00:00:07 Introduction and Professor Bram Desmet’s background.
00:01:43 Linking strategy, finance, and supply chain to optimize inventory.
00:03:25 Explaining the supply chain triangle and its importance in value generation.
00:06:28 Supply chain independence from the S&OP process and its role in strategic planning.
00:08:13 Supply chain as a challenger in strategic planning and the S&OP process.
00:09:02 Supply chain’s role in strategic and financial planning.
00:10:57 Responsibility of supply chain in balancing the triangle.
00:12:11 Jonas’ thoughts on S&OP and its efficiency in decision-making.
00:15:20 The drawbacks of traditional S&OP and its origins in the pre-software world.
00:17:09 The need for a more quantitative and strategy-driven perspective in S&OP.
00:17:50 Importance of granularity in forecasts.
00:18:51 The founding of the Strategy Driven Supply Chain Institute.
00:20:22 CEOs and CFOs not investing enough in planning processes and systems.
00:22:00 The goal of the Strategy Driven Institute to improve knowledge in executive teams.
00:24:01 The commoditization of ERPs and the need for investment in supply chain capabilities.
00:26:59 ERP investments and their relation to electronic bookkeeping.
00:29:14 Companies underplaying supply chain and its impact on attracting talent.
00:32:33 The connection between entry-level tasks in supply chain management and nurturing talent for strategic positions.
00:33:18 Finance’s understanding of inventory and its connection to service impact and cost impact.
00:35:00 The role of cash flow in repaying loans and its impact on working capital and investments.
In an interview, Bram Desmet and Joannes Vermorel discuss the importance of integrating strategy, supply chain, and finance for a competitive edge in business. They emphasize the need to balance the supply chain triangle of service, cost, and cash, critiquing the traditional Sales & Operations Planning (S&OP) process as inadequate for achieving this balance. Desmet proposes that supply chain management should assume more strategic and financial planning responsibilities, while Vermorel calls for leveraging software and automation to improve decision-making. The discussion highlights the need for a change in mindset towards supply chain management as a strategic function rather than just bookkeeping.
In this interview, Nicole Zint, the host, talks with Joannes Vermorel, the founder of Lokad, and Bram Desmet, professor, keynote speaker, and founder of the Strategy-Driven Supply Chain Institute. The discussion revolves around how strategy, supply chain, and finance, when integrated correctly, can provide a competitive edge. Bram Desmet has written a new book on this topic, titled “The Strategy Driven Supply Chain.”
Bram Desmet starts by giving a brief introduction of himself, mentioning his background in IT, supply chain consulting, and his PhD in inventory optimization. He shares how, while teaching at Vlerick Business School, he began analyzing questions like how much inventory a company needs, which led him to connect the fields of strategy, finance, and supply chain. Desmet believes that connecting these areas is crucial for improving a company’s financial performance and realizing its strategy. He emphasizes that making the supply chain more strategy-driven or making the strategy more supply-chain-driven is essential, especially considering recent global events like the COVID-19 pandemic and the Ukraine-Russia war.
Desmet briefly explains the supply chain triangle, a concept covered in a previous episode. The triangle highlights the importance of integrating strategy, finance, and supply chain management. It also underscores the need for organizations to align these aspects of their operations to achieve success.
Throughout the interview, Desmet offers several examples and comparisons to illustrate his points. He mentions that different strategies can lead to different levels of inventory, citing the example of Aldi and Carrefour. Aldi, with a smaller assortment, would have lower inventory levels compared to Carrefour due to their different strategies.
The conversation continues to explore the importance of supply chain management in the current business landscape, where disruptions can cause significant problems for companies. Desmet argues that CEOs now realize that a functioning supply chain is vital for their businesses to thrive.
The interview focuses on the importance of integrating strategy, supply chain, and finance to achieve a competitive edge in business. Bram Desmet’s book “The Strategy Driven Supply Chain” dives deeper into this topic, providing valuable insights and guidance for organizations seeking to align these critical aspects of their operations.
The discussion was about supply chain management, balancing service, cost, and cash, and the role of Sales & Operations Planning (S&OP) in modern companies.
Bram Desmet highlights the importance of balancing the supply chain triangle of service, cost, and cash, which is crucial for value generation in a company. He explains that balancing the triangle is mandatory, not optional, and is tied to a company’s financial metrics and performance. Desmet believes that the S&OP process, while helpful, is inadequate for balancing the triangle because it requires a strategic perspective.
