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Richard Helppie
Hello, welcome to The Common Bridge. I'm your host Rich Helppie, and we have a returning guest today, Mr. Bill Michals, or as I like to refer to him, the godfather of supply chain and all things supply chain. If you were privileged enough to listen to Bill - you can still get this out of the archives, it's podcast episode 145, from March 7 of 2022 - you might want to take his recommendations for some Las Vegas wagers, because he set out what was going to happen in the supply chain and he's really been spot on. Bill was, of course, on our program early on in March of 2020, so we welcome back to The Common Bridge, Bill Michals. Bill, it is always great to see you, how are you?
Bill Michals
I'm great, thanks Rich, for inviting me, I really always enjoy these podcasts because you're really great at pulling out the stuff.
Richard Helppie
Oh, appreciate that. Bill, how is the supply chain doing these days?
Bill Michals
You know, it's really...three words that really kind of stress what people in supply chain have to do. It's agility, it's flexibility, and it's resiliency. The supply chain is in constant change all the time. Now, we thought we got through a lot of things with a couple of natural disasters, trade wars, war in Ukraine, and these things continue to go on and happen. If I'm a supply chain person, one of the first things I'm worried about is the geopolitical situation. If I have supply coming out of Asia or Europe, everything's changing so people are really focused on aligning their supply chain, trying to get some resiliency, trying to get some agility and trying to keep sustainability going.
Richard Helppie
You talked about that in our prior podcast. We were talking about how supply chains, for example in Japan, couldn't get pigment or paint for [inaudible], floods in Taiwan hit integrated circuits, the tariff wars revealed that we didn't have enough redundancy. Remember, at that time, grocery stores were not stocked, car manufacturers were waiting for chips, there were ships off the California coast that couldn't unload, huge labor shortage at that time, didn't have enough truck drivers or trades, then China was locked down. Since then are we still in the throes of all those problems or are we starting to mend those a little bit?
Bill Michals
No, I think we're still in the throes of some of those problems. I mean, there are shortages of material and we now have interest rate rises. Interest rate rises cause people in manufacturing to have stress, because when money was free it was easy to get your line of credit to take extended payments, pay your workforce. When the interest rates go up we're putting stress on the manufacturing companies, particularly the small ones, when they have to go pay money to do all those things and finance their materials, finance labor - labor is still very, very short. There's a premium on good people and the scramble to find them. So I think the interest rates are causing a lot of stress across the supply chains. We're going to see some bankruptcies and now with problems to the banks, it's going to cause more stress on manufacturing companies.
Richard Helppie
Well, you talked about that in your prior appearance on The Common Bridge. You talked about interest rate changes needing to slow down consumption to bring things back into balance. And remember at that time the Fed was saying that inflation was going to be transitory. Then you pointed out that, look, when all the bars and restaurants were closed and there were no meetings, it dropped demand - farmers were dumping milk and plowing crops under, offices were shutting down - that was killing productivity, combined with materials one couldn't get. How much of an impact are those factors versus, for example, Russia's invasion of Ukraine, which between the two of them was some 29% of the production of wheat, not to mention oats and rye and barley. What's going on with those things these days?
Bill Michals
Well, it's even becoming more complex. You're seeing Russia starting to align with China and starting to align with Iran, which is causing more and more tension. If you have a supply chain out of China, like the electronic supply chain, you're extremely vulnerable, and you need to be looking for where are you going to source those things if any incident happens. So the geopolitical position really forces you to look at the risk in the supply chain, look at where are you. And then we hear the president talk about he's helping manufacturing. Well, if I'm a company, I'm looking at my risk and I'm looking at where's the least amount of risk with all this geopolitical tension. You're starting to see war insurance on shipments and so you've got to really look at where are you going to put this stuff. What we're also seeing is that it didn't make sense to place one location somewhere in the world and then ship from that location. We were chasing low cost labor across the globe and it gives us too much risk in that. What we found, when we looked at the total cost of ownership, that wasn't a good decision because it cost so much to get materials during the pandemic and some companies have not recovered from that yet. It doesn't make sense to chase low cost labor, doesn't make sense to ship from one place to the world. So people are actually changing their footprint and bringing manufacturing closer to the markets that they serve. They're duplicating footprints if they're smart.
