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Tensions around the Strait of Hormuz have sharpened focus on the fragility of global supply chains. As geopolitical risks rise, how prepared are governments and businesses for the ensuing disruption? Do decisionmakers have the tools to respond and build resilience? On this episode of #ConsiderThis Melisa Idris speaks with Dr Shardul Phadnis, Professor of Operations & Supply Chain Management at Asia School of Business, where he’s also the Founding Director of Operations for the 21st Century.
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00:00Music
00:10Hello and good evening, I'm Melissa Idris. Welcome to Consider This.
00:14This is the show where we want you to consider and then we consider what you know of the news
00:18of the day.
00:19Tensions around the Strait of Hormuz have sharpened focus on the fragility of global supply chains.
00:26But as geopolitical risks rise, how prepared are governments and businesses to adjust to the ensuing disruption?
00:36Do decision makers have the right tools to respond and to build resilience?
00:43Well, joining me on the show to help me think this through, I have with me Dr. Shardul Fadnis,
00:49who is the Professor of Operations and Supply Chain Management at Asia School of Business,
00:54where he's also the Founding Director of Operations for the 21st Century.
00:59Shardul, thank you so much for joining me on the show today. It's good to have you.
01:02Likewise, thank you for having me on the show.
01:04Yes, I mean this is an exciting time to be looking at supply chains.
01:06I think people don't really think about supply chains until there is something that disrupts it
01:11or that it brings it right to our attention.
01:15Absolutely.
01:15Has that been your experience that we don't really think about a well-oiled machine until something breaks down?
01:20Exactly. People don't think about it until something stops working.
01:24And that's the way it should be, right?
01:26But since COVID now, we realize that things just don't show up where you want them to show up.
01:32There is a big machinery behind it.
01:34There is a big infrastructure.
01:35Yeah.
01:36Series of factories and the ports and container ships and so on that carry all the stuff to us, right?
01:43So now people are becoming aware that there's something behind it called supply chain.
01:47So great for our business.
01:49Great. Wonderful.
01:50Well, let's talk about what's happening currently.
01:52So I think there's a lot of attention on the Strait of Hormuz.
01:56It's now a household name if it wasn't before.
01:59I mean, everyone understands where it is and the importance of it now.
02:03But what do you think people don't understand or miss understanding about the importance of the Strait of Hormuz
02:11beyond, say, the trade of oil?
02:14Yeah, right.
02:15So trade of oil, that's something we know now by heart, right?
02:1920% of the world's oil goes through Hormuz.
02:21For Malaysia, that percentage is much higher, about 35-40%.
02:25But it's not just the oil.
02:27We also know that there is feedstock.
02:29So naphtha that is used for making plastics and synthetic rubber, that comes from the region.
02:35So it passes the Strait of Hormuz.
02:36There are other products, for example, fertilizer comes through that region.
02:42LPG, liquefied petroleum gas, what we use as cooking gas.
02:47A big portion of that used in Malaysia comes through the Strait of Hormuz.
02:51There are food items like dates and dry fruits.
02:53They all get exported to Malaysia from the region.
02:56So it's just the stuff that is coming out.
02:58But also stuff goes in, right?
03:01So palm oil that goes from Malaysia to the food manufacturers, to the region, has to pass the Strait of
03:06Hormuz.
03:08There's a port of Dubai, Jebel Ali, is one of the largest container ports in the world, the largest in
03:15the Middle East.
03:15So any time we are shipping electronics, machinery, gloves, all the containerized goods, they are passing through the Strait of
03:24Hormuz.
03:24So when we talk about Hormuz disruption, it is a lot more than just the petroleum supply.
03:29All the stuff that is coming out and going in is disrupted.
03:33But also there is a kind of a second and third order effect.
03:38So what happens because of this uncertainty is that now we see that there are insurance costs go up.
03:45Now that affects if you are shipping goods from anywhere, right?
03:49Especially if you are passing this region.
03:51So insurance costs are going up.
03:53Shipping costs can go up as a result of that.
03:56But lastly, we need to look at Strait of Hormuz disruption, not as an isolated incidence, but as a manifestation
04:05of a bigger trend.