Desmet proposes that supply chain management should be responsible for strategic planning, challenging the company’s strategy and ensuring that it aligns with the supply chain. He also suggests that supply chain management should play a role in financial planning, consolidating the planning processes and balancing the triangle. Desmet acknowledges that this proposal might be challenging for supply chain professionals, as it would require them to leave their comfort zone and take on more strategic responsibilities.
Joannes Vermorel offers his perspective on the role of S&OP in companies. He believes that S&OP, as a way to organize discussions, might not be efficient enough to handle the large number of decisions required in modern supply chains. Vermorel sees S&OP as a process that emerged in a world where software was non-existent and the mindset of mechanizing white-collar work was not yet established.
Vermorel critiques the lack of a strong quantitative perspective in traditional S&OP processes, especially when it comes to incorporating financial metrics. He argues that the S&OP process should be adapted to the modern world, leveraging software and automation to improve decision-making and generate value.
In summary, both Desmet and Vermorel acknowledge the importance of balancing the supply chain triangle of service, cost, and cash, but believe that the traditional S&OP process is not sufficient for achieving this balance. Desmet suggests that supply chain management should take on more strategic and financial planning responsibilities, while Vermorel calls for leveraging software and automation to improve decision-making in supply chain management.
The importance of supply chain optimization for businesses. Vermorel emphasizes the importance of granularity in forecasting accuracy and the absence of strategic targets in supply chain management. Meanwhile, Desmet points out the lack of knowledge about supply chain management in the executive room and the misplaced investment in ERPs instead of planning systems. Both experts agree that supply chain optimization is often overlooked in successful companies, leading to a reluctance to change anything. Vermorel notes that ERPs are overpriced for what they actually do and that the real investment should be in analytical powerhouses. The discussion highlights the need for more education on supply chain management and a change in mindset towards it being a strategic function rather than just bookkeeping.
They explore why companies may be reluctant to examine their supply chains and the importance of supply chain management in an organization.
Vermorel believes one reason companies underplay the importance of supply chain management is that the people in these roles are not seen as the elite within an organization. At the entry level, supply chain employees may spend their days managing Excel spreadsheets and micromanaging inventory, which does not compare favorably to the more strategic roles in finance or consulting. This disparity in perceived value makes it difficult for supply chain management to attract top talent and for those in the field to rise to strategic positions within the company.
Desmet, on the other hand, focuses on the financial aspects of supply chain management. He explains that companies don’t go bankrupt from making a loss but from a lack of cash. He discusses how startup companies can survive without making a profit for years, as long as they can attract sufficient investment. This principle also applies to more established companies, where cash flow and cash generation are crucial factors.
Desmet notes that finance departments often misunderstand inventory management and its connection to service and cost impacts. When companies need to generate cash, they may reduce inventory, halt investments (capex), or stop repaying loans. However, finance departments prioritize repaying loans and maintaining capex over inventory management. This approach places significant pressure on supply chain management, which is expected to reduce inventory without understanding the full consequences.
The interviewees argue that supply chain management should receive more respect and be given a more substantial role in strategic and financial discussions. Desmet suggests that better planning systems and capabilities can help supply chain management improve its standing within organizations. By investing in these areas, companies can elevate the importance of supply chain management and recognize its value in maintaining a healthy business.
Nicole Zint: Today, we welcome back Professor Bram Desmet to dwell deeper beyond his previously explained supply chain triangle and look at how strategy, supply chain, and finance, correctly integrated together, can give you a competitive edge. Bram, I am in fact quoting the title of your new book on the strategy-driven supply chain. So, if we can start off by you giving us a quick introduction to yourself but also tell us what led you to write this book in the first place since we last spoke.
Bram Desmet: Thank you, Nicole. Thank you for the opportunity to be here and to talk about the book. So, a short intro of myself: I started my career in IT, to find out that for me, IT was interesting as a means to an end but not as a goal in itself. I then switched from IT into supply chain consulting. I ran into a lot of inventory optimization projects, did a PhD in inventory optimization. That PhD brought me to the Vlerick Business School, where I started teaching the more quantitative stuff like statistics and optimization techniques.
