How to Avoid Chokepoints and Build Supply Chain Resilience

It may never happen, but we're going to focus on where that potential risk could have the greatest damage. Welcome to Supply Chain Optimizers, the show that uncovers the controversial strategies and candid stories of innovators and disruptors from some of the world's largest supply chain operations. Let's cut through the noise and optimize your logistics and supply chain one bold idea at a time. Welcome to Supply Chain Optimizers. I'm your host, Diego Lorzino. And today it is my absolute pleasure to welcome Jonathan Kohlhauer, Managing Director of the Global Supply Chain Practice at ust. Jonathan has over two decades of experience driving operational excellence, digital transformation, and enterprise software integrations for global organizations. He has a fantastic background spanning across McKinsey, Accenture, Oracle, Manhattan Associates. He has basically seen it and done it all. In this episode, we'll explore potential disruptions to supply chains worldwide and how events such as, for instance, the straight up for Ms. Could ripple across global supply chains and what strategies companies can use to build resilience in these uncertain times. Jonathan, thrilled to have you on. Welcome to the show. Thank you, Diego. It's good to be here. Let's start off with your journey from consulting enterprise software to leading global supply chain strategy. Now at ust, you've worked a little bit on both commercial and operational sites consulting. Walk us through your journey. Basically, yeah. So I started my career in consulting at Accenture and that's really where I got hooked on operations and supply chain. I'd done my MBA in operations management, so it kind of made sense. But it was just the number of different experiences that I had and the number of different clients that I had the opportunity to work with. I eventually had responsibility for all of our utilities clients around the world. And what that meant was then I was kind of spending a week in Europe, a week in Asia, a week in South America, and then a week in the US it was just burning me out. So I spent a few years at Oracle, about five years there and what we, I think the biggest thing we did There was the J.D. edwards acquisition. It was fortunate I had an opportunity to actually run a, an early stage company for battery ventures doing multi channel inventory optimization. And that was great. It was an early stage company that we ended up selling and when we sold the company, that's when I went to McKinsey. Really I was responsible for enterprise applications within the operations practice. I was pulled into Manhattan Associates actually as the Chief Marketing officer and did that for about seven years and really got a chance to get really close to some of the more software related applications in wms, tms order management. And it was just a really wild time for us. So now I've been at USD for going on four years and we've got a great set of clients and very talented organizations. So that's kind of what brings me up to today. Fantastic. And a lot of what you talk about today, and certainly I'm sure this is a reason your clients seek you out, is you're very knowledgeable about disruptions for supply chains globally. You are an active poster on LinkedIn and you talk a lot about the ripple effects that disruptions could have. So I wanted to explore a few of these that you've talked about previously and what impacts you see for global supply chains. Let's start with this trader of promise, for instance. So I think that within my group we take a bit of a different approach to managing risk. And I see a lot of organizations that will go and they'll say, where do we think we have the highest visibility to the risk? Where can we predict it the most? And we take a different approach and what we say is where could that risk damage your business the most? It may never happen, but we're going to focus on where the, where that potential risk could have the greatest damage. The Strait of Hormuz is a very good example of that. Only because it's a ubiquitous supply chain that moves so much of our energy and when you look at how much energy is shipped through that Suez Canal area, that a potential shutdown of that Strait of Hormuz could be devastating to not just one industry, but every industry that relies on energy. So that's part of the reason why I've spent a good bit of time looking at that part of the world because it impacts so many different organizations. So then the question is what could actually prompt that? And I think that we've seen it and the bomb throwers out there aren't making things any better. I do believe that we're making progress on a peace agreement, but it certainly didn't help when Israel bombed Qatar. And that just is a prime example of one slip could cascade and cause a whole lot of other things to trigger that closure of the straight of hormones. And maybe you can paint the picture to our listeners. How do you define energy in this case? What do you mean by this is a, you know, crucial point for energy? So it's oil and it's natural gas. Those are the two primary things that move through there. And I think that's just, you know, one example of a choke point. I think if you look at, in Asia, if you look at the Strait of Malacca is another choke point where China brings in so much of their energy through that Strait of Malacca that they realize that this is a real threat, a real risk. And if something were to happen with, say, Taiwan, for example, that's probably the first thing that would happen, is that the United States and the Philippines and our other friendly allies would probably move in to blockade that Strait of Malacca. And same here, right on the, on the Strait of Hormuz and the impact on energy, raw materials, basically. What