Over the years, logistics professor Mats Abrahamsson has been a frequent contributor to *Supply Chain Effect*. His articles have often focused on how logistics and supply chain management can create value and competitiveness as part of a company’s business model. The theoretical premise has been that companies need to build a resource base and develop dynamic capabilities that can handle increasing volatility. With COVID-19, Mats Abrahamsson has found his argument validated. He believes that today’s supply chains are far too rigid and lack sufficient dynamic capabilities and resilience.
– The lessons learned from COVID-19 so far show very clearly that we have been too one-sidedly focused on transactions in today’s logistics and supply chain management. This has led us to seem to have sought out the lowest production costs—for example, in Asia—rather uncritically, and to rely on global, low-cost transportation from supplier countries. This applies to both raw materials for industrial production and the supply of goods for retail—and, not least, medical supplies. Driven by the old adage that tied-up capital is a curse, we have been lulled into a false sense of security that just-in-time deliveries of cheap goods will always work, says Mats Abrahamsson, noting that cheap global transportation and low production costs have made us somewhat blind to the total costs that can result from purchasing and producing in low-cost countries—and the risks this can entail.
– It’s now clear that we need to conduct total cost analyses and, based on those, sensitivity analyses that show what happens if deliveries don’t go as planned—which is evident in the pandemic we’re currently facing. With more comprehensive total cost analyses, one would see, for example, that inventory management is actually cheaper than ever—interest rates are low, and the costs of building and renting warehouses are also relatively low. And with increased automation, warehousing costs will fall even further. Maintaining inventory remains a very good option for reducing supply uncertainties and ensuring the delivery of critical goods. This type of analysis—which also involves differentiating the supply of various types of goods to different types of users—is often conspicuous by its absence. Dynamic capabilities represent the strategic application of such differentiation in logistics and are based on the premise that dynamism and flexibility are at least as important a part of logistics and SCM as low costs. There is a misconception that flexibility costs money—and that is true if you do not have dynamic capabilities that allow you to achieve flexibility in a cost-effective manner.
In addition to these analyses and the differentiation of the flows, what do you think is missing or lacking in today’s supply chains?
– In addition to the lack of proper system and total cost analyses, in which alternative suppliers and supplier markets are evaluated based on various scenarios, I feel that the societal dimension is missing. Whether you’re a private company or a municipal agency, you have a social responsibility. In the context of logistics, the environment is an area for which all organizations bear responsibility. Another is the availability of goods. In its eagerness to reduce costs, society has outsourced a great deal of what we take for granted as essential to a functioning society, including the supply of medical supplies. At the same time, it is clear that both procurement and execution have, in many cases, been questionable, to say the least. The focus on low prices and low transaction costs has meant that no one takes responsibility for a needs-based and efficient supply chain. This should reasonably be a shared responsibility between healthcare providers and logistics operators. Understanding that demand is not constant over time but is constantly changing—and that this therefore requires ongoing adaptation of logistics—is a very important part of the SCM of the future. Another aspect is the lack of information in our supply chains. There are many different types of intermediaries involved in a global supply chain, and it is very difficult not only to know where goods are located but also to take actions such as rerouting goods during transport if necessary. Many believe that blockchain will help improve this situation, but we are still a long way from having functional blockchains that companies can use.
You're saying we need to redesign our supply chains—could you elaborate?
– Today, supply chains are characterized by a ”one-size-fits-all” approach—that is, a very low degree of differentiation and, as mentioned earlier, an excessive focus on transaction costs. One consequence of this is that companies become dependent on other organizations and businesses over which they may not always have sufficient control. We also see too little of the collaboration between companies in a supply chain—which is the very foundation of SCM—and, unfortunately, too little collaboration within companies between different units such as distribution, manufacturing, and procurement. As complexity increases, so does the need for control over the flow of goods, which can be achieved by handling more in-house or by developing supply chain collaborations to function effectively even during shortages or shifts in demand. The lack of what we call “Supply Chain Integration”—that is, the absence of a shared, flow-oriented approach within a company, where each function is optimized separately—also makes it difficult to establish effective flow control that works with external partners. This is largely a matter of expertise—working with large systems, such as a supply chain, is difficult and complex. But it is just as much a matter of leadership. If management thinks in terms of functions rather than flows, it becomes difficult for a supply chain manager to develop an effective flow-oriented approach with processes that function effectively both internally and externally.
So you’re saying that traditional logistics has focused too narrowly on low costs and economies of scale for far too long. How do you think the logistics of tomorrow need to evolve in contrast to this and in light of COVID-19?
– We must understand that flexibility and dynamism are essential in a dynamic world and in global markets that are constantly changing. We must also understand that flexibility and dynamism are not at odds with economies of scale and low costs. Economies of scale need to be complemented by resource advantages, economies of scope, and integration advantages, or economies of integration. Resource advantages are achieved by using the same resources—such as a central warehouse, IT systems, personnel, or key partners in various fields—in a differentiated manner for different types of products, different types of marketing channels, and different types of customers. Resource advantages combine economies of scale with flexibility. Integration advantages arise at the interface between internal and external actors in a supply chain. By better understanding customers, supply can be planned jointly with them, and current and future needs can be understood in such a way that one can plan for changes rather than being caught off guard. Understanding the interfaces with customers and suppliers and leveraging integration benefits is, in my view, absolutely crucial for sectors such as retail to successfully navigate the transition to customer-driven omnichannel environments where e-commerce and in-store sales are seamlessly coordinated in the customer interface. But it is also crucial for meeting the challenge of environmentally friendly and efficient urban distribution in light of the sharp increase in e-commerce we are seeing today, where integration with municipal actors and other urban stakeholders becomes essential.