From both an academic and professional perspective, through consulting in supply chain and teaching about statistics, I started analyzing simple questions like, “How much inventory does a company really need?” To answer that question, you run into finance because finance is concerned with inventory since inventory is part of the working capital, and working capital is cash. You also need to link to strategy because different strategies lead to different levels of inventory. I often say, “Who would have the lowest inventory, Aldi or Carrefour?” For sure, Aldi because they have a smaller assortment; basically, their strategy is different. So, to answer that question, you also need to make a link to strategy.
Before I knew it, I was really connecting strategy, finance, and supply chain, to then find out that quite often, in practice, they are not connected. It led me to write a first book and this second book where I said, “If you want to improve your financial performance and if you want to improve your success rate in realizing your strategy, you need to better connect the strategy, the financial metrics, and the supply chain.” You need to make your supply chain more strategy-driven or you could also say you need to make your strategy more supply chain-driven.
Certainly, with COVID and now the post-COVID Ukraine-Russia war, I think every CEO, more than ever, realizes that if the supply chain is not functioning, you simply don’t have a business. So, that’s maybe a brief but still relevant introduction.
Nicole Zint: Supply chain is indeed the backbone of any business. And Bram, before we go any further in the discussion, for our new viewers here, you did explain the supply chain triangle in our previous episode. Could you just give us, first and foremost, a quick summary of that?
Nicole Zint: What is supply chain management? People will typically talk about end-to-end, from the customer’s customers to the supplier supplier. It’s about information flow and flow of physical goods and cash flows. But when writing my first book, I said that if I look at what supply chain managers really struggle with, it’s about balancing that triangle of service, cost, and cash. Even if you look at COVID, there was a lack of raw materials or a lack of transport leading to service issues. Now, I see companies being concerned and saying, “Hey, but what if there is an economic slowdown before we know all that inventory may be delivered, and then we will have an inventory problem instead of a service problem?” But the real struggle I’ve seen in supply chain is balancing that triangle of service, cost, and cash.
Bram Desmet: The subtle thing is, in the first book, I started linking that also to financial metrics and financial performance because people asked me, “Oh yeah, Bram, I understand, but isn’t this how companies work?” We need to be careful here because if service is the driver for the sales of the company, from an investor’s perspective, it’s not just about the sales; you also want to see a margin. If you combine the sales and the cost of the service and the cost, you get to the margin. And it’s also not just about the margin; it’s about the margin you generate over that capital employed, over that working capital, or the invested fixed assets. Balancing or optimizing that triangle is not optional, and it’s not just okay that there is a little bit of tension. The tension in the triangle really touches the heart of the value generation of a company.
So, it puts supply chain in a different context, and I think that’s the subtle thing which that triangle does, which the first book has done and the second book confirms. Indeed, the service, cost, and cash in the supply chain triangle are not independent of one another, and improving one thing will equally decrease something else. It’s important to be aware of that to find that ultimate, most profit-maximizing balance.
Nicole Zint: Correct, Bram. And also, your very last sentence in our previous episode, you ended it by saying how supply chain should be independent of the S&OP process, so the S&OP process should not be running supply chain, which we quite often see is, in fact, the case. But I just want to ask you, what did you mean by that before we go over and look at the strategy in the supply chain and how we find the correct one?
Bram Desmet: In general, what I see in supply chain functions today is a lot of operational stuff, like logistics and customer service. The argument I make in the second book is that balancing the triangle is not optimal; it’s mandatory because balancing the triangle is crucial for the value generation of a company.
Nicole Zint: The triangle is about value generation, and I’d say the best tool supply chain has today is the SNLP process. However, I also say that the SNLP process is inadequate to balance the triangle because it really starts with strategic considerations. What’s my strategy? Do you want to be a total solution player? Then you will have a broad portfolio. If you have a broad portfolio, it will trigger inventory, right? Or do you want to be the lowest cost player? Then you will need to focus on efficiency and scrutinize the portfolio. Balancing the triangle starts from a strategic perspective.
Joannes Vermorel: Supply chain today has the semi-responsibility to manage the triangle because typically, supply chain needs to manage the inventory piece of the triangle, and inventory is the most complex one. Supply chain has the responsibility, but they don’t have the means. In my new book, I say that SNLP is not enough. Supply chain should also become responsible for strategic planning, and then people start sweating. Does that mean that supply chain will then define the strategy? No. Supply chain will not define a strategy. Just like in the SNLP process, supply chain is not defining the forecast; it’s sales who own the forecast.