you're saying is this such a crucial choke point because since it moves so much oil, so much gas coming from Asia and Middle Eastern countries into the Western world, let's call it, let's say it like that, any disruption happening there would have a complete effect on the energy markets, thus on pretty much any, every single industry out there. And part of it is I remember so vividly when there was a ship that was stuck in the Suez Canal, Evergreen was stuck. And how shocked people were that that would happen. And the answer is, well, it's happened eight times in the last 50 years, so you shouldn't be shocked that that would happen. And what that really sent a message to a lot of our clients was be prepared, have a Plan B, because it's probable that it's going to happen again. And if you don't have a plan B, then you're really going to regret it. And it's not just enough, Diego, it's not just enough to have a plan B. You've got to practice that Plan B because you can't create a Plan B when something goes wrong. That has to be in place well ahead of time. And I will definitely. Jonathan wants to explore what a plan B is. Right. And how can companies prepare themselves. But since we're in the, let's say, negative portion of the narrative, let's say maybe with a few other disruptions that you recently pointed out. Right. We talked a lot about the Trans Arctic shipping lines. What can you tell us about that? So certainly there are, there are new lanes that are being opened up through the Arctic. And this is, I think, part of the reason why we've seen so much tension on Greenland and for nations that are competing to become what they call Arctic nations, because then they have a say in how things will, you know, what the policies are for the trans Arctic shipping. It's still a ways away. I think it's probably still five to seven years away because much of it is still very seasonal, so you might have a four month window when you can actually maneuver through that part of the world. It is very risky. Still, there are a lot of natural formations that present risk. Obviously the ice presents risk and quite frankly the infrastructure is not yet there and that includes the ships necessary. It does require specialized equipment to be able to navigate through the Arctic. And I think certainly China has probably three to four times as many icebreakers as other shippers or other nations. So I think it's going to be hotly contested. I think that there are some real advantages to it. Not only does it cut down on the journey time, I mean probably 10 days you could take off, but it also allows a shipper to avoid the Suez Canal or the Panama Canal. Those are very expensive. I mean, the amount that shippers have to pay to move through those canals is just going higher and higher. So there are real cost advantages. I think that there are time savings advantages. And that's one of the things that I'm looking forward to is working with clients on saying, you know, we just took a third of your time out, now you can do all sorts of good as far as lowering inventory levels, setting customer expectations, all those kinds of things become a lot easier. You also did mention in a recent post the China Pakistan Economic Corridor cpc. What can you tell us about that? So this is part of the Belt and Road initiative and it's been a priority for China for some time. And essentially it's a land based corridor that goes from Western China through Pakistan and into a deep water port, you know, on the Arabian Sea, I believe is where it comes out. And that is going to give. Well, there are, there are several advantages. Number one is you're going to be able to reduce the transit time substantially. And number two is you're going to have access to a deepwater port in the Middle East. And so that will also allow the shipper to avoid the Suez Canal and they'll be able to reach Western Europe much faster. And as I mentioned earlier, it does give China this very needed alternative to the Malacca Strait and its ability to import energy and avoid that ocean move. So I think there are, obviously there are tensions between India, Pakistan and China and I think we're going to have to make sure that if shippers do choose that as a route that they've got their eyes wide open as far as what the risks could be in that region. And I think the last thing I'll mention about that is the economic impact that that could have for Pakistan is just unbelievable. As far as lifting up some of the people in that region who just continue to struggle. You also did mention adding to this complex picture is the expected overcapacity of container ships. You see a record number of new vessels being ordered, influx of capacity, depressed, you know, fright rates because of this. What can you tell us about this third disruption that you or emerging situation that you described? So the backlog of container ships that is expected to hit the market in the next 18 to 24 months is quite remarkable. And so probably five years ago, following kind of COVID time, there was a real effort put in to increase the fleet, the container shipping fleet. And there are some areas in the world that are much, much better at building container ships than in the US So China and Korea are master builders and they have been putting out quite a bit of new capacity. So anytime we see new capacity coming on board, and that includes container ships that are in renovation right now, they're being refurbished. So, you know, I think it's good news for the shippers. I think that they're going to see rates come down. I think it's going to be a tough market for some of the major carriers. And having that additional capacity, I mean it's a cyclical business but having that additional capacity will go a long way. It's kind of interesting to see what's going on right