04:08And that trend is more geopolitical tensions, kind of breaking of rule-based orders that we have been seeing in
04:14the past few years.
04:15So there are tensions in Ukraine and Russia, there are U.S.-China trade tensions.
04:21Hormuz is another incidence.
04:22So once we start seeing these things not as isolated incidents, but kind of a manifestation of something else is
04:30going on,
04:31then we realize that we need to prepare for that something else, this bigger driving force, which is geopolitical tensions,
04:39probably a rift in the global trade, maybe.
04:43So we have to rethink how the global supply chains will look like.
04:46And also an era where we are going to start seeing a lot more uncertainty, not just in the long
04:54-term strategic planning, but also in operational issues.
04:57Now, plans that last a few months to maybe a few weeks to a few months out, a lot more
05:03uncertainty and unpredictability in that.
05:04Okay. You mentioned that COVID-19, the pandemic, brought supply chains to the forefront as well.
05:12Can I ask you if supply chains, the global supply chain in general, did we adjust after the COVID-19
05:22pandemic disruption?
05:24Did supply chains become more resilient structurally after that?
05:30So we hope so, right, that companies are paying more attention to resilience.
05:37And I think there are.
05:38So we see examples of companies where they are saying, well, we cannot just rely on a single low-cost
05:44supplier.
05:44We need to have a backup supplier.
05:47And one thing that occurred at the same time as COVID is kind of the tensions between U.S. and
05:53China.
05:54And there was a shift for China towards China plus one policy, right?
05:59So if you have a factory in China, but you also want to have a factory maybe in Malaysia or
06:03Vietnam, somewhere else, right?
06:04Just to kind of hedge your bets.
06:06So that has helped because now you're not reliant on just a single source of supply, but you have multiple
06:13sources.
06:14Another thing that helped during COVID is a greater use of digital technologies in supply chain management in general.
06:23So just to give you one example, I was speaking with a supply chain leader at a very large energy
06:28company.
06:29And he said that his current project is creating a digital twin of a particular commodity product supply chain.
06:37What that means is that you create a map of your physical supply chain in a computer model.
06:43Now, that's been around for a long time.
06:46That is simulation.
06:47But also you collect real-time data about where the goods are, where the trucks are, where the container ships
06:55are, how much capacity you have.
06:57And you feed that data in real-time into your computer model.
07:02So as a result, you have a physical supply chain and a digital twin of that.
07:07That allows you to do what-if analysis and simulations and things like that.
07:11So that can help you not only build resilience, but also respond quickly when something goes wrong.
07:16Oh, like a stress test of what could go wrong and then figure out where the weak points are.
07:22Yeah, based on real-time information.
07:24Okay.
07:25Right, so that's the digital twin.
07:26That's the beauty of that.
07:27So we are seeing these digital solutions being used in supply chain management more and more.
07:32So that's a good thing.
07:33Okay.
07:33So I want to come back to that about how to pinpoint maybe some of the vulnerabilities and address them
07:39before disruptions happen.
07:41But since we were talking about the Strait of Hormuz, can I just ask you about the Strait of Malacca?
07:46Sure.
07:48Closer to home, maybe more relevance to us.
07:51How does the Strait of Malacca compare in terms of global trade and its importance in the global supply chain?
07:56So it's a very important channel because anything that goes from, say, China and Southeast Asia to parts of Asia
08:05and Europe is basically passing through the Strait of Malacca.
08:09So it's a very, very important channel.
08:13Even more than Hormuz because now this is going all the way to Europe, right?
08:18Fortunately, the region around the Strait of Malacca is a lot more stable and has been a lot more stable
08:24compared to the region around the Strait of Hormuz.
08:27So we have more stability here and that is really helpful.
08:29But you also have some really big container ports in the world right on the Strait of Malacca.
08:35So you have Port of Singapore, Port of Tanjung Pilapas in Johor, you have the Port Clang, the ports in
08:44Port Clang.
08:44They all are here on the Strait of Malacca.
08:47So this is a very important waterway.
08:48When you said that we should be thinking about some of these, the recent incidents, not as isolated incidents, incidences,
08:59what are the potential disruption risks that you think the Strait of Malacca could be vulnerable to, that supply chains
09:09have to pay attention to?