Bram Desmet: Supply chain is the challenger, so it’s challenging the demand and the supply in the SNLP process. Supply chain should also challenge on the strategic level and say, “Hey, do you really believe you will be able to drive these volumes at those price levels for that type of product or that type of market? It’s not going to happen.” Or on the supply side, “Are we really sure that this supply chain or this operation will provide us with sufficient flexibility to scale up or to scale down?” Supply chain should play that connecting role, which it is already doing in the SNLP process, but it should also get that responsibility on the strategic planning.
Joannes Vermorel: For me, supply chain should also get that responsibility in the financial planning, and that’s where people definitely start sweating. What are companies doing today? We have a good planning process, which is SNLP. We are duplicating that process in finance, financial planning and analysis (FP&A). Even if we do IBP fine, finance still has their own planning tools and their own planning processes. Then we triple the effort by trying to integrate the two. We even have a name for that; it’s called IBP. That doesn’t make sense. If you want to have integrated plans, put them in one pair of hands.
Bram Desmet: Supply chain may not be ready for that, and finance may certainly not be ready for that. But in the book, I say that if we want balance in the triangle, it has to do with strategy, budgeting, financial planning, and target setting. It also has to do with operational planning and follow-up through S&OP. My proposal is, if you want balance in the triangle, it’s not happening automatically. So if you want balance, you need to give that responsibility to somebody. Give that responsibility to supply chain and make sure that supply chain, instead of being a tiger without claws or teeth, really has something to have.
Nicole Zint: That impact by consolidating the planning processes into one pair of hands, and when it’s about customer service or logistics, I say in the book, customer service or logistics, that’s operations, right? So either give it to the CEO or maybe give customer service to sales, but we should get out of that limbo, like okay, we are responsible for balancing the triangle and the inventory, but we don’t really have the means, and then we are continuously reckoned on or measured on quite operational stuff.
Bram Desmet: I would keep S&OP with supply chain, but I would add the running of the strategic planning and the financial planning process to that, and I would get rid of the more operational stuff. And then everybody starts sweating because supply chain people need to get out of their comfort zone. We like to complain about everything that is going wrong, but then leaving behind the operational stuff to pick up a more challenging role and claim our seat at the executive table. Not every supply chain person is in favor for that or is ready for that.
Nicole Zint: Joannes, what do you think about what Bram is saying and what do you think the role of S&OP is in a company or should be?
Joannes Vermorel: It’s very interesting. There is a general law that was kind of uncovered about the organization something like 40 years ago, it’s known as the law of Conway, which is basically the idea that companies, when they engineer systems, they replicate in their systems, and typically software systems, the communication patterns that are already in place, irrespective of whether this is really something adequate considering the sort of tools that you have with modern computers or not. I would say potential or potentialities. So, you’re stuck in the old ways. But when I say S&OP, the way I see that is that it’s a way to organize essentially discussions.
However, the supply chains of present day are not the ones that we had 50 years ago. There are many companies, I mean even relatively modest companies have tens of thousands of products nowadays to manage. So clearly, if you want to just take decisions, you very end up with is knowing that for every single product there is like a half a dozen of decisions to be taken every single day. You very quickly range into the millions of decisions per week. For large companies, it’s literally tens of millions of decisions per day. And that really begs the question of the efficiency of S&OP as a process to ultimately generate high-quality decisions for all of that.
Nicole Zint: So, that, I would say, is my very first concern about S&OP. It’s essentially that decisions must be executed quicker than S&OP is able to communicate. What is really the mindset of having people talking to each other? That’s the essence. And yes, we want to have corporate alignment so that there is not one portion of the company, like sales, that says, “Oh, we go into pharma,” while production says, “We go into a completely different direction, like not even the same market.” It’s a caricature, but to create some basic alignment on what we are trying to achieve, and that’s kind of fine. However, the thing is that the S&OP processes tend to devolve into things that are just routine meetings where–
Joannes Vermorel: I would say it takes a lot of time, a lot of effort for a lot of people to actually produce the sort of artifacts, you know, reports, numbers, figures, KPIs that are associated with that, without necessarily translating into euros or dollars of return. So you see, the difference between the pre-software world and the post-software world is that, in this day and age, if people do something, it is ideally so that they improve some kind of numerical recipes somewhere in the organization, and those numerical recipes just keep running and doing the hard work to generate value. We have machines that have been doing that in factories for a long time. The idea is that you just mechanize and automate, and so you have a productive asset that does not depend too much on the ongoing efforts of people. But you can do that also for white collar functions. This sort of mindset of turning efforts into productive investment that just generates value on its own has been happening for more than a century for blue collars. That’s the essence of mechanization. But for white collars, it has essentially been happening for the last four decades with software in many other forms. So my criticism for the classic form of S&OP is that it’s clearly something that emerged in a world where software was kind of non-existent, this sort of mindset that you can mechanize white collar work, that you can build a productive asset for decision processes was just non-existent. So that would be one aspect.