now because so many companies, they pulled their orders forward in advance of tariffs and when they did that they basically stuffed their supply chains with inventory and now they're backing off of the orders. And now we're seeing more and more are what they call blank sailings where a Maersk is saying we're not going to go and we don't have enough demand to justify the trip. Well, it's not like you can just catch the next flight out. It might be another three days before you can get out. So that's causing quite a bit of anxiety. I will say that most of the clients, and I try to check in with my clients, you know, at least once a month on these questions. I've been pleased to know that they are, they're feeling good about busy season. So you know, the holiday season coming up, they're not panicking because I think that they brought in a lot of that merchandise ahead of time. Hearing you Jonathan, I cannot help but think of Henry Kissinger and in the way in which, you know, exposed the view of the world and one myself, I'm really tempted to ask you, right, like in this Kissinger esque way in which you view the world, right like the world order, maybe to wrap up this section. Right. Like just paint the picture for us and our listeners. Right. In your own words, what's global trade? The choke points? What are some hotbeds? What are some, like just in your own words and kind of like your summary of the global situation before we move to okay, what can companies do? Right. But really tempted to ask this question this way. There are parts of the world that are just absolutely ripe for development and I think we're going to see those parts of the world pop in a good way. I think India is very well positioned as far as the investments that it's made in infrastructure. Simple things like a reliable power supply. Those are the kind of investments that they've been making. How if they could kind of make it a little bit less administratively challenging, I think it would work out very well. I think South America is another area. It's another part of the world that is going to, it's going to really explode. Particularly with Brazil, I think, and Chile are parts where we do have a good manufacturing base, we do have improving infrastructure. And so I'm excited about that. I will be very frank and if we could get some stability back, business would be able to invest. But right now I don't feel it. I don't feel the confidence in business to be willing to make large capex investments and try to hope that they'll be able to get a return. So that's going to hurt us and we may not feel that for another three or four years, but we'll look back in 20, 30 and say, what happened? Why did we slow down? And the answer was because we stopped investing for two and a half years, three years. I have to ask maybe, since we're talking about the global picture a little bit on the future, right. Do you think that our future will continue to be globalized? And I know it's anyone's guess, right? A lot of people speak about the end of globalism. I wonder what you think about this. No, I don't believe that's the case. I really don't. I think that economic forces have so much more power than we're giving them credit for. And so it's all about having comparative advantage. So we've specialized our production and our supply chains to suit the economies where there's a comparative advantage, meaning manufacturing goes to a lower wage market than in say, the United States. I don't believe that you can artificially engineer that. To change this is like trying to change the way the surf comes in the ocean's going to win. And so I think that I'm still very optimistic that we can find that, that globalization and we might not get it as, as tightly integrated. But what we have learned is that we have to have alternatives. And so a lot of clients that I would work with would say, oh yeah, we have China plus one is our strategy. Well, that's not going to, that's not going to work any longer. So there are emerging economies that are going to give China a run for its money and that's where we're going to see the wider distribution. Very interesting. I sort of hold a similar take to you. Right. It's already so ingrained and so obviously advantageous to have these comparative advantages and really using them that yeah, there's in a way, no not going back from that. And it makes sense that it makes an abundance for all of us consumers. What I think is unfortunate is we worked so hard for 20 years to build these integrated supply chains. And if you just look at the USMCA and the Mexico and Canadian trade agreements and how product would flow between Ontario and Detroit or between Monterey and Nogales, those were burned in trade lanes, didn't require a whole lot of over engineering. And now that's where I think that it's unfortunate that that's coming apart. I mean, now I talk to some auto manufacturers or assembly lines and they say it's not worth our time to meet all the compliance because trying to calculate to that level of detail, we're just, we'll take the 2% penalty in Terra. That actually is good news, at least for me and for my business, because here's where we're able to kind of step in and say, here's a good way to automate that process that you might not have thought about before. And we can help you get back to that frictionless point even if there are some structural barriers. Now, since we kind of switched the conversation naturally into all right, what do companies, what are companies doing? Especially what could they do? Right? You've painted us a very, very good view of the world order. Right. And what's happening, choke points, etc. Okay, what can companies do? There are a couple big opportunities out there. One is around be prepared. So when it comes to resilience, understand where your risks