09:10Yeah.
09:13So right now we are looking at Strait of Hormuz, disruption as emerging from geopolitical tensions, right?
09:21And so there's a tendency for people in general to say that whatever is happening now, we start thinking about
09:28that as the future scenario.
09:30So for example, lots of scenarios that came out in 2021 and onwards, many of them had a pandemic in
09:37it.
09:37But if you look at the scenarios that companies had considered in, say, 2019, maybe not so much.
09:43So there's a tendency to say, well, geopolitical tensions and disruptions that can happen.
09:49But there are other sources of disruption that we need to be aware of.
09:54So one big disruption source is just the changing climate and how disruptive it has been.
10:01So just a few months ago, we had a typhoon farm in the Strait of Malacca.
10:07Wasn't it just a...
10:08Yeah, yeah, yeah, that's right.
10:09First time ever in the recorded...
10:11Yes, it was a very freak...
10:13Yeah, total freak.
10:14Yes, you're right.
10:15Now, is that a one-time incidence or that is a warning sign of what's to come?
10:22So one thing that we've seen...
10:24So if we go back about six, seven years, we have seen lots of environmental disasters.
10:29The flooding in Malaysia, for example, in 2021.
10:33Devastating flooding, right?
10:35The bushfires in Australia in, say, 2019.
10:38Both those incidences, for sure, were described as this is a once-in-a-century event.
10:45But now we are seeing those once-in-a-century events every year.
10:49We have had bad flooding every year in Malaysia and then in Indonesia and Thailand and so on and so
10:54forth.
10:55So we know that climate is getting more disruptive and that could be a source of disruption that we need
11:01to be prepared for.
11:03We also have to think about geopolitical tensions and how, say, tensions in the U.S. and China
11:08and the retaliatory actions that the governments might take, how that might play out.
11:13So there are these different variables we need to consider.
11:16And what happens in a project like that is we do a systematic study to see what's going on in
11:22this particular region,
11:23try to understand these big macro-level driving forces and see, kind of work through to understand
11:30how they might affect a particular supply chain or a business and so on.
11:34So I understand businesses would be invested in wanting to identify some of their vulnerabilities in the supply chain.
11:42But can you talk to me about the role of governments?
11:44Where does national governments come into play when identifying what supply chains they think are crucial for the country
11:54and what requires building resilience and protection?
11:57So there are certain products that are really of very high importance to the nation, to the people,
12:05and governments often take a, correctly often take an active role in ensuring that we have supply reliability.
12:14So think about critical food items, right?
12:17If the food is getting imported, you need to make sure you have enough supply or at least backup suppliers,
12:23right?
12:23Supply sources, multiple supply sources.
12:26Another thing is energy, right?
12:29Pharmaceuticals.
12:31And if you look at kind of the largest ministries in Malaysia, based on their budget,
12:37you have Ministry of Education, Ministry of Health, Ministry of Defense.
12:41They all have significant control or influence over the supply chain.
12:46So for medicine, for health ministry, you need pharmaceuticals, vaccines, medical supplies, personal protective equipment, medical devices.
12:56We need to ensure that that supply is either we have either backup supplies or we have suppliers that we
13:03can rely on.
13:04Same thing, defense and so on.
13:06So that's one.
13:07You can safeguard or you can take measures to kind of assure those supplies.
13:13Governments can also encourage companies to start investing more actively in resilience strategies.
13:21So for example, central banks do this with banks.
13:25In what way?
13:26So central banks will say, all the banks in that country, we need to make sure that you have enough
13:31liquidity,
13:32you do the stress test because you don't want the banking system to fail.
13:36Right.
13:36So why could we not do something similar for supply chains of critical products?
13:41Right.
13:42So kind of maybe mandating or at least strongly recommending critical supply chains to do these resilience checks.
13:50And then lastly, another thing that, and this is kind of pushing the envelope per se,
13:55the governments can do is to create a kind of a overarching frameworks
14:01that many companies in a particular industry or supply chain can use.
14:06So we did something similar for during my doctoral research.
14:10It's like almost two decades ago for transportation infrastructure.
14:16So we created a set of scenarios and a process for using them.
14:21And this was when I was at MIT.