Joannes Vermorel: Another aspect is that, also, and that’s where I would go back to the triangle and the second part of the book, which is a strategy-driven aspect introduced by Bram, is that there is a fundamentally shallow quantitative perspective in the classical S&OP perspective, especially when you put euros or dollars into the picture. We have S&OP, and we have typically people who, when they think quantitative assessment, they
Nicole Zint: Will just have the percentages of error on this on the forecast?
Joannes Vermorel: Yes, although I think it is very limited in use. If you look at the sort of accuracy you can have in your forecast, it is essentially driven by the granularity that you have. If you’re selling things in a mini market one by one, it’s going to be incredibly erratic. If you’re a chemical producer, you’re probably going to have a much more stable flow of production and orders.
Nicole Zint: So, the second criticism would be that errors are absent and part of that is that the sort of strategic targets are kind of also slightly absent. That really brings us to the second part of the book, which is what is it that your company really tries to achieve and how is this strategy actually implemented by supply chain. We’ll get to that question in just a very short amount of time, but before we do, I just want to ask you, Bram, since we last spoke, you also founded the Strategy-Driven Supply Chain Institute. You mentioned that you noticed a lack of knowledge in the executive room. What is that knowledge?
Bram Desmet: To illustrate that there is a lack of knowledge, I often run a survey that asks the following questions: 1) What would be the first investment for your CEO and CFO - new capacity, a new ERP, or a new planning system? 2) What do you think costs the most - new capacity, a new ERP, or a new planning system? 3) What do you think has the biggest impact on balancing the supply chain triangle - new capacity, a new ERP, or a new planning system?
When I ask these questions, people say that they would first invest in new capacity or new ERPs, which are by far more expensive. But when it’s about having an operational impact on the triangle, the planning system has the biggest impact. It’s a bit awkward that CEOs and CFOs don’t invest in planning processes and planning systems. That’s my experience. They’d rather invest a factor of 10 in new machines because that’s visible or in a new ERP because they have to. But they really don’t understand what the impact of supply chain and supply chain planning can be on the operational result. They also have no clue about the changes in planning requirements if they change their business strategy.
For example, I say to companies that if they are product leaders driven by innovation, they should know that if they launch 10 new products, seven of them are going to be failures and three of them are going to be a huge success. It’s extremely important that they are able to scale for those three successful products because their success needs to pay for the seven failures and cover the cost of increasing inventory. But when I ask how we design the supply chain for efficiency and minimum cost, I say no, that’s not what you should do. And so, it’s like we have the strategy and then…
Nicole Zint: We design the supply chain. I also often say finance still sees supply chain as their favorite lemon, and lemons are there to be squeezed, so less costs and lower inventories. I think this is foolish and immature. There is a huge task to educate non-supply chain people in how this works. It’s also a problem with supply chain people because supply chain people like to talk technical stuff.
Bram Desmet: I often say to people, listen, if you want to improve the S&OP, don’t talk about S&OP. The moment you start talking about S&OP, they will say, “Hey, but that’s your process, that’s your problem.” So, don’t talk S&OP, talk business. How do you talk business? Talk about the triangle and how it links to financial value. Talk about the strategy and say, “Okay, who do we really want to be in the market? How do we want to differentiate? How do we want to stand out?” Once you have the interest there, that’s when you need to say, “Okay, if this is what we want to achieve, this will be the impact on our supply chain and the cost in the supply chain and the investments and the buffers, and this will be the impact on the planning tools and processes we need to have in place to be able to realize that.” But it’s like we’ve been communicating completely next to each other. We’ve been living in separate worlds. The Strategy-Driven Supply Chain Institute really has a goal to use the concepts of the book, trying to improve the knowledge level and executive teams, so that we look at this stuff with a different pair of eyes or a different pair of glasses and hopefully drive more investment into supply chain and supply chain capabilities.