are, understand what the potential impact to your business could be, and then build a playbook of various alternatives of how you would solve that particular choke point or disruption. And then as I mentioned earlier, practice that playbook. You cannot get out on the field and just pull it out of the book and expect to play it. You know that if the defense has this formation, you're going to do a jet sweep. Right. You don't even have to think about what you do. And that's where I want to get clients to that point of comfort with their playbook. I think that getting your business processes segmented so that they're not completely reliant on another trading partner I think is key. And part of that is having better collaboration with all of your trading partners. One of the things that I'm seeing now are what are called private trading networks. And a private trading network is basically it's a permission based collaboration hub that uses blockchain so that all of your. If you've got a supply chain that's got five echelons, if something breaks three echelons deep, you might not know about it for 45 days. You need to know that now. And that's where a private trading network comes in is the trading partners, they feel like they can share information in a safe environment and everybody is aware of what the status is. So if I'm in the garment business and I have somebody who's doing the cut and sew operation, I want to know where are you in that production sequence? And not only do I want to know that, but the person who's doing the finishing or doing the shipping, they need to know that as well. So that's another area that I think is a great opportunity. The last thing I'll mention is around product design and product development. So if you're using aluminum today, your material engineers need to be thinking about are there alternatives to aluminum? If I'm going to be tariffed on that incoming aluminum, can I use a carbon fiber? Could I use a high density plastic? Are there other options? And that's maybe what, what I'm trying to say is figure out how to go on a diet and cut some of these things out of your diet. I obviously, you know, as a, as a technology founder, always try to think of technology solutions for this. Right. Obviously enterprise software I would think plays a big part in, you know, helping come up with Plan Bs and then practicing those Plan Bs and helping with product design. Right. And private trading networks, maybe. So have you seen tools out there that you're excited about to help companies navigate these disruptions, this global order? I have, I've seen some very good visibility tools that are quite good. The other area where I've seen a lot of development in the last three to five years is around Network design and scenario planning. Okay. It used to be when I started my, you know, when I started in consulting, we would build a network model and we'd have to let it run overnight and just hope that the job would finish today. You can build dynamic models on the fly and they solve in seconds. The compute power is so much greater. And so what I'm seeing with executives today, which is different than it was just like five years ago, five years ago, they want an optimized plan. Tell me the number. Today they want to simulate, they want to do what if analysis, they want to test alternatives. And so I'm encouraged by that because it shows how engaged the executives are in testing alternative scenarios. Now you've got to keep them in line, not let them go crazy. But I find it such a great way to get them involved. And I think the last thing I would mention around technology, so probably 80% of supply chain engagements struggle and they struggle because of data. It's either data availability or it's data accuracy. And I've seen some really good data cleansing tools that allow the enterprise to mine information that's usable, that will generate insights. And so that's the other area where I think supply chains are going to benefit remarkably so. Jonathan, I think you nailed that one right? Data availability, data enrichment. A lot of the theses around, you know, today's AI boom in the logistics and supply chain space has really to do with how backwards looking. I don't particularly like saying that, but how old school. Some of the supply chain and logistics processes are, right in terms of very unstructured data flowing through a bunch of different places that make for very siloed data. And if you have siloed data that cannot be structured, then it's hard to make decisions and use it for, well, anything right from simulation to optimization or whatever you want to do with it. I think it seems to you that simulation and scenario planning, because that was the first thing you mentioned being excited about, can provide a real competitive advantage. And you've seen this in the real world. Can you tell us a little bit more about how that can turn into a real advantage? Simulation and scenario planning. One of the things that I mentioned earlier on was about building playbooks and that's one of the places where simulation can really benefit an organization. So let's build an end to end network model and then let's start identifying where those pinch points are and then solve for how might we architect an alternative supply chain to should that part of the of the supply chain be disrupted? What would we do and how would we behave? And the good news is that you're not just relying on heuristics, you're actually relying on good, clean, quality data. And it's much better to be able to make decisions than to just say, well, I don't know, what did I do last time? That's not going to be good enough. And so the nice thing is there are open source simulation and optimization tools that are available today that would be amazing for people to get their hands on and understand