“You want friends around the world, not enemies”

Pro­fes­sor Edwin Keh greets the cam­era, sit­ting in his office at the Hong Kong Research Insti­tute of Tex­tiles and Appar­el (HKRITA), sur­round­ed by stacks of books and doc­u­ments. The CEO of the Institute—who also teach­es sup­ply-chain oper­a­tions at the Whar­ton School of the Uni­ver­si­ty of Penn­syl­va­nia and the Hong Kong Uni­ver­si­ty of Sci­ence and Technology—is a vet­er­an in man­ag­ing pro­cure­ment and sup­plies for notable brands such as Wal­mart, Pay­less Shoes, and Aber­crom­bie & Fitch. In recent weeks he has been—in his own words—“outrageously busy.” As the Covid-19 pan­dem­ic has sent demand shocks to economies around the world, his advice is sought after more than ever. In between meet­ings with offi­cials to work on an antivi­ral reusable face mask that’s good for as many as sixty wash­es, Keh takes time out for an inter­view with Porsche Con­sult­ing Magazine.

It’s the first mod­ern pan­dem­ic. Although peo­ple had some stan­dard play­book to refer to when the econ­o­my shut down, they found that there real­ly isn’t a sce­nario of what we are going through. In Feb­ru­ary 2020, the sup­ply side stopped when man­u­fac­tur­ing got shut out, and by March, demand dis­ap­peared. Since May, we have begun to come out of this gen­er­al hold. By now, we real­ize that our mod­ern lifestyle is only pos­si­ble because of these very nice­ly oiled glob­al sup­ply chains, which pro­vide the qual­i­ty of life that we enjoy. The shock was that we now can see the vul­ner­a­bil­i­ties that we have. It requires every­thing to be in a very sta­ble and pre­dictable envi­ron­ment. We have been in a peri­od of peace glob­al­ly for the past fifty years or so. There were no jar­ring, dis­rup­tive changes. So we have a sense of secu­ri­ty that this is what nor­mal looks like. Part of the psy­cho­log­i­cal changes that we are expe­ri­enc­ing right now is that it turns out that the last fifty years were the abnor­mal peri­od of his­to­ry, if you will. We need to think about hav­ing more robust sup­ply chains, and how to ensure that we have more secu­ri­ty of the sup­ply chains.

There’s always a trade-off when we look at sup­ply chains. You want sup­ply chains that are fast, cheap, and high qual­i­ty. You can prob­a­bly get two out of three, but it’s hard to get three out of three. Since we have been in a very secure state; com­pa­nies were look­ing for more and more price sav­ings because they thought they could go fur­ther and fur­ther with­out hav­ing to pay extra for risks. If you look at some of the short­ages in the first phase of the pan­dem­ic, it would affect things nor­mal­ly have very flat, non-sea­son­able demand. One great exam­ple is toi­let paper. It’s all this panic sen­ti­ment that cre­at­ed this demand for some­thing that should have been very pre­dictable. PPE (per­son­al pro­tec­tion equip­ment) is the other extreme: it was such a com­mod­i­ty that nobody want­ed to make any PPE because it was so cheap and so ubiq­ui­tous. And then all of a sud­den, we find we have a sin­gle point of fail­ure on our sup­ply side.

The Amer­i­can researcher Jim Collins named this the Stock­dale Para­dox. When fac­ing a prob­lem, you must not be sim­ply opti­mistic or pes­simistic. That’s because if you are too opti­mistic, you won’t do any­thing. If you are too pes­simistic, then you are par­a­lyzed. You have to be a real­ist and look at the bru­tal facts, and that is the hard­est thing to do. The scale of the pan­dem­ic over­whelmed us. The appro­pri­ate respons­es were not devel­oped ahead of time, so reac­tions were slow­er because we never account­ed for some­thing like this.

