply chain began when I joined Her Majesty's Customs and Excise. So I'm actually the bad guy who impeded the free flow of goods, although I was in drugs intelligence. So I think maybe that was a good thing to do.

Since then, I've worked in the electronics industry, and I did research in aerospace supply chains, which has led me into this line of work. And I'm a supply chain academic nowadays as well. We both share that interest in sustainability, and I think that's as relevant to the title of what we chose to do here.

Disruptions and sustainability because what does sustainability mean? It means being able to carry on, and there are geopolitical disruptions, but also we are heading into a blind alley if we keep on doing business the way that we did in the 20th century, perhaps so. It's always been interesting to hear your insights into this.

For now, let's talk about those disruptions. Ooh. What an interesting few years it's been for disruptions. It's a gift for those of us who want to talk about the supply chain because we're on the evening news all the time.

We had COVID-19. We had the motor vessel ever given getting stuck sideways on in the Suez Canal. Here in the UK, we had our departure from the European Union and what that would do to our future of trade. And then, of course, we had the war in Ukraine and perhaps other things as well.

What really stood out to you, Xavier, as a supply chain disruption?

DR. XAVIER PIERRON: Yes. Agreed that supply chain used to be a term used by specialists. Unfortunately, and also fortunately because we are redesigning our supply chains, now that has become at the forefront of the news. And certainly it began, we could say, with the first trade wars initiated a few years ago. And then we had COVID-19, and as you mentioned, we had several disruptions that just add up. And we don't really see the end of it.

And when we're talking about globalization-- and now actually we have entered a different phase. And that geopolitical phase is actually inducing changes for supply chains. So now instead of globalization, we call that Slowbalisation. Slowbalisation was a term invented by a Dutch economist that was then retaken by the economist. And the idea is that the level of trade across the blocks is diminishing and the amount of trade as part of the world GDP is also diminishing.

And now this trend has accelerated, I just mentioned, but it dates-- it dates from the financial crisis. So basically for the 1990s and the fall of the Soviet Union until the Great Recession we had in 2008, we had a great deal of expansion. That's globalization. And now since a decade, we have entered a different stream of investments.

So now you have fewer companies investing overseas, and now they invest more in their trade block. So for example, in the European Union, in NAFTA, in ASEAN, and you can see more trade within these blocs and less trade across these blocs. So obviously that implies massive changes to supply chains, and we have these geopolitical shifts, but also we had globalization on the back of efficiency. That was cost cutting, clearly.

But now with all the disruptions you have mentioned, we are looking at security. And the idea is to secure supply chains, and we have seen so many disruptions, so many industries being impacted, that with PPE, but now we have entire segments of the industry such as the car industry or what goods manufacturing. And it has put a pressure on prices, as we see in inflation.

So that trend has changed and, the point of that slowbalisation and reshoring is that we are redesigning supply chains so that they are closer to their home markets. And they are more secure in a sense because we want to minimize disruptions. Today, disruptions cost a lot of money to companies.

This quarter only, Apple estimates that they're going to lose 10% of their revenue on one quarter. And Apple being Apple, it's close to $90 billion lost in sales. So that's efficiency that was the point of outsourcing is now cost cutting, costing companies, and now we look for security. And security has also a cost because if we've been outsourcing, it was to lower cost.

Now, if we bring back manufacturing capabilities as reshoring, that will also have a pressure on prices, yet we'll have more secure supply chain. So there's always a balance here.

- Thank you. That's very comprehensive. I've also noticed this initiative of slow steaming. When there's overcapacity in the transport sphere, what do they do? They react by moving vessels more slowly, which saves a great deal of fuel.

That ought to be a good idea in terms of reduced pollution, but what that does to companies who are trying to trade globally is challenging. And maybe shortages of shipping containers are in the wrong place and things like that. Globalization is more complicated than we might think perhaps. But is there something, Xavier, that we as the business world did wrong, something that made us more vulnerable?

DR. XAVIER PIERRON: Well, it's a good point you raise, Richard. When we talk about efficiency against security, certainly we thought for so many years on the back of globalization that it was good. And it was good, you know. We increased trade. We expanded our supply chains, and as I just mentioned before, I was a product of that.

I was very happy to move to Hong Kong and find a job with the Chinese companies and to export the goods overseas, and it worked very well. Now today, we see then reshoring and businesses, they follow a trend. They follow the trend that the customers want, and what customers want is to have products at the moment, and also they want to have secure supply chains because we're talking about white goods, which are everyday goods. But also in the reshoring capacity, we're talking about batteries manufacturing. We are talking about high tech.

