Beyond the Buzz: Dr Stefan Gstettner Talks Supply Chain

When you sit down with someone as knowledgeable and experienced in supply chain as Dr Stefan Gstettner, Partner & Associate Director at Boston Consulting Group (BCG), you don’t mince words. And so I didn’t. I milked every moment, and the man was gracious enough to even let me sneak in a few extra questions. So we did this one Q&A style. Let’s dig in.

We hear so much about tech and digital transformations that it seems we’ve forgotten about humans along the way. Could you explain to me, Dr Gstettner, the concept of a “bionic supply chain”?

“The digital supply chain transformation is not just the technology transformation, and that's why we are promoting the concept of the bionic supply chain so heavily because it's mainly humans driving advancements in supply chains. But today, they are augmenting their capabilities or mentored by technology. So we need to take a human-centric approach to all the change that is going on in supply chain transformations. 

“Then we need to have an equally savvy view on the technology opportunities and how we can make technology help the humans to drive supply chain management. Then there is the next step, which goes into cognitive, i.e. intelligent, automation of supply chains. And I do believe that will play a huge role. However, the human aspect will never go away. It will only change. There will probably be less human interaction. It will definitely become more demanding human interaction. But the principle remains the same. It will be the perfect blend between humans and technology that will drive the desired outcomes.”

Extreme market volatility is yet another immense challenge being faced, bringing a lot of disruption to business planning. Along with the logistical issues previously mentioned, supply chains are now dealing with dramatic shifts in both supply and demand and feeling the failings of deterministic models, which previously proved more reliant. Could you lend your thoughts on how new technologies can help with this?

“From my perception, there are two schools of thoughts on this. The first one is let's manage volatility by becoming better at predicting volatility. That encompasses advanced demand planning, forecasting, demand sensing, and demand shaping to anticipate better and then to be better able to respond to it. That's the first school.

“The second school says, look, not all volatility can be anticipated, so let us be agile and respond to volatility as it comes. And I don't believe in predicting volatility because, per definition, it's quite hard to predict volatility. I would say the truth is somewhere in the middle. 

“I see the best companies doing both. Investing in becoming better to predict what is predictable, also be realistic, but still being high-end in capabilities to predict the future because with AI and some forward-looking indicators, predictions have become much better even for volatile demands. Then, building agility into the supply chain remains super important in logistics, in manufacturing, also upstream to suppliers and the combination between building an affordable degree of agility in the supply chain plus becoming better in predicting volatility. I think that is the sweet spot to overcome the issues here.”

When it comes to all the new tech that is available, I think it’s difficult for people to gain an understanding of the maturity level and think perhaps it’s too early to make the jump. Would you be able to give us a high-level view of this?

"Supply chain particularly doesn't do a good job at overcoming the buzzword level of explaining things. And I think putting forward super buzzwords, like control tower, digital twin, AI, and not to mention blockchain, in the end, it doesn't help if we are not able to explain what exactly we mean. But then, more importantly, what exactly we want to achieve with the term.

"I think that there has been a too long phase of putting forward technological concepts without really understanding and explaining what exactly they are good for. So, therefore, I also sense some degree of frustration with our clients to say, look, these are all nice technological concepts, but ultimately they will not work, and I will not be able to deploy them.

"Therefore, I think it's always imperative to turn it around from a technology and solution discussion to a business discussion. What is the business future we are preparing for? And then, in a dedicated effort, looking for solutions to respond to those challenges. What we call them doesn't really matter. It's more important to have a solid approach to implementation that’s agile, very customer-centric, employee-centric and solution-centric in place rather than hopping on technology trends and hoping that they will do good."

Prior to Covid, you offered a Master Course about the future of Supply Chain Management through MIT, and you say, “Supply chains will look fundamentally different in 10 years. They will turn into agile networks of players, each one of them operating in the sweet spot of capabilities. At the same time, there will be a drastically increasing challenge to manage this complexity and synchronise the networks.”

Covid-19 has drastically escalated both the need for agility and the challenges you speak of. The agile network you describe sounds like a utopia as we see very few successful transformations. Business complexity is often given as an excuse. Could you lend us your thoughts on how companies can tackle this challenge?

“There was an article I co-wrote in 2018 in the Harvard business review called The Death of Supply Chain Management that resonated quite well in the community because what we said is there is no logical reason why many of the supply chain decisions couldn't be made by machines in the future rather than people because, in supply chain management, it very often comes down to rational trade-offs. It's not about instincts, and it’s not about pure experience or gut feeling. It's about having, for example, to trade-off between service level versus inventory? And there are rules and formulas for this, and so there is no reason for this to be tasked to humans. 