What sup­ply-chain offi­cers should con­sid­er now is that except for cost opti­miza­tions, they should strive for more secu­ri­ty as well, maybe just by get­ting some insights. It turns out a lot of peo­ple didn’t have great vis­i­bil­i­ty into their sup­ply chain. They didn’t know that it was their tier 2 or tier 3 com­po­nent sup­pli­er that was cre­at­ing the holdup. On one hand, tools such as the blockchain are help­ful, but that’s the hard­ware por­tion of the answer. I think the soft­ware por­tion of it—which is the rela­tion­ship and the net­work of the peo­ple and the companies—is even more impor­tant. We should have learned this with SARS, with the tsuna­mi in Japan—there were many occa­sions in which we could have had a prac­tice run. But we default­ed back to mak­ing things cheap—so that I think is some­thing deci­sion mak­ers now should recon­sid­er. What they need to do is to real­ly spend time on under­stand­ing the inter­re­la­tions and con­nec­tive­ness of the sup­ply chain. So much com­pe­ten­cy has been out­sourced that even ask­ing the right tech­ni­cal ques­tions is dif­fi­cult for some sup­ply-chain offi­cers because it just has been so com­part­men­tal­ized. When Henry Ford built the Model T, every­thing was in-house—he owned the for­est, the mines and the assem­bly lines. The temp­ta­tion in the past decades was that com­pa­nies only focused on the con­sumer-fac­ing part of things and out­sourced the other parts. And what we are learn­ing from this pan­dem­ic is that it could be problematic.

From an emo­tion­al stand­point, local­iza­tion, onshoring, and region­al­iza­tion are all going to be what peo­ple think about. But it should begin as a strat­e­gy dis­cus­sion. If you say the avail­abil­i­ty of PPEs, ven­ti­la­tors, or cer­tain drugs is para­mount to me, you should make a deci­sion based on that strat­e­gy. But the other ques­tion you must ask is, do you want friends around the world? Glob­al trade pulled us clos­er; it cre­at­ed more under­stand­ing and rela­tion­ships; and it’s the foun­da­tion of peace and pros­per­i­ty that we’ve been enjoy­ing. So that could be a strate­gic consideration—I do busi­ness in China because I want to have friends in China, or I want to have a cus­tomer base, or to rely on China in some cir­cum­stances. So a bet­ter solu­tion may be a more robust glob­al­iza­tion, because it’s bet­ter to have friends around the world than enemies.

When you con­sid­er relo­ca­tion of sup­ply chains, it also depends on which seg­ment of the mar­ket you are in. If you are a steel mill, you prob­a­bly are stuck in one place because it’s hard to move. But if you are Louis Vuit­ton, you have a lot of flex­i­bil­i­ty and can be quite dynam­ic. If you are Apple, and the value of your prod­uct is in the user inter­face and the cool­ness of your design, then for you cost may not be as big an issue as long as you keep the demand for your prod­ucts high. If you are Wal­mart, then per­haps you still have to opti­mize and think about how to make things 10 per­cent cheaper.

The process may be accel­er­at­ed by the pan­dem­ic, but it was already head­ing in that direc­tion any­way. China doesn’t want to do all the cheap man­u­fac­tur­ing jobs anymore—because of pol­lu­tion and a rapid­ly aging pop­u­la­tion. It is grad­u­al­ly shift­ing from a man­u­fac­tur­ing econ­o­my to a con­sum­ing econ­o­my. For the next three to five years, I sus­pect that it’s not China that is going to expe­ri­ence the biggest shift. It could be India—the change would be much faster and even more rad­i­cal. From 350 mil­lion to 500 mil­lion Indi­ans could be jump­ing to the mid­dle class. Their demands will cre­ate rela­tion­al changes in sup­ply chains. So all in all, com­pa­nies haven’t been giv­ing this suf­fi­cient thought—why are they man­u­fac­tur­ing in China? Because they did it twen­ty years ago when they want­ed some­thing cheap and want­ed to make lots of it. Today this is no longer valid but many com­pa­nies are still doing it the way they did back then.

If com­pa­nies aban­don their sus­tain­abil­i­ty and social com­mit­ment as a result of this pan­dem­ic, peo­ple will say, “You were just green­wash­ing; you never took it seri­ous­ly.” At the end of this, those com­pa­nies won’t be able to attract the best tal­ent, and they will lose brand cred­i­bil­i­ty with their cus­tomers. If com­pa­nies go through this and say, “We are still going to be true to the state­ments about who we are,” then they will become much more cred­i­ble and pow­er­ful as brands. It is one of the things that will deter­mine win­ners and losers out of this pandemic.

It’s not only about your sur­vival; it’s about the sur­vival of every­body in your sup­ply chain. The way to come out ahead in this pan­dem­ic is for your entire sup­ply chain to come out intact. I deal with a lot of appar­el brands, many of whose first reac­tion was to can­cel orders. What I kept remind­ing them is that if you come out of this OK, and you open up your shop, but you don’t have any­thing to sell because all your fac­to­ries are down, then you are still dead. You have to come out of this with your sup­ply chain—whatever shape that is, after all the actions that have to be taken to con­serve cash. That’s a con­cern that goes beyond the four walls of people’s offices, and will chal­lenge sup­ply-chain man­agers to be think­ing about.