Wolfgang Lehmacher is the founder and co-host of the Supply Chain Innovation Network and an independent advisor and non-executive board member. He is an operating partner at Anchor Group and advisor at Topan AG, Switzerland. Lehmacher previously was the Head of Supply Chain and Transport Industries at the World Economic Forum, Geneva and New York, and President and CEO of GeoPost Intercontinental, Paris and Hong Kong. He is an advisory board member of The Logistics and Supply Chain Management Society, Singapore; Ambassador of The European Freight and Logistics Leaders’ Forum, Brussels; Advisor to GlobalSF, San Francisco and a founding member of the think tanks Logistikweisen, Germany, and NEXST, Singapore. Lehmacher is the (co-) author of multiple papers, articles, and books, including the Practical Playbook for Maritime Decarbonisation, Disrupting Logistics, and The Global Supply Chain. He recently spoke to The Innovator about how to manage supply chains and make them more sustainable.
Q: Please tell us about the Supply Chain Innovation Network and its focus.
WL: The Innovation Network is comprised of handpicked supply chain professionals from all over the world who run operations for large companies or people with a special interest in supply chains such as transportation executives working for ports or airlines. What we do is exchange views on a monthly basis on specific topics such as digitalization, blockchain, digital twins, decarbonization of transport, challenges we are facing or concrete practical case studies. I do a lot of complimentary work on various research topics with my co-host Mikael Lind at the Research Institutes of Sweden, the first professor for maritime informatics.
Q: Supply chain are at the top of the news these days. What is causing all the disruptions?
WL: During the last administration when the U.S. became less supportive of globalization, supply chains were impacted, and a lot of people didn’t realize what the consequences of some of the decisions would be. Going back to that time I think that is where the inflation story started. When you apply massive tariffs on goods imported to the largest economy in the world it has an impact on pricing and not only on consumer pricing but also on the B2B businesses of manufacturers across various industries. There could not be a good ending. COVID-induced measures added another layer of cost as well as the war in Ukraine and so the mid-term consequences are the supply chain challenges and some of the big issues you see today. Take the example of semiconductors. Chip issues started the moment the Trump administration declared a tech war on China. When this kind of thing happens supply chain professionals buy whatever they can find because they see a problem coming, so we already had a chip shortage before COVID hit but people didn’t see it. Then we had COVID and two trends: increased demand as supply chain professionals were buying up semiconductors because they were worried about an upcoming shortage and a surge in chip utilization because people were buying more electronics. Another effect of COVID was that the automotive industry’s sales went down to almost zero because people couldn’t move so why would they need a new car? Then, in the fourth quarter of 2020, the auto industry bounced back and when they called their suppliers they were told ‘sorry there are no semiconductors’ and that created the headlines about companies like GM and Volkswagen halting manufacturing. Volkswagen expects chip shortage to last till 2024. There is another story behind that. The auto industry pays the lowest possible prices so in addition there was little motivation for the chip manufacturers to solve the automotive manufacturers’ problem.
You can’t avoid disruptions. Sometimes they just happen, and you can’t anticipate everything, but you can prepare yourself. Many in the automotive industry ended up using chips with less functionality but Toyota didn’t have to. It too was hit by the COVID crisis, but it has a very good relationships with its suppliers. Toyota uses ecosystem thinking. It considers its suppliers to be part of the ‘family’, so they have a very different type of communication, collaboration and alignment. There are several learnings here. Have good relationships with your suppliers and buy at a decent price. If you are only focused on being cost optimal, you will be the last in the queue. And, if politicians had been more conscious of what they were doing the world would be in a different place today. More alignment and collaboration across governments would have spared us several of the disruptions we have been seeing.
Q: There is a lot of talk now about de-globalization and making manufacturing more local. Isn’t that easier said than done?
WL: Concentrating the manufacture of some pieces in one place often far away from home is about economies of scale to optimize cost. Another reason is competence clusters, which is why almost all of semiconductor manufacturing is in Asia. Asian countries built these ecosystems and have lower cost labor, so everyone put their manufacturing there. I remember when former U.S. President Barack Obama and Steve Jobs met at a dinner, and Obama asked ‘What would it take to make iPhones in the United States? Why can’t that work come home?’ Jobs bluntly replied “Those jobs aren’t coming back”. In China entire cities are built around manufacturing. This is less the case anymore in the West.
All companies want to grow their top line and want to serve the global market. Does this mean they will now move manufacturing back to the U.S. or Europe? Say I am a global company based in France. I might make 5% of my global revenues in France and maybe 30% in China, so it makes sense to keep my manufacturing in Taiwan. Many companies do a significant share of their business in Asia. So, to answer your question, many companies will build new capacity in other regions – the famous de-globalization – because to a large extent it is a natural shift to bring some manufacturing closer to market, which also means some manufacturing will stay in Asia close to the markets there. It comes down to where the customers are and factors like labor, talent, infrastructure and permits. It is not so easy to build factories in Europe. It might take three years to get the permits. Will there be a trend of near building? Yes. That trend is being driven by different factors: where things are going geopolitically and consumer expectations around sustainability. Long distance travel and transport is not good for carbon footprints, but the consumer will pay the price. What will they say when they see the bill with, for example, a 50% price increase? I expect, at the very least, for consumption patterns to change.
Q: What role do you see technology playing in improving supply chains?
