Kitty Koelemeijer: ‘Becoming Future-Proof? Address The Supply Chain’

What do you see as the main incentives for companies to really get down to organizing and implementing such collaboration now?
‘Inflation, energy prices, transportation and wages, procurement.... costs have gone up by double-digit percentages in recent years. Added to that is the advancing digitalization, which is creating far more transparency and internationalization on both the demand side and the supply side. If you want to buy something online, as a consumer but also B2B, you find a multitude of marketplaces from all over the world to get what you want from. This combination creates enormous margin pressure on trade and, in fact, on production too.
In addition, legislation is forcing more chain cooperation - think ESG criteria and the CSRD directive. Organization consulting firm McKinsey states that we are in a new era where scarcity is going to play a major role. Not only scarcity of labor, raw materials and energy, but also scarcity of nature and clean air. ESG criteria can be a wonderful catalyst to finally get collaboration and innovation in the supply chain off to a good start. Consumers want companies to have their ESG in order, but smaller companies in particular find it difficult to monitor this themselves. They will want to outsource a sizeable part of this to other parties in the chain, so there are also opportunities there.’

You quite often hear that European environmental legislation creates an uneven playing field compared to the United States and Asia, which have far fewer regulations. Is collaboration in the chain part of the solution?
‘Why should the U.S. and Asia not have to become more sustainable? The urgency there may be less due to less stringent legislation, which offers an enormous price advantage for some goods, but that is changing rapidly. Environmental aspects there indeed carry less weight economically, but they certainly do in terms of societal aspects. It will take a little longer, but it is inevitable that it will happen there too. We in Europe may, through a multiplicity of innovations and better chain cooperation, actually be ahead by then.
It would be best if companies take the lead themselves, but sometimes it takes some pressure from legislation to prove that change might not be of benefit for the environment alone, but also for the company itself. Less energy consumption, less inventory, less storage and less waste are not only more sustainable, but it also saves costs. There is thus a compelling business reason for it, even if the effect is not always immediately apparent because you must first invest in building sustainability and relationships with other parties in the chain. Still, it is essential for the future of business. If the competition does it and gets it right, you will miss the boat. You will be the one left with too high a cost level, or no longer be able to achieve a good margin or deliver a good service.’

Speaking of an uneven playing field. The CSRD, which only applies to large companies, is quite challenging. Small companies can still operate somewhat under the radar and employ cheap labor in Bangladesh, so to speak. Does that not give them an advantage?
‘In the short term it does, but in doing so those small companies also miss the opportunity to learn and develop competencies for something they will eventually have to do anyway. It is indeed shooting oneself in the foot to see this as a benefit. And to be quite honest: those small players are usually not serious competitors for the big concerns. A collective of these small parties might be, but in the medium term they lose that advantage.’

Does better collaboration necessarily mean that companies will outsource more to other parties in the chain?
‘On the one hand, it is about integration of elements, such as linking inventory systems. But indeed: you do not have to keep everything in-house. Sometimes other parties can do things better than you and then you outsource it for a fee. Now everyone tries to optimize for themselves at the lowest possible cost, but it can be done so much more effectively at chain level. It is in the DNA of entrepreneurs to want to do things themselves, but the days of every man or woman for him or herself, are over. Horizontal cooperation specifically is still really in its infancy, also because parties are afraid to share data with their competitors, whether through a third party or not. The concern is whether they can trust that competitor.
There are, of course, challenges. The debate around privacy and cybersecurity is related. Over time, we need data sovereignty. Developments such as Web 3.0 require wallets, putting individuals in control of their own data. Certain parties in the chain, such as supply chain financiers, may become very large and indispensable, giving them a somewhat more dominant role, while others will become more dependent. We will have to deal with that changing balance of power very wisely and responsibly. Since this really is about a systemic change, there is also the question of whether small players will have sufficient opportunity to catch on. It is much easier for large organizations to bear the development costs required for innovations to achieve better cooperation. To create a level playing field, you have to ensure that the small players also have access to it eventually. Because certain techniques for example become cheaper and standardize through scalability. This does require smaller parties to do more to coordinate and standardize their systems. So far it is not happening at great speed, but I do expect it to happen.’