“Something that is brought forward, the autonomous supply chain or the lights off planning or self-driving supply chains-- even more of those buzzwords-- although fundamentally I agree that there's no reason why these shouldn't happen, there are fundamentals that need to be in place in order to realise something like this. We haven't built the bottom of the house, let's say, and therefore we are not quite ready to build the roof. And at the bottom, there are really fundamental questions. Like, have we segmented our supply chain well? Do we have our KPIs in order? Are we sure that we have set the right balance regarding the KPI target values? Do we have the right incentive schemes in place? As well as the previously mentioned topics such as capabilities.

“So again, conceptually, I think it's easy. And to be honest for us as consultants, it's, of course, easy to put on paper that this will happen. But then practically, as we see, this is where the challenges come in. I think that is the task that we all have in supply chain, to have this North Star as a desirable target state of mind. And then we relentlessly work on the fundamentals and then on the technology to achieve this. Because I think for companies, it's desirable to have this end state in place because it will make companies much more agile, much more responsive to customer needs. And that's what we ultimately want in supply chain management.”

I loved your comment on rational trade-offs. If you don't mind, I would like to sneak in a question, because I think that is where people have a lot of difficulties, in setting a formal process for that and understanding that they're going to, let’s say, give up on price a little bit to mitigate some risk or increase safety stocks. How do you come up with a way to quantifiably balance those things, as you said, rationally?

“Absolutely, and that is a discussion that we very often have with our clients. One additional element to this is scenario capabilities. So if we want to play through certain scenarios, for example, let me take the Integrated Business Planning (IBP) process, which is typically a monthly planning process, which in the midterm synchronises demand with supply. And obviously, we cannot 100% foresee the future of demand. So we need to look into scenarios, and in those scenarios, it is all about making trade-offs. So if we allocate some capacities to a certain market, it will do this to our inventory. It will do this to our overall EBITDA. It will do this to our overall costs. And then we have a second scenario where we probably have a different success profile, maybe less inventory, less cost, but then also a little bit less margin because it's lower margin products or lower margin markets.

“And now there are two difficulties. The first one is that obviously, there are millions of potential scenarios that we can play through to theoretically, practically not, but theoretically, because there are so many permutations of opportunities in complex supply chains. That's the first one. And the second difficulty is, putting values behind the trade-offs is inherently difficult because the link to the finance function very often in supply chains is underdeveloped. This makes evaluating potential impacts on supply chain KPIs in financial terms or the possible EBITDA impact of a certain decision, for example, relatively difficult. 

“Those two points, struggling to find meaningful scenarios to discuss in an IBP process and then having a sound and agreed upon method for determining the financial implications of scenarios in place, make it difficult to make rational decisions. And that's another imperative I think, for us to work towards being better at defining and financially evaluating scenarios.”

In terms of the scenario or what-if building, is there a new technology that can help with that?

“More integrated systems are coming to the market. And again, I'm not saying that the system resolves anything standalone, but I think powerful systems which have these design criteria of linking volume-based supply chain planning with value-based financial planning in a very integrated fashion will be successful in the market. 

“More and more, I would say there are systems even originating from financial planning and now going more into supply chain planning. And I think this understanding has arrived at some high-end planning system providers and our obligation now is to make it usable for our clients to use systems like this with the right data. 

“This is a good example where, as a concept, perhaps one of the undefined buzzwords, digital twin, could be used to simulate scenarios. Meaning, a digital twin could provide a virtual representation of the internal supply chain with financial and volume data, creating a sandbox, if you will, where implications of varying scenarios and alternative decisions can be played out. This would allow you to fully analyse financial impacts and make better-informed decisions. And I think we will see it in the next five years.”

Supply chain risk management is another very relevant but massive topic. There are many areas of risk, and trying to identify and mitigate your largest threats can be an overwhelming task. What do you feel people are or aren't doing right in this area?

“Whenever I talk about risk management, I feel that it is too decoupled from the normal way of running supply chains because I often feel that most of the risk monitoring processes are set up in a supply chain agnostic way. And I do appreciate that there are some risks that are simply not associated with the supply chain. For example, major financial risks or reputational risks may not be as closely related, but then when it comes to supply disruptions, disruptions in factories, and so on, sometimes I don't feel that it is ingrained into the normal processes, like the IBP planning processes and the mitigating actions are too decoupled.

“What I'm advising our clients to do is to think of the supply chain as a permanent set of risks, which sometimes materialise and sometimes not. The ability to respond to both smaller and bigger risks is a capability that supply chains do need to have. There should be little to no gap between the processes, no artificial separation between the standard way of running a supply chain and a risk mitigation strategy. The goal should be to integrate those processes as closely as possible.”

“In risk monitoring activities, I think there's also too much gut feeling involved at the moment. So whenever we work on this topic, we bring in more data-driven, analytical ways of monitoring environments, and then having a better inflow into the risk mitigation discussion, but then putting it into the, for example, IBP planning courses to discuss it seamlessly with the other supply chain topics.”

And with that, he was off, and in my mind’s eye, triaging broken supply chains.