WL: Tech has always played its role. We would have never been able to put production in China or Mexico or North Africa or Turkey or Bangladesh without modern information and communication technology. We won’t go from having factories in China to putting factories in the U.S. We are going to move to a distributed network of factories. This is thanks to digitalization and the possibility of technology-enabled “remote control”, which is more important than blockchain or 3D printing. If you are making shoes you need to know how many shoes are needed and how much material is in the warehouse. Digital technology provides that visibility. 3D printing is the cherry on the cake. One day it will be mainstream, but I don’t see that at this stage.
Q: Isn’t technology also increasingly playing a role in measuring Scope 3 supply chain carbon emissions? Dozens of startups are now providing this.
WL: Calculating and reducing scope 3 emissions is a big, big topic. It is a largely unresolved challenge. We are working a lot with averages of averages. For example, a company might calculate what the emissions are from a 20 foot container traveling from Shanghai, China to Long Beach, California but that figure usually doesn’t take into account whether that container is carrying five tons or 15 tons of cargo. In that sense the startups have a point. There is a need for more accurate numbers. The same is true with trucks. If a truck is traveling from Paris to Marseilles, you can’t just measure emissions based on distance and averages. You need to know is it an old vehicle, what type of fuel does it use on that journey and what sort of engine does it have. The style of driving of the specific driver on duty that day determines the level of fuel consumption and emissions as well. Startups can help. The challenge for large companies is there are so many startups they need to do due diligence to determine if they can deliver on the promise. Some companies leverage their corporate venture teams to find and vet operational partners, others use external experts like investors and corporate development firms.
Q: How do companies go from accurately measuring carbon emissions to reducing them and making supply chains more sustainable?
WL: How you reduce carbon footprints is a broad question that needs to be answered at the company level, the industry level, and the ecosystem level.
In aviation, fuel represents about 25% of their total costs. Short-term airlines order lighter planes using carbon-fiber composites instead of metal, more fuel-efficient engines with winglets at the tip of the wings. Long term the answer is sustainable aviation fuels. But this requires alignment across the ecosystem. The issues are quantities and price. We don’t have enough alternative fuel, and it is too expensive, and the two issues are linked.
For long distance road transport electric trucks are still more expensive, biodiesel competes with food and hydrogen is one of the most controversially debated topics in the transport decarbonization discourse. Infrastructure is lacking for almost all new alternative sustainable fuels. The energy transition is critical for the decarbonization of transport but, like with aviation, it is a question of quantity and price. Over time we will get there but we need to exploit all short-term measures and we need pioneers that start the movement towards better economics. We also need governments to implement large-scale solutions so we can move from product to program, from thinking about trucks and planes only, to considering the entire package, with fuel, infrastructure, vehicles, operations etc. Public-private partnerships are required.
In the maritime sector we see industry level efforts, such as the definition of standards to drive digitalization for optimization ,but a number of issues still need to be resolved. Maersk has ordered 13 new ships with dual-fuel engines that can also run on green methanol but the entire production of green methanol in the world today doesn’t suffice to power those ships. There are about 100,000 ships and 50,000 commercial vessels on the waters. The transformation towards zero is a massive undertaking. So, for the time being we need to use technology to realize short term gains and target the low hanging fruit. Small operational changes like hull design for better hydrodynamics and advanced weather routing can result in total anywhere from 5% to 30% in emission reductions so we aren’t talking peanuts when considering the smaller short-term steps towards zero emission shipping.
Decarbonizing transport involves three value chains – the energy value chain, the vehicle manufacturing value chain and the operational value chain- and we need to align across all three.
We also have work to do on the macroeconomic level. We need to transition towards a circular economy. We are perfect in value creation. We are poor at value preservation. We produce 100 of something and about 90 we produce end up in landfills after the first use-cycle. If we were reusing these products and materials the impact on our carbon footprint would be enormous; there would be less materials to be extracted, less to be manufactured, less to be transported. The circular economy is a great supporter of decarbonization and it’s the future.
Q: What role can innovation play in helping solve these big issues?
WL: Without innovation we will stay where we are and this is not a good place. We are overburdening the planet and we are struggling with managing our supply chains in today’s volatile times. Without innovation no decarbonization, no circular economy, and no visibility across the supply chain. We will not be able to reach the Paris Climate goals without totally new technologies and their large-scale adoption. We will not be able to manage disruptions. But companies need to drive innovation and governments need to ensure favorable conditions and offer support when market mechanisms fall short.
Q: What advice do you have for the people in charge of supply chains at big companies?
WL: Every organization, whether private, public, or non-governmental, is in the business of capital creation. The winners are those organizations with a recipe that generates the highest level of productivity within their competitive sphere.
Mikael Lind and I, together with our colleague Richard Watson, assert that the most effective way to drive balanced capital creation is to combine collaboration and digitalization strategies to drive business models that simultaneously address economic and societal capital creation. We call this the CDES model, which stands for Collaboration and Digitalization for Economic and Societal value. The concept is explained in detail in an upcoming UNCTAD article.
A pure short-term focus on profits that neglects a balanced broader stakeholder view can boost the share price but inflict long-term damage. The CDES formula can help supply chain professionals to drive revenues and profits as well as decarbonization and circular practices through the combination of collaboration and digitalization. It’s a strategy that architects in the field of supply chain management should start employing now.
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