Richard Helppie
You talked about that before, about building in the United States duplicate manufacturing facilities near the market. But you also pointed out that with a lot more automation that didn't necessarily translate into millions of new well paying jobs, it just meant machines are going to be building things here in America. What are you seeing today based on that forecast?
Bill Michals
Well, I think that that's going to be true, it's even more true when we start to look at the systems and AI, what it's doing;. it's giving us improved visibility of shipments so we don't have to have people chasing shipments. It's giving us predictive analytics so that we grow the right materials at the right time. It's helping us optimize manufacturing. I know people have said we've got to slow it down but it's doing a lot of things. It's improving quality; when we look at quality and we automate the quality and we use AI, that's helping. It's also helping us increase efficiency. So as we start to automate things, and as we start to bring things in, there's less need for people. If we look at the integration of supply chain longer term, I mean, I wrote a book and in the early '90s about transforming the supply chain before people knew what the supply chain was. And in that book there was a prediction that over time we're going to have a series of integrated supply chains; we're going to have our supply chain, someone else is going to have a supply chain, and there will be competing supply chains, and the transactions which will be done automatically across the supply chains. Your planning functions will go across automatically; your quality functions, your invoicing is doing that now. So all those process automations are helping. I think the job for procurement supply chain would be to architect the supply chain and to get the supply chain aligned on the same business mission. So if we look at - I like to look at the automotive industry having come from Detroit - if you start to look at those supply chains, they're starting to break up. The domestic manufacturers have their supply chain, the Koreans have a supply chain, Europeans have a supply chain, and they're competing supply chains. I think when we look for agility, flexibility, we're going to have a strong integrated network of suppliers.
Richard Helppie
Bill, it's that kind of insight that most people don't get. All they hear is a headline; the supply chain - as if it's a singular thing - is broken, or the supply chain is fixed, and people go, what does that really mean? I like the way you bring that home. I hope that you're going to author another book in the near future about the impact of artificial intelligence and we'll get to that a little bit later in our interview. When we talk about some of the pandemic changes becoming permanent, for example, business travel, it's much easier, much less cost, much less wear on employees if we do a Zoom meeting or some other video conferencing meeting in lieu of getting on an airplane and going to a hotel and renting a car and such. One of the other things - I'm going to quote you - is that I don't want to be in the commercial real estate business and I concurred. Today, look, we've got trillions of dollars in commercial real estate loans coming due. And for people that don't invest in this area, a loan on a business property - whether it's an office building, a manufacturing facility, a warehouse, whatever it might be - it's not like a 30 year mortgage. There is a loan and then there's generally a term, like five or 10 years, and there's going to be a need to refinance that. So now what we've got here is a time when demand for office and retail space is down, which means that the assets are worth less and now the cost of that loan is going up; the ability of borrowers to access credit lines from banks who can't give out weak loans because of something called loan to value. If the value is like a $3 million building and now it's a $2 million building, you can only support two thirds of that amount of loan. But wait, it's at a higher rate so the business needs to throw off more cash. This is not just at the retail level, those mortgages are packaged in collateralized mortgage-backed securities, those are sold throughout the financial system. And those are sitting in all kinds of insurance companies and healthcare insurers and in people's retirement accounts and money markets even, so this chain reaction that we're seeing from the pandemic and the stimulus spending that most people agree was overdone, along with the zero interest rates, this is going to come home to roost in a really hard way. Where do you think we are in this process?
Bill Michals
It's certainly interesting, because it's not getting any better. The pandemic forced us all to use technology, stay at home. Now what I'm saying is...I've been to a couple of my clients, and I recently talked to a CEO that said he doesn't have a team that will come back to work, they're not going to come back. So when we look at what companies are doing to adjust to it...one of my other clients used to have four floors of a building or five floors of a building and what they've now done is they've got one floor and these little meeting places around - a couple of conference rooms, a couple of training rooms - and it's all crammed into one floor. People come and go as they want, or they're hybrid; they come one or two days a week to work. Companies are really stressing about that, some of the management are stressing; how do I even get these people together and how do I get them to collaborate. They're not getting the water-cooler talk or just let's go down and have a quick talk to resolve this thing. So it's becoming harder and harder to do business and that doesn't help the real estate situation at all. People prefer a lifestyle where are they have freedom of choice and they can work from home and pick their own hours and do their own thing. I think most companies are going to one or two days to work in the office and then the rest of the time is all remote. So it's causing a couple of problems; one in business in general, and two, in the real estate market.