And the automotive industry is suffering a major crisis that they are suffering once in a century. And now you have alliances with companies that were working against one another. For example, your Mercedes-Benz and Stellantis, the Franco-Italian-American companies. They have a joint venture capability to produce batteries in Berlin.

So the idea is that now you had competitors, but now they are working together to secure their own supply chains. And instead of relying of a [INAUDIBLE] supply chain on the technology, they want to bring this back. So of course what businesses did wrong-- we can [INAUDIBLE] this way, that they follow the trend and now they are following another trend.

And now we are in a period of readjustments, and this is the difficulty we're experiencing right now-- disruptions, inflation, security. But in the next three to five years, these supply chains will have readjusted and this is a role as supply chain experts or practitioners that we are redesigning them and working now in more integrated fashion with the car industry, for example.

And Tesla would be a great example on how they are managing the supply chain. They have become the poster child that other car manufacturers want to emulate. Although they are a competitor right now, the integration-- the high verticality of Tesla is being imitated by other car manufacturers. They were outsourcing completely the production, and they were just designing, assembling, and selling cars.

Now they want to make sure that-- because they want to secure the supply chains, they want to integrate all stages of manufacturing and also all the profits. So, again, that will take some time. The car industry is trying to phase out its combustion engine by 2025-2030. And Tesla is already ahead of the game. So what we're going to see over the next 5 to 10 years for the car industry will be very telling for the other industries how they will re-adapt to these new supply chains, which is reshored supply chains.

- That's fascinating. We haven't seen that level of vertical integration since Henry Ford, I don't think. Thank you. Great example.

Is this the perfect storm then? We've said there's a lot of disruption at the moment. Is that a perfect storm, or is it the new normal

DR. XAVIER PIERRON: Well-- [CHUCKLES] we thought COVID-19 was the perfect storm. It was just the beginning, and actually it was dramatic, you know. But in terms of managing the supply chain was easy.

That was a clear definition of the bullwhip effect. Those of you who have studied the principles of supply chains, that the bullwhip effect is you start with a little flick at the beginning. But then it will have massive repercussions at the end of the chain.

So if you think about that, by the disruptions and the factories closing in the Far East at the beginning of the pandemic, and us keeping ordering white goods, brown goods, you know, everything we need for our home. And then the moment that reopened a few months after, there was a massive shift in terms of demand throughout the supply chain.

And we end up with disruptions, and now they're trying to catch up. But at least, for example, for the semiconductor industry they planned at least eight months of more disruptions.

Of course companies are investing massively into developing capacity. But, again, to put in place a new semiconductor factory, it takes 18 to 24 months. So [INAUDIBLE] we thought it was COVID 19. It's only the beginning, and as I mentioned before, you know, that we have that trend that's been there for the last five years.

It just becoming more prominent, and, one, Ukraine is unfortunately putting more awareness on disruption. So we started with household goods disruptions. Now we're moving to energy disruptions and food disruptions.

So we are increasing the criticality of disruptions, and unfortunately we don't see the end of them. What will be next? Now with the massive crisis we've been through with COVID-19, we are aware that things can happen very quickly.

The good thing is that businesses are extremely agile, and they have moved very, very quickly. Governments ahead, of course, but also companies have readjusted their supply chains. As I mentioned you know, Tesla or the car manufacturers. They're investing heavily. So now we're just into a period of lag between massive investments to reshore production and the moment these investment will be able to deliver.

So I expect within 12 to 24 months, you know, that we will see fewer of these disruptions. But certainly it's costing companies a lot. The car manufacturers year on year have lost 80% of their cash. Cash because they had to invest heavily, although they borrow, but also basically because the factories-- some factory is not running anymore because there's a glut of certain components. Perfect storm.

Well, we'll see in hindsight. We talked about the Great Recession. Now, 15 years after, we can actually understand what really happened and the extent of government and businesses responses. So today to measure the impact of COVID-19, the war in Ukraine, and maybe another crisis, we'll take a few years actually to understand how well we are weathering this crisis.

- Good point. Yes, we need the benefit of hindsight. Don't we? So time will tell. Thank you.

Let's try to at least equip companies with something to help. What new strategies, new policies, or new investments would you recommend to a person in industry who is experiencing these disruptions?

DR. XAVIER PIERRON: Certainly. So if we think about reinventing globalization, and trying to move away from the disruptions, and thinking back about the concept of reshoring, and security over efficiency, well, the answers you have come with long-term partnership with suppliers. That's the first thing, you know, that more and more companies were relying on a source supplier. And now they try to diversify that supplier base.