how do I structure my network if I'm going to be dependent on a particular lane? Let's say I bring all of my cargo into, you know, Long Beach. If Long beach goes on strike, what do I do? And there are answers. If something happens to the bridge in the, in the Baltimore harbor, what do I do? And those are real risks that can have a meaningful impact on your business. Yeah. I want to ask you, since you chatted so much at the beginning about global order, right. And it sometimes feels that not feels like it really is beyond companies controls. But what I want to ask you here is do you think corporate leaders play a part in, you know, maybe as industry groups or as advocate groups? What's the role that there is to play between, you know, corporate company, private companies with government coordination to mitigate these risks? Is there any role to play there? And what's that? Absolutely. I mean the prime example is there's a Brazilian aircraft manufacturer, Embraer. Embraer is facing 50% tariffs coming into the United States. They've got a backlog of probably 300 jets for US customers. So how do you handle that? And the answer is you have really good lobbyists in Washington that know how to talk to the politicians and get your products on an exemption list and so that you're not having to face that. So corporate leaders today have got to be involved. I'm not really super thrilled with the way it's working today because it's not really what I would consider to be a negotiation. But by far I think that business leaders have got to be involved in government regulation. For example, right now where we're waiting is on several commodity groups. Pharmaceuticals is one that is currently under review for trade sanctions. And that will be a critical area that will come out. I think it'll probably come out in the next 30 to 60 days. Jonathan, I've really, really enjoyed this conversation. I had a couple closing questions. Kind of rapid fire, but yeah, you can answer however you, you want. But think of your career, right? And you're you know, long consulting and you've been at this for a lot of years. What's the most challenging supply chain problem that you faced in your career and how, what did you do about it? Or maybe your favorite story about disruptions, probably the most interesting challenge. We were working with one of the large agricultural businesses. They basically, they produce seeds for corn and soybean. And you know, there's so many different genetically modified products. You know, is it rain resistant, is it drought resistant, is it pest resistant? Just lots and lots of combinations. Well, a lot of the determining factors are out of your control. You have no idea what the rain is going to be, you have no idea what pests are going to be. And oh, by the way, you have so many different products that probably only one or two of them is going to be that blockbuster. And I'm just going to, I'm going to keep showing you the complexity of this. Not only do you have a lot of variables that are out of your control, but then you have to actually think about what that farmer is going to grow and the day that they decide they're going to wake up and look at the Chicago Board of Trade and see where the futures are. Again, something, you know, out of your control. And the last thing I'll say is to get an adequate supply takes years. These are growing seasons to get an adequate supply. So if you do have a blockbuster and you don't have enough supply, what do you do? And that was kind of the problem that we were, we were faced with. And so ultimately the client opened up an additional growing season in South America so that if there was a blockbuster, the client knew that they could go to South America, get a whole other harvest in and make as much of that as possible for the market. It was one of those things where you could talk to 10 experts and you'd get 10 different answers. But I don't know if you've ever read any like, you know, Malcolm Gladwell books, but you know, he has this idea of the wisdom of crowds. And the wisdom of crowds is basically you could talk to 10 experts and get the wrong answer, or you could talk to a thousand farmers and they'd be much more accurate on what do you think it's going to do this season. So that was another part of the strategy that we employed. Looking ahead, a close in question, maybe a non obvious technology strategy emerging, whatever that you are excited about that you think will have a real impact in the future of supply chain resilience. I think that it's somehow harnessing this individual capability and being much more flexible in your supply chain. So it's not as rigid. We grew up with these very highly structured ERP solutions that you had so much structure around your data that it was almost meaningless. So how do we allow solutions to tap into that individual wisdom and give managers the ability to be an alternative outlet or input to the system? I think that how do we capture that information? I think we look to some of the things like social media and collaboration. How do we give the millennials the opportunity to engage the way they want to engage? Jonathan, thank you so much for taking the time to chat with me today. Really enjoyed the conversation, learned a ton. Thank you very much again and we can stay in touch. Thanks Diego. I appreciate the opportunity. That's a wrap on today's deep dive with supply chain optimizers. If you found value in our controversial tactics and data driven stories, don't forget to hit, follow and subscribe so you never miss an episode, have a burning question, or want to share your own optimization success. Connect with me Diego Solorsano on LinkedIn or for more information on how we can help you transform your supply chain and logistics operations, visit the Steya.com thanks for listening.