Are you looking for more logistical experimentation and a focus on both customer value and societal benefit?
– Dynamic capabilities mean that a business constantly adapts and continuously changes its logistics and supply chain. Sometimes this involves responding to a new situation, but just as often it involves creating new logistics services that need to be tested in the market. In such cases, you need to become skilled at quickly launching a pilot project—using the resources available internally or through your partners—to test it in the market. If it works, it becomes a service integrated into daily processes. If it doesn’t work, something else is tried. This is a type of experimental development that is often lacking in logistics and the supply chain. Experimental development begins at the customer level with the aim of creating various types of value for customers and differs from traditional development work, which is often preceded by extensive analyses—not least cost analyses— and is then followed by a fairly extensive implementation effort that may well be preceded by substantial investments in new resources that must be recouped. Customer value often aligns with societal benefit. This is evident in terms of more environmentally friendly deliveries, which are increasingly in demand, particularly among younger customer groups, and which, when carried out correctly, lead to societal benefits in the form of lower emissions. Therefore, societal benefits should be factored into the evaluation of pilot projects, and in many cases, these benefits can be the very driving force behind change for many companies. For a company, acting as a responsible ”corporate citizen” builds both brand equity and increased sales across many industries.
Are you saying that a fundamental challenge in developing supply chains is that the traditional functional organizational structure runs counter to a flow-based approach?
– Yes, unfortunately, the old approach to functional optimization—which still dominates the way companies are organized and operations are budgeted—is in direct conflict with a flow-based mindset. It’s easy to say that we should work cross-functionally and across different organizational units, but in practice, operations are mostly geared toward optimizing each function individually. Processes and flow-oriented approaches are frequently cited when companies describe their working methods, but when you scratch beneath the surface, the classic production-oriented approach still dominates.
What can be done to achieve those dynamic, customer-focused workflows anyway?
– As I see it, it’s important to distinguish between management metrics and key performance indicators when monitoring operations. Today, operations are often managed using operational key performance indicators in the form of productivity measures, such as the number of units handled or produced per hour. Such key performance indicators are useful for fine-tuning operational activities, but they need to be supplemented with performance metrics that are flow-oriented—such as lead times, where lead times are measured in absolute terms and drive toward shorter total lead times throughout the entire operation. Lead time metrics should be supplemented with performance indicators that measure availability and performance for customers, such as OTIF (On Time in Full), total operational costs (supply chain + manufacturing + distribution), and the total environmental impact of the business. Together with lead times, these metrics provide a picture of how efficient and customer-oriented the business is overall—not just how high the manufacturing cost per unit is.
You’re saying that the pandemic illustrates that businesses and society need to get better at collaborating and creating value together. Could you elaborate?
– The pandemic has exposed major shortcomings in society as a whole and in the logistics systems necessary for society to function the way we have a right to expect. I see a very clear need for risk analyses related to the supply capacity of essential goods for society, including medical supplies, but also other goods. I also see major shortcomings in the Swedish model’s delegation of responsibility to the municipal level. Today, municipal procurement officers are scrambling to compensate for these shortcomings by panic-buying medical equipment on the global market—something they have neither the expertise nor the resources to handle. Similarly, ministers are demanding that 100,000 COVID-19 tests be conducted per week, issuing directives to regions and municipalities, without understanding that neither the municipalities nor the regions have the resources or organizational capacity to carry out such a task satisfactorily. The fact that there are private laboratories with the production capacity for 100,000 tests per week is not enough unless the logistics for conducting, collecting, and distributing these tests are in place. The entire supply chain must function, which today’s severely strained municipalities are not equipped to manage. At the same time, it is abundantly clear that there is neither the expertise nor the resources at the central level to rapidly establish such testing operations. We need better collaboration not only between the national, regional, and local levels but also between the public and private sectors in matters of supply, logistics, and supply chain management so that society can function as we expect it to. Although the companies that are awarded supply chain contracts through outsourcing are often significantly more professional in operating in a global market, they still need an understanding of both central and local needs—during normal operations and in crisis situations—to be able to be part of society’s supply system in the future. Similarly, in their pursuit of car-free cities, Sweden’s municipalities seem completely oblivious to the rise in e-commerce, which the World Economic Forum (Jan. 2020) is predicted to lead to 78% more urban distribution by 2030 compared to today. Given the sharp rise in e-commerce during the COVID-19 crisis, many believe this trend will accelerate even further. Municipalities are focusing on bike lanes, while citizens, through e-commerce, are demanding fast home deliveries of packages. In summary, system analyses across different levels and stakeholders are needed to create logistics systems capable of handling the fluctuations in demand brought about by the pandemic. This includes creating shared resources—such as warehouses at the national and regional levels—that help increase flexibility. A calculated and deliberate excess capacity in certain parts of a supply chain is a very cost-effective and proven way to create flexibility and delivery reliability in the face of uncertain demand. With today’s low interest rates, inventory holding is also cheaper than perhaps ever before.