Nicole Zint: It’s quite interesting that you mentioned that supply chain is essentially not getting enough attention, but it should be because it’s really what defines how profitable a business can be. That leads me to my next point, and you also mentioned this Bram, in both of your books: how a supply chain that is not a supply chain, how a company that is seeing growth and on paper looks successful or the brand is by now well known, are quite reluctant to change anything or to improve their supply chain to find a better balance inside this triangle that you’ve mentioned, simply because, “Well, we’re successful, right? So clearly our supply chain must be as well.” So, it’s this continuous overlooking of the importance of a supply chain for a company. Joannes, I know that we see that quite often, so what are your thoughts on this?
Joannes Vermorel: Bouncing back just prior to this question of relative importance of supply chain versus the rest, I think one aspect where I’m jumping on the wonderful remark of Bram is that investment on ERPs versus pretty much anything else is very interesting. I mean, obviously, I’m biased being a software vendor myself. But the interesting thing is that ERPs, which should be better named ERM, or Enterprise Resource Management, because there is basically no planning in those systems, it’s just about record management. We are talking about pieces of software that are four decades old that are essentially completely commoditized. For example, transactional databases that used to be fairly unique technology sold by Oracle.
Nicole Zint: Nowadays, you have open source databases that are just excellent. Unless you have tens of millions of transactions per second, open source products will work just fine. Inventory management, or just simply record management, keeping track of what goes in and out, as far as software is concerned, it’s completely trivial. It even has a name in the software industry: CRUD (create, read, update, delete). Every single operation that you do is basically adding a line to a table, reading the line, updating the line, or deleting the line. Then, you have around 200 screens to support all your operations, but essentially this is very commoditized, simple, and straightforward. Nowadays, both the building blocks, like transactional databases, are literally open source, as well as operating systems and pretty much everything else.
Joannes Vermorel: The point I would like to make is that I would expect record management to receive something like 5% of the investments, and the smarts, the investments in doing anything intelligent on top of that, could be spending money on people, software, or whatever, would be 95%. The analytical powerhouse, so to speak.
Bram Desmet: Analytical or actually really something that is just thinking about what you should be doing, as opposed to just being like a bookkeeper.
Joannes Vermorel: The insanity with ERP investments is that ERPs are just glorified bookkeeping systems. For me, the incredible thing is that in the 21st century, companies end up spending more money on electronic bookkeeping than they used to in the 19th century when it was done by hand. Normally, we had these systems to generate massive productivity improvement. One computer can manage literally billions of records, so why do we end up paying more for the system than companies used to when it was done by hand? I’m obviously exaggerating. Yes, companies were maybe spending less in the 19th century, but their assortment was probably 100 times smaller. There are plenty of factors like compliance problems that they didn’t have as much back then.
Bram Desmet: As you said, we spend far more on ERP than on planning because, for some reason, bookkeeping is seen as a super complex system, yet it’s very trivial.
Joannes Vermorel: I think it really relates to the knowledge that is missing from the boardroom. I strongly suspect that in many large companies, nobody in the board really acknowledges the fact of what is pure commodity tech from differentiation, from what is literally four decades old commodity tech, from what is actually novel and innovative.
Nicole Zint: Obviously, there are plenty of vendors, Lokad being one of them, who are trying to push buzzwords like cloud, AI, blockchain, or whatever, and they’re just muddying the water, making it very confusing. So, why do you think companies are still reluctant to look into their supply chain and see what is at fault here? How can we do better? Is it linked to what Bram said, that supply chain is simply not getting the attention it needs in the executive room? That there is a lack of knowledge of how important a planning system is compared to a transactional system?
Joannes Vermorel: One of the reasons why many companies underplay supply chain is because, as a matter of fact, the people and the organization in this division are not the elite. For many large companies, at the bottom of the supply chain, you end up with hundreds of people going through Excel spreadsheets all day long. You start your journey in the company by being assigned 1,000 SKUs, and then you micromanage the min and max for the inventory for those SKUs. You go through your spreadsheet once a day or once a week, rinse and repeat. If you’re good and reliable, you progress and become a manager where you train more people to manage more spreadsheets.