Richard Helppie
All those hits to productivity ultimately come out in higher consumer prices. So we're going to pay the piper one way or the other and it looks like the way that we're going to pay it is with persistent inflation. The Fed is going to try to deal with inflation by raising interest rates, which are going to have a negative effect on the condition of banks. In my estimation, we are in the early stages of this, I don't know that we're going to get a crash necessarily, or a slow step down into a new normal. I'd be loath to forecast what that looks like but as the guest and the expert, what do you think it might look like?
Bill Michals
I think the remote work, it's here to stay. I think that we've got to find different ways to work, different ways to get productivity. I think one of the good things about that is you can hire talent wherever it is in the world. I don't know about you, but my lifestyle's changed; I'm up at five o'clock in the morning on calls and it's not uncommon to be taking late night calls because you're dealing with global businesses. I think you've got to get better at the productivity too when you start looking at Zooms and things like that, because Zooms are an hour long. I've sat for eight hours or nine hours, just one right after another, time enough to go get a coffee or a restroom break. But they don't have to be an hour long. So I think we have to get better at communicating. Everything's changing in terms of the way we work, and the way we work on teams, and the way we work with our suppliers, and the way we work with our supply chains. Everything is changing and then we're really on seven days a week, 24 hours a day. That's where we are now.
Richard Helppie
We need to seek that balance between what's work and what's the rest of one's life. I don't think anybody's going to be writing a book called The One Minute Zoom Manager. [Bill Michals: I hope not.] Bill, we've had some interesting things happen of late and it really goes back to one of the things you said in our earlier interviews; you said that your greatest worry was the move to automation. You particularly called out artificial intelligence, AI, replacing humans with machines. You said that you thought there's a big social problem that's gone unaddressed. We don't have the skills for the new economy and what's going to happen for the workers that have been displaced. Now since that time, what we discovered is that we have actually bots for censoring as revealed in the reporting on the Twitter Files - which, just as a side note, is very interesting; people that don't like the facts coming out and are attacking the messenger. But we also now have chatGPT and the obvious implications for it to replace things like writing simple contracts, accounting work, other traditional office-based white collar jobs, that now could go the way of plant floor automation. Where do we stand today with artificial intelligence as it relates to the supply chain or the general economy? Where do you think go and where do we need to be careful?
Bill Michals
Well, I think a lot of the processes are being automated. So let's just take the payable process; that payable process is in the box, match up the payment with the invoice and process the payment - you don't even see it. Then if there's a conflict, it's managed, the supplier goes and fixes their invoice; it's very difficult to even see that. That's a big change. Now, if we look at the space of procurement and supply chain, you could technically have AI look at all the suppliers in the world for an item, find the best four or five, generate a request for proposal, narrow it down, and then make a recommendation to someone to look at these two or three, and you've eliminated a whole lot of people in that process. Because an automation of the order process and automation of the planning process...it's even better if you think about the Internet of Things; when your refrigerator can tell you what you need at the grocery store and your car telling you all the things that it needs or wants at a given time. So those things are automatically transferred into the supply base. The planning can be done based on the Internet of Things and reporting back so you don't have your rigorous planning system, you'll have the demand, the demand will be out there, and it'll be filled. So, I think that's going to be a change in manufacturing you're going to see over time, if you're not seeing it already. I think if you're looking for tracking of things, one of the things that was interesting for me in my early career was I was a commodity trader in the food business and it was spices. You'd get these spices from all over the globe, someone in a small country would ship a batch of spice, and you had to keep track of the boat. And then when it got in you had to keep track of when did it go through customs and when did the FDA look at it. And that tracking was almost impossible, so a lot of times you'd go out and you'd buy high priced spot market commodities just to cover what you couldn't see. But now you've got improved visibility; the refrigerated trucks have the temperature sensors, and they're reporting it out to the internet every day, every hour. If your meat's been...if the temperature has changed or fluctuated, it's not right; that same thing on ships and containers. I used to do fish and we'd