Does the margin pressure on the supply chain make it more difficult or easier for a newcomer to enter the market?
‘New entrants in fact have an advantage because they can do everything differently right away. Existing companies are more burdened with the legacy of past activities, processes, assets and personnel. That makes it much harder to transform. The real challenge is how to deal with disruptive technologies and new entrants as an existing party. Ultimately, optimizing the supply chain is not enough. Other business models are also needed. Because of the factors I already mentioned, the margin pressure and global supply, the time when companies could make good money just by selling and/or distributing goods is basically over. They get much less value in return for what they create and must look for other ways to increase their resilience and responsiveness to the market and achieve continuity.
New services will need to be introduced and new business models will emerge, such as from ownership to usage. That also requires a lot from the supply chain in which so much has been invested already. You have to know which parts a product contains, keep an eye on how long they have lasted, know where the end product is... This is something you could think about with all parties in the chain in a much broader, more creative and radical way than is currently the case. Better chain cooperation and new business models can go hand in hand. That is what I like about it.’

To what extent will artificial intelligence (AI) change the supply chain? Where will we be in ten years in that regard?
‘Processes in the supply chain will become much more automated and that will bring huge productivity gains, but we cannot accurately anticipate what will happen yet and how fast those changes will happen. In its report The State of AI in 2023, McKinsey compares the rise of generative artificial intelligence, or GenAI, to Toyota’s emergence of lean management in the auto industry, with enormous potential to scale up and have a major impact on all kinds of industries as well as the labor market. You can see it as a huge threat if systems can do everything humans can do, and even better. You could also argue that it offers huge opportunities if such systems start overseeing and managing the entire supply chain. In inventory management, for example, AI allows you to analyze historical sales data, customer behavior and market trends even better to predict product demand and optimize inventory levels more accurately. In doing so, you also improve service to your customers and can, for example, automatically let them know that a product is not available today but will be tomorrow.’

Supply chains are increasingly faltering due to geopolitical challenges such as trade conflicts, natural disasters, the pandemic and climate change. Drought threatens global trade through the Panama Canal. Recently, the Houthi attacks on ships in the Red Sea had huge effects on world trade. There seems to be no end to the disruptions. Are we going to learn to deal with them better?
‘I find that difficult. For a long time, the economic idea of free world trade was the highest ideal and we all focused on that. Now you see how vulnerable we are to this specialization in certain areas, and the call to become more self-sufficient follows in its wake. Yet that can only be the solution to a certain extent. Of course, you can investigate whether you really need certain raw materials or whether you can make do with a substitute, but not everything can come from our own region. For some products we depend on China, where human rights such as privacy are weighed differently than in Europe. For the next few decades, we will still depend on oil and gas, and we will have to import that from elsewhere. That is a fact of life, whether you like it or not.
For the time being, it is a utopia that everyone will produce according to ESG criteria. A transition simply needs time. Moreover, when it comes to sustainability, there is a paradox between short-term consumption behavior and long-term responsibility. You see this, for example, with young people. They care about the environment, it is often said, but at the same time they buy cheap things from Chinese parties. The buying behavior of consumers in physical and online stores is in the here and now. They do not want to have to think about how responsible a product is at that moment. Not everyone has the time and knowledge to research whether it is local and sustainable. Not everyone can afford that fine, local wine either.
Sustainability is driven only to a small extent by consumers and needs to come from companies and be facilitated by businesses. That is where the impact is, especially with large companies like Unilever and Procter & Gamble or fast-food restaurants like McDonalds and KFC, which, incidentally, already work extensively with organic products and sustainable materials. We must be careful to not view the world from the perspective of our own bubble too much.’

This interview was published in Management Scope 04 2024.