But also in the past, especially large companies such as Unilever or automakers, they had very little visibility on the supply chain. For example, they understand very well their first and second-tier suppliers, but they don't see the third and fourth tier. So when these suppliers experience disruptions, now they impacted, and now they try to see through the entire supply chain.

So now what they're doing is not only long-term supplier contracts, devising the supply base, but also cooperating across the entire supply chain. But it's complex because they have thousands of suppliers. Then another one that, as I mentioned, the car manufacturing industry is a prime example of change and might be also an example for other industry in the future is vertical integration. We're going back to where we were a century ago.

The whole trend after the Second World War was outsourcing, and it became even faster with the globalization [INAUDIBLE] Now back to where we were. We want to integrate. We want to secure everything.

You mentioned, Richard, Ford. So Ford was a prime example that the [? caller ?] that was used to power the manufacturers was actually from Ford mines. The rubber they were using was from Ford plantations.

Everything was integrated, and Tesla right now, for example, they start to own lithium mines. And they start to own also other mines in Africa and everywhere to make sure they will secure that supply. And, of course, other companies are following suit.

So that vertical integration is going to be extreme that you want to have contact with the customer to collect data and make sure you have that relationship. The basic extraction of minerals and everything will be controlled. So is it good for trade? Well, too early to say, but certainly this is a way to reduce dependencies and to increase security. So vertical integration, shorter supply chains, and long-term contracts and visibility throughout the chain are certainly the key themes emerging from the crisis.

- Thanks, Xavier. Some excellent points there. Yes, vertical integration.

Just as an aside from that, we've said some things that are very negative perhaps. But is this a good time to implement a circular economy? I know we're both interested in electronics manufacturing, and one source of materials might be from things that we've finished with.

If the global supply chain is disrupted, can we do more with our own waste with end-of-life products?

DR. XAVIER PIERRON: Indeed. Thank you, Richard, and this is where I came to the circular economy. So from a supply chain background, the circular economy is the next step. Sustainability is the next step, and you have that slide here, illustrating the linear economy, which is the economy we're in at the moment.

We take. We make. We use. We dump, literally, and we will recycle a handful of that, and recycling is actually destructive. You crush materials, and you retrieve only a fraction.

The point is that we want to move towards that, and we know very well that to be sustainable we cannot continue the way we do business and the way we consume, yet the economy needs to grow. So the idea is actually to move from that linear economy to a circular economy. And this is where the logistics and supply chains are essential.

The idea is to move away from ownership, owning things, to using things. And the paradigm of making money and also using them is completely different. Take an example-- take a telephone, for example, a smartphone.

Right now, Apple, Google-- the aim is to sell it, and the aim is for us to re-buy it within two to three years. This is the idea. This is the business model.

They are designed not to last. The batteries are glued to the screen, whereas before you could change the battery easily. You remember like me, you go to a Nokia, easy to change the battery.

Today, in that search of efficiency and wait, we glue the battery to the screen, which has a result, or usually we break the screen when we want to change it. And everything is glued together. You don't have any screws anymore.

And this is the linear economy at its best. You take. You make. You dump, and in these smartphones you have lots of resources. You have batteries, lithium, rare earth. They are a condensate of the modern economy.

Every year, we manufacture two billion handsets, two billion, and year on year. And we have every year 55 million tons of e-waste generated, and only a fraction is recycled, almost non-reused. That's the linear economy.

So the circular economy is moving away from that. The idea is that, do I really want to own a phone that will break at some point, or do I want to use it? Do I want to have access to the internet? Do I want to have access to data

Well, yes, that's what I want. I want to service. I want to have access to the internet. I want to use something that works and that will be changed before it breaks.

So the moment you start to think about user-ship over ownership, I'm happy to use a phone, but I don't want to own it with problems. So this idea is that Apple, for example, will remain the owner of the phone. If they remain the owner of the phone, then I become the user. So I enter a subscription relationship.

I will enter that contract on a monthly basis or a quarterly basis. I will pay a fee for that, and then also as a customer I will be more inclined to stay with Apple and to start my customer relationship as we start the subscription, not to end it when they sell me the device. Now also for Apple, what is it? They start to sell things as service, the cell phone as a service. So they start to derive also more revenue from just one device.

Because Apple will be the owner of that smartphone, they will have a direct interest to manufacture a phone that will last and that can be reused. I'm not talking about recycling it. Reusing it.

Reusing because it will be made to generate more profit through services. So they have a direct interest to redesign their products, redesign the logistics, redesign the operations, redesign the supply chain, so they become more circular. They want to reuse that product as soon as possible so they can derive services.

So I think this is one of the future elements of supply chains and the circular economy is that we need to shift towards user ship. And this is happening already with these new generations. Millennials, Gen Zs, they are very keen to use and to experiment things rather than owning them. So with that generation comes also a trend of consuming differently, and let's welcome that.