14:23So the project was done for departments of transportation in different parts of the U.S.,
14:28different states and so on.
14:30So what the output was, that was four scenarios that any planning agency could use to say,
14:37how should we invest in that particular supply chain or invest in this particular infrastructure?
14:42Where should we build highways or should we invest in ports and things like that?
14:46But there's a common guiding framework about how you think of future uncertainty.
14:52Something similar could be done.
14:53You have a set of scenarios to guide, say, healthcare supply chains and different hospitals,
15:00maybe pharma companies, clinics, pharmacies.
15:03They all use those kind of common set of uncertainties and scenarios as a guiding framework to say,
15:10as an individual business, how they should compete by thinking that these are the big drivers
15:15that are shaping our industry.
15:17So there are several ways that governments can get a really active role in guiding businesses.
15:24Because this is what we need.
15:25This is a world of uncertainty and we need somebody to guide companies through this.
15:31At what point does that tip into protectionism?
15:35So I think my question is, when we think about supply chain disruptions,
15:39it often triggers protectionist measures, right?
15:45There's this instinctive response that nations have to want to safeguard the domestic market.
15:51And there are export bans and they say, let's guard whatever supply we have before it runs out.
16:01How do we make sure that you don't trigger this zero-sum-every-country-for-itself response?
16:07Yeah, we are seeing a lot of that right now, aren't we?
16:10Absolutely, yeah.
16:12So it doesn't need to be a predictionism.
16:15You can create a set of, kind of guiding framework to say that, look, if you look at, say, 10
16:24years out,
16:25these are some critical uncertainties that we face, that we see.
16:31Maybe it is geopolitics, maybe it is evolution of AI and other kind of emerging technologies,
16:39kind of the modern technologies, like robotics, AI, and so on and so forth.
16:43And we don't really know, we can't really predict them accurately about how they are going to look like
16:48two years from now, three years from now, 10 years from now, right?
16:51So we need to be prepared for whatever happens and how will they evolve.
16:56So one framework, let's say, public framework or government framework could be,
17:02here are the scenarios that we have developed in consultation with academia, businesses,
17:07various other stakeholders, bringing the experts together, that we think can accurately guide
17:13policy and strategy discussion in Malaysia for the next 10 years, based on these critical uncertainties.
17:20So you provide a guiding framework and let the businesses compete on their own without getting involved in the business.
17:27Do you think that the disruption of the Strait of Hormuz, alongside all the other potential global supply chain shocks
17:40that have happened in the past few years, has that signaled what some people have described
17:46as the end of this hyper-efficient, just-in-time operational model?
17:54That's been the basis of globalization and capitalism, essentially.
17:59Are we seeing what people are describing as de-globalization, a lot of this near-shoring that's happening?
18:07So, just-in-time and globalization, right?
18:09So, let's unpack that. That's a lot of terms and I'll let you unpack that for me.
18:15So, definitely companies realize that we cannot just be reliant on just-just-in-time.
18:22There's also, you have to think of just-in-case.
18:25Oh.
18:25Yeah.
18:26So, you know.
18:27Tell me.
18:28Yeah.
18:29So, we've been seeing some discussion of that, just-in-case.
18:32But then, just-in-case of what?
18:35How do you think of the potential scenarios or contingencies?
18:38So, that remains to be unseen.
18:40Because you cannot have, I mean, you can, but it will be extremely expensive, right?
18:47We cannot make backup plans for every single thing.
18:49There's a cost to everything.
18:50There's a cost to everything, right?
18:53But, ironically, this just-in-time, and it's a really interesting story that came out of COVID,
18:58and I don't think many people have learned that lesson.
19:01So, just-in-time comes out of Toyota production system, going back to 1960s and 70s and so on.
19:07Cars, yeah.
19:09Toyota often operates with a few hours of inventory, maybe a couple of hours of inventory,
19:15between their, say, assembly plant and the immediate supplier.
19:19In 2021, when we unexpectedly, really fast, emerged out of the pandemic,
19:26because the vaccines came on the scene within nine months,
19:29and people started going out of the homes and so on, the demand for cars, which had been complete,
19:35which had collapsed completely during the pandemic, during the MCO and so on, that took off all over the world.