have refrigerated containers on things like anchovies and now that's reported every couple of hours - here's what it is. I mean, you used to take inventories in a warehouse. I went to a seminar on drones. I was thinking delivery drones and that wasn't it; a drone every hour, it goes through the warehouse, scans all the bar-codes and reports the inventory on time, real time, this minute. You don't have people running around. If something changes, the drone says this was here and it's moved to here because it can see all of the bar-codes. So you've got automated picking in the warehouses that get the stuff and bring it and put it, pack it, ship it. You really are going to see more and more and more automation and you're going to see more and more use of AI. So the efficiency of tracking is one of the things. Predictive analytics, if you're doing maintenance, it's going to tell you when are your machines likely to break down, when should you have to repair parts. For logistics, you can optimize the routes using AI. There's just a whole bunch of things that you can do. And then marketing, your stuff is tracked everywhere. Linda and I laugh because we'll talk about something - I don't know, we'll talk about, oh, maybe we should get an electric car - next thing I see in all my social media is, hey, look at this one, look at that one. It's tracking you from Siri and wherever, Alexa, whoever you have. So it's kind of kind of interesting.
Richard Helppie
Think about the business and social impact of this. Think about the old adage, hey, we had a good meeting, my people will get in touch with your people, now it's like my bots will get in touch with your bots. [Bill Michals: Oh, yeah.] What becomes of that adage about people do business with people, which I found to be a cornerstone of my business career. You think about marriage rates, I mean, if you've got bots and automated things telling you what you need and when you need it and you didn't even know that, you might not even need a spouse.
Bill Michals
[Laughter.] I don't know about that, Rich, I won't go that far.
Richard Helppie
You have to concede that is the essential nature of having a good spouse - things I didn't know that I needed or didn't need, or that I wanted and didn't need, but I was told that I did [laughter.]
Bill Michals
It's going raise some issues, too, kind of interesting legal issues on the contracting part. I know that you've got the airlines, the airlines have bots looking at everybody's fare and if a fare changes they're changing the fares along with it, so what's going on with pricing and how is that going to work in the marketplace.
Richard Helppie
It happened to me a couple of weeks ago, looked at prices and availability, and just by looking at it, we think it changed in the 40 minutes it took us before we decided to book; they're measuring all that, how many people are making an inquiry. Look, this is going to have social impact in that the purpose of an economy is to distribute goods and services, and unfettered capitalism ends up like the Monopoly game that we played. At the end of the Monopoly game, in my house as a child, somebody had everything. And if you were playing the game on the floor, you called the dog in to run through the game, because then you could restart it. We have to make sure that that we are able to give people spending power. What we saw during the stimulus, people had spending power without needing to contribute to the economy, they just didn't go to work. They spent the money, they saved it, and when they spent the savings now they're going back to work. So that basic social contract that underpins any economy is at risk. And that social contract, of course, is I give you my labor, my innovation, and in return, I get spending power. I add productivity to the economy, I maybe get a little more spending power. I take a little bit more risk and if it's successful, maybe I get a little bit more spending power. You can just imagine what's going on in corporate boardrooms in places like Starbucks and Amazon who are looking at union organization of the workforce, there's got to be discussions going on about what's the capital investment to replace some of that workforce with machines. Think about it, you walk in your favorite Starbucks, facial recognition, says good morning Mr. Michals, would you like your regular today? Great, we've already got your payment method, and you walk to the end of the counter and a machine has made it, put the cap on it, and you pick it up and you're out of the store in 20 seconds.
Bill Michals
You're seeing that now though, I mean, if you've gone to one of those automated McDonald's where you go in, you pick the picture that you want and you put your credit card in, and then one person comes out from the back room and gives you your food. I read that in Japan, they've got a machine that makes pizzas; it takes the orders on the phone, makes the pizza. I mean, you've got voice to text recognition. If these machines are coming in, you're right, it's still going to be an issue. Hopefully you have enough people with the technological ability to support all the automation, all the changes that are going on, someone to make sure that you're doing it. I think in Japan, there's one factory that builds robots, and it builds up to 30 days with lights out. It's amazing, no one in the plant.