Compare that to finance, where right from the start, as a trainee, you’ll be tackling very strategic tasks, like supporting negotiations with the bank. When you try to capture young, talented engineers who have many job offers, option one might be a company like McKinsey with extremely difficult challenges, option two is a trainee position in finance where you’ll be assisting with large deals and very strategic negotiations with the bank, and supply chain, where you’ll be managing a spreadsheet for maybe the first two years.
Once you have that in place, it becomes difficult for the rest of the organization to see real talent being attracted here and later being promoted, because the job is not so attractive in the first place. I’m talking about the entry positions, which makes it much more difficult to have some sort of emergent opportunities or talent that would really shine and where the company overall says, “Yes, we need to trust this person with very strategic tasks.”
Nicole Zint: Responsibilities after a couple of years, you see again that, I’m just saying, look at what is being done at the bottom, and is this work at the very bottom nurturing the talent to become, you know, a future board member? And I would say for most supply chain companies, very frequently, if I look at the basic task, no, this is not a stepping stone to ever get into a strategic position. Bram, I want to end this episode, we’re nearing towards the end now, but I want to end this episode on quoting one of my favorite sentences from your book, which is how you mention companies, they don’t go bankrupt from making a loss, they go bankrupt from lack of cash. So, what is actually meant by that?
Bram Desmet: If you look, there are many startup companies who don’t make a profit for the first 10 or 15 years, and still, they don’t go bankrupt. Why is that? Because investors continuously put in new money. As long as you can attract sufficient money, you don’t go bankrupt, so that’s already explaining that principle. If you turn it around, not for startups but for a general company, it really took me time to understand how finance looks at inventory. I often say, and I also say this to finance people, finance doesn’t understand anything about inventory. They think it’s elastic, like if you just push on it, it goes down, but they don’t make the connection to what is the service impact or the cost impact, and they don’t see this triangle.
Joannes Vermorel: No, they don’t see it. They don’t see the triangle, and sometimes I also have the feeling that they don’t want to see it, or they don’t want to know because it’s easier. It only adds complexity, and they have a beautiful financial view. What I’ve seen is that companies say, “Hey, we did a new acquisition, it’s debt-financed.” So, all of a sudden, we took on a lot more debt. That smart finance graduate who did the big negotiation with the banks, there are certain agreements with the banks that the loan will need to be repaid, and if you repay a loan, that needs to be cash flow. In the end, the cash will be generated from the operations, and either the cash will go into capex, new investments, it will go into working capital, or it will go into repaying loans, interests, or dividends.
Bram Desmet: That’s really a primary driver for finance. So, even if they won’t go bankrupt, if the operational result is disappointing, what do you think they will do? Reduce working capital, so reduce the inventory, and don’t think too much about the service or cost impact. No, you just reduce the inventory, you stop capex, you stop investments, or you stop repaying the banks. What do you think will be their priority? If they stop paying the banks, that’s their fastest way to the exit, so that’s really the last thing they will do. Stopping capex is not ideal, but…
Nicole Zint: Stopping investing in the company is like stopping the growth, so they will really be reluctant to do that. So, inventory takes the hit, right?
Joannes Vermorel: Yes, it’s always inventory which takes the hit, and it’s the one which they don’t understand. That’s why I also often say, when finance says to the VP of Supply Chain, “Hey dear VP of Supply Chain, now that you have your VP title, it’s time that you make yourself useful for the company. You, the VP of Supply Chain, are going to lower the inventory by 30% for me, the CFO.” And why does that inventory need to go lower? It’s typically for cash flow reasons.
Bram Desmet: Cash flow is so important as a metric in the financial world. It really took me a long time and the second book, and discussions with former CFOs, to start realizing that. So, even if companies don’t go bankrupt, that whole cash flow and cash generation is a huge constraint to the operational system and a huge driver.
Finance often defines the constraint without taking the hit or the impact of the constraint. The hit or the impact of the constraint is most often taken by supply chain people, which is fine, as long as they invest in better planning systems and better planning capabilities. And as long as supply chain, instead of being considered as something semi-operational like “just do your stuff and just get the product there right, however you do it,” gains more respect and gets a more firm seat around the table, not just in operational discussions but also in strategic discussions and financial discussions. That’s where the book is trying to push the supply chain people to.
Nicole Zint: Bram, thank you very much for joining us yet again here on lokadtv. Thank you for tuning in, and we’ll see you next week.