19:41And there was tremendous demand for people wanting to buy cars, but every single car company in the world said,
19:48we have so much demand, but we cannot make the cars.
19:51Because we are missing one product, and that is the chips, semiconductor chips, that are used for,
19:58now, cars are basically computers, right? For traction control, for, now, if you have a car passing by,
20:04there is a little light that blinks on your side mirror, right?
20:21Yeah, yeah.
20:21Car companies absorbed all that capacity of chips, because everybody needed computers and tablets,
20:27because they were working from home and studying from home.
20:30So now, all of a sudden, car companies have this massive demand, but they cannot make the car,
20:34they don't have chips. Every single car company in the world, including Malaysia, except two.
20:40One company was Toyota, and they said, you know what? We don't have a problem.
20:46We have a massive stockpile of chips.
20:50And it turns out that Toyota had about six months of stockpile, and that's my estimate.
20:54It's not publicly mentioned anywhere, but based on the reports I've seen, they had about six months of supply.
20:59And why did they have that?
21:01It's because 10 years ago, when the tsunami after the Tohoku earthquake hit Fukushima,
21:09there was a nuclear power plant, right?
21:13Toyota's main chip supplier, Renaissance Electronics, was in that region,
21:16was affected by the earthquake and the tsunami and the nuclear fallout and so on.
21:20It took that company nearly six months to recover fully to the operational status.
21:27That made Toyota realize that if the chip supply goes down, there's no quick fix.
21:32So we better stockpiling chips.
21:35And they carried that stockpile supposedly for a decade until COVID hit and when that came to use, right?
21:43So that's just in case, but Toyota learned from experiencing the disaster themselves.
21:48The question that we ask our companies and the work that we do is that can you learn about a
21:54potential uncertainty without experiencing it first?
21:57Right.
21:59And that's where we use scenario planning about what might happen.
22:02Can I ask you, in the time that we have left then, for the policy makers, decision makers, both governments
22:09and businesses,
22:11how do they do that scenario plan without that disruption, without experiencing that disruption?
22:18What's your advice to them?
22:19How do they build that resilience within their organizations?
22:22So you need to have a systematic way of creating scenarios which has been around.
22:26It requires tremendous research and then you collect a lot of information, conduct interviews
22:33within the organization with outside experts and so on, bring all this information together,
22:38analyze it and say, here is what the world might look like in 10 years from now.
22:42Let's say these are 10-year scenarios.
22:44If you're looking at 50-year scenarios, you're looking at 50-year scenarios and so on.
22:48Yeah.
22:48And then what needs to be done is that you need to have a systematic process to create these
22:53scenarios so you can defend them.
22:56You can take these scenarios to the board and say, look, here are the visions of what the
23:01world might look like in a decade.
23:03These are developed rigorously and we better start thinking about these multiple possibilities
23:09in our resilience planning.
23:11And we have companies that we do this work with.
23:14So the companies that are mature, they are looking at scenario planning as almost an essential
23:19tool for managing supply chains now.
23:22Okay.
23:22And for the companies who may not be as rigorously testing their resilience?
23:30Well, start doing scenario planning.
23:34No, take it for granted.
23:36Not taken for granted.
23:36But second thing, so we have a new initiative.
23:38You mentioned operations for 21st century.
23:40So we look at four different areas in that.
23:42So resilience, supply chain resilience and so on is kind of one pillar, one vertical.
23:48Second vertical is what we call orchestration.
23:51And this is where companies need to balance very high uncertainty and volatility on the demand
23:58side with the ability to keep the supply side stable because it needs supply.
24:04And so you need to have specific mechanisms, both on the demand and the supply side and how
24:09you integrate them.
24:11So, of course, you cannot anticipate every single scenario.
24:14So when you cannot do that, how can you orchestrate?
24:18That's not the skill you need.
24:20Wonderful.
24:20Shonil, thank you so much for shedding some light into the mechanics of a supply chain.
24:26We really appreciate your time.
24:27Thank you for that.
24:27My pleasure. Thank you.
24:28That's all the time we have for you on this episode of Consider This.
24:31I'm Melissa Idris signing off for the evening.
24:34Thank you so much for watching and good night.
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