Richard Helppie
We talked about, on earlier podcasts, that we exported the electronics industry, we exported the tooling industry. The craftsmen that we need to build machine tools are retired or gone and we're very vulnerable because we don't have those base skills. When we look into some segments of the education system, are we supporting mathematics and industrial arts or are we arguing about what grade we need to bring a drag queen in to perform in a school? And part of that, I think, is that people have grown up in this affluent society not realizing that their grandparents, or great grandparents perhaps, were really concerned with just basic food security, food and shelter. They are not necessarily givens, they all need to be created, they need to be created by a vibrant economy and that vibrant economy needs to have a supply chain, it needs to have people contributing to it. Maybe that's a bigger item for another day.
Bill Michals
I think that's right. One of the things that I look at - I work with a lot of home builders - one of the things that we did...when I was in school, people had an opportunity to go to trade schools, learn a trade and get a skill. Not everybody had to go to college or wanted to go to college. So I mean, if you look at the trades now, they're desperate for good people that can do things. The people in the trades are making...a plumber can make...I saw one plumber working in the industry who made $53 million a year with its team and it's just because those trades are not there.
Richard Helppie
Well, on a broader social note, our economy and our society needs to be one where people are allowed to strive, that they are allowed to exceed expectations, that we do celebrate excellence. I'm going to be covering some of those topics in future episodes of The Common Bridge. I had an experience recently where I was solicited through our philanthropic arm, a very proud institution that used to talk about striving for excellence - they didn't even use the word excellence anyplace in the pitch. And that's the thing, that everybody can strive for excellence. Excellence doesn't know any color, age, race, sexual orientation; it's about can you master something. But anyway, I don't want to go down that rabbit hole. Bill, this has been a great talk about the supply chain and the economy. What did we not cover today that we should be talking about?
Bill Michals
I think we covered a lot of it, we covered the the interest rates and what the impact is on business and interest rates, we covered AI and how that might be changing things. One of the things we didn't cover is really two things that are causing...we've got a lot of demand volatility because planning is not there post pandemic; cybersecurity is a concern in the supply chain. And then everybody's on a sustainability program, everybody's looking for sustainability, it's become the number one area in supply chain, that people are looking to manage sustainability; good for the environment, the economy and the country. So I think that that's the focus that people are on right now, I just wanted to mention that.
Richard Helppie
That all makes sense to me and we only have one planet, we have to treat it well, so that it is here for the future generations. Looking from a purely capitalistic economic point of view, the true cost of a product or a manufacturing process is also returning the environment to the state in which you found it. Early on things were just dumped into groundwater or into the ground; we had an episode about Camp Lejeune and the way that they took solvents that they use to clean weapons and just dumped them into the ground, and dry cleaning chemicals and put those into the ground, which created this environmental disaster. Those dumps were never captured on anybody's income statement or balance sheet. So I think that using the structure of capitalism and free market economy to account for that cost is imperative. If we make a plastic milk jug, part of the cost is making sure that that plastic milk jug doesn't end up in a landfill to be with us for the next two centuries. That needs to be part of it. So I cheer on sustainability. And we can do this, we've got the technology, we've got the knowledge on how to make that happen.
Bill Michals
Well, let's save that for another another time.
Richard Helppie
All right. Bill, any closing remarks for the listeners, readers and viewers of The Common Bridge?
Bill Michals
Just remember the three words I said: flexibility, agility and resiliency. That's the thing that we have to do with our supply chains.
Richard Helppie
That applies to people that are participating in the economy as well. Look forward, embrace challenge and be nimble. With our guest today, talking about supply chain and the economy, the godfather of the supply chain, Bill Michals, this is your host, Rich Helppie signing off on The Common Bridge.
Bill Michals
Thanks, Rich.
Richard Helppie
Thanks, Bill.
(Watch, Listen or Read) Supply Chain Devastation Resolved?