This is the future, and certainly the circular economy is not the only answer to sustainability but certainly one of them. And the [INAUDIBLE] has been fantastic in promoting the circular economy, advertising also other companies. They have done fantastic jobs into designing products so that they could sell services.

DR. RICHARD FARR: Thank you. That's really interesting. I think the logistics and supply chain industry need to up their game a little bit in this regard as well because we're very good at the linear economy. We've been doing it for hundreds of years, and we're used to doing things in bulk and doing things that are very repeatable in the way that Adam Smith got excited about in The Wealth of Nations.

But what we need is some maybe to get things back in an economy of scale kind of way and not-- my old phone is in a drawer at home. At some point, it might go for recycling, but its condition will have deteriorated. It will be more obsolete.

Nobody but me knows exactly what's wrong with it and why I got a new one. Everything about this is uneconomic. We're not very good at that. We like mass production.

So the industry need to raise their game just as much as the public need to kind of transition over to accepting service rather than ownership, but it's fascinating. It's for the future. It's an exciting journey to be on.

So I totally agree with what you're saying there. Just a reminder to our audience. We are taking questions. If you want to post a question in the-- I think it's in a sidebar for you. Yeah. Please submit your questions, and I will put them to our speaker, Dr. Xavier Pierron, before we finish.

Our first question at this point from Herbert in Hong Kong-- Herbert, thank you very much for your question. May I ask whether COVID-19 can be a chance to boost the logistics and supply chain rather than just a disruption? So, for example, the increase in air cargo, the importance of coping with disruption, I guess-- can it be good for the industry?

DR. XAVIER PIERRON: Well, certainly, and thank you very much, Herbert, for your question. And reminds me fond memories of Hong Kong, so I'm very glad to take your question.

Yes. As you can see, during COVID-19, of course we had disruptions. But what did that develop? The whole service economy of deliveries, instant deliveries. And entire logistics and supply chains have been redesigned for that service.

Now a third of the value in supply chain are the services, the services, for example, of home deliveries. now And everybody became adept very quickly as a massive master class to home deliveries. And that was from basic items, food, anything.

So this was a great opportunity, and that has changed the consuming patterns the world over. And now you have Amazon and all the dairy companies. They are working in very small patterns in urban logistics. So that trend is here to stay, urban logistics.

It has been started a long time ago for companies like Amazon, but COVID-19 has definitely accelerated that trend. And here the urban logistics are very short-circle logistics as opposed to extended supply chain.

So of course, you can still trade goods across countries, across economy. It's not the question, but the trend is now the volume of trade and actually the volume of revenue is definitely generated at the end during the last mile, as we call it.

- Thank you. We are getting some more questions. I'll come to those in a minute. While we're on this subject, is there anything positive that we can take from the current disruptions that we're seeing? Is there some good news to go with the complications?

DR. XAVIER PIERRON: Certainly. It makes us think differently. We had to reset a little bit our operating system. That was a massive reset.

So now during lockdown, we always seen that it was a difficult period to live. Lives were lost, yet we could see the environment taking back over quickly over the urban environment. So yes, that was certainly a good thing that the way we function is detrimental to the planet and the people. And yet when we take a step back, we can very, very quickly see the improvements.

So although we very quickly went back to our consuming patterns, I think in people's minds something has shifted. And now the talks about sustainability, sustainable supply chain, sustainable logistics, the circular economy, it has come forward. We were discussing at the beginning of the master class that supply chains-- there used to be a term used by practitioners. Now everybody is aware of supply chain.

So now same for sustainability. It's the same. It has come at the foreground, so people think differently. People consume differently, and they're willing to try different consuming patterns, basically.

So yes, definitely. There's something good to take out everything.

DR. RICHARD FARR: Excellent, and that seems like a good time to talk about skills. You talk to companies. We both talk to companies.

Is there a change in the skill set that employers are looking for to cope with the kind of things that have changed in the industry?

DR. XAVIER PIERRON: Certainly, Richard. In just one word, agility, creativity, adaptability. When we are in a world that changes so fast, we need these soft skills. They are critical because hard skills are very good because they are the basis of education and then also into a career. But also to last and to be efficient and productive in their career, we need to think differently because the businesses we operate today in 2022 will be extremely different in 2025 and 2030.

And we cannot teach that but the ability to adapt, and this is definitely what to try to do at Hull Online, to have that possibility to be creative, to work in teams, to be a problem solver. And this is the essence of being into a crisis mode. We need to solve these problems so that then we can reconnect with a path of growth and visibility.