What the Duck?! Episode 48 Transcript
DIRECT MATERIAL DILEMMAS: Procurement, China-Taiwan Impact, & Optimal Benchmarks with Jeff Brown
Welcome to What the Duck?! A podcast with real experts talking about direct spend challenges and experiences. And now, here’s your host, SourceDay’s very own Manufacturing Maven, Sarah Scudder. Thank you for joining me for What the Duck?! Another Supply Chain Podcast brought to you by SourceDay. I’m your host, Sarah Scudder, and this is the podcast for people working in the direct materials part of the supply chain. I’m @SarahScudder on LinkedIn and @Sscudder on Twitter. If you are new to the show, make sure to follow this podcast so you don’t miss any of our direct materials supply chain content.
Today, I’m going to be joined by Jeff Brown, and we’re going to discuss a number of things, including how to turnaround weak procurement, how the China-China and Taiwan conflict could massively impact direct materials procurement. We’re also talking benchmarking best practices and direct materials and accelerating your career. So, if you’re a direct materials person and want to get ahead in your career or be on the front lines of things like the China and Taiwan conflict preparedness, then this episode is for you.
Jeff is a 20-year Co and GM who’s LED operations and supply chains for companies such as Johnson & Johnson, Boston Scientific, Endologic, and Steris. Jeff was named the top exec in med tech in 2021 and was the keynote speaker from Med Tech’s largest annual event in 2022. Jeff is a lean evangelist and one of the most recommended supply chain leaders on LinkedIn. Welcome to the show, Jeff. Thank you, Sarah, for having me. It’s wonderful to be here.
So, I want to go back in time, so put your thinking cap on and talk about how you got your start in supply chain. Yeah, so if you go far enough back in time, I actually started my career in sales, completely in a different space and was in sales for a little while. Got through the .com boom in bust, and then the sales thing kind of had gone its course, and I tried to move from sales into operations. I was kind of tracking my father’s career track, and he had been a plant manager for Coca-Cola for many, many years. So, I thought maybe I would follow his path in the operations world. So, I did that, and it was just a real natural fit there. And then, as I spent more time in operations and spend more time specifically in supply chain and all aspects of supply chain, there was just a very, very strong fit there.
So, I’ve always found supply chain and just being very logical, calculatable, able to be planned, and when it really works well, it just, you know, a good and well-run supply chain just hums and and and kind of sings. It’s just everything is moving in lockstep. It’s almost like watching a 4×100 relay, you know, in a track and field race when it’s running really well together. It’s just orchestrated, and it’s sort of a beautiful thing to watch. So, that’s just always been something that drew me to this supply chain rule. And when it’s not, it’s hair on fire, firefighting mode, absolute chaos and craziness. So, definitely prefer the smooth humming side of supply chain.
So, you were at Boston Scientific for about five years, and you sat on their Global Supply Chain Management board. What were the most important supply chain and direct materials things you learned there? And the reason I’m calling them out is they’re a very, very massive company. They’ve got a pretty established supply chain organization, and I think there’s a lot that our audience can learn from kind of a well-structured, well-oiled supply chain team.
Yes, I would totally agree. So, I think Boston Scientific’s supply chain was definitely one of the very best supply chain teams in Supply chains that I ever worked with, and it was one of the earlier experiences in my career, so it was a really good space or place to cut your teeth in the supply chain world. So, there are more mature Supply chains and there are less mature Supply chains, and what I was able to experience at Boston Scientific was a great example of a very mature supply chain. And if you’re wondering, if anyone’s wondering, how mature their supply chain is, here’s one really good indicator: how long is the time, time perspective of your Sales and Operations Planning process, your SNOP process? At Boston Scientific, we were always looking at a two-year window of time, which to me is the ideal timeline, a window in which to look at in terms of your planning horizon.
So, looking at a two-year window, that is really indicative of a very mature supply chain. If you’re in a business that’s looking at this month, next month, or this quarter, next quarter, you’re in a reasonably immature supply chain, and that is just an opportunity, right? It’s an opportunity to continue to adapt that and to mature some of the processes, the planning, the demand planning, for example, and things. And so again, Boston had just had a phenomenal supply chain. You’re absolutely right. So, the timeline horizon is very, very important. Also, the level of sophistication in demand planning. You know, I am famous for saying to virtually everyone that I speak with that when it comes to supply chain, everything in supply chain starts with a good demand plan. Everything. You cannot really build a good supply plan unless you have a good demand plan, right? Otherwise, your supply plan is just random if you don’t really have a good demand plan, and you’re kind of playing the lottery a little bit if you don’t have a good demand plan. So, the level of sophistication there was incredible. Again, looking at historical analysis, statistical analysis, which is backward-looking, but that would just be the start and the baseline for how we would build our SNOP demand planning. And so, yes, it was a great experience, and I don’t want to get too into the weeds, but able to learn a lot while we were there.
So, after your time in Boston Scientific, you worked at a few other organizations, two that I want to specifically call out in my next question. So, what did you do for the two years as the GM at Johnson and Johnson in Minnesota? And this, again, the calling out because it’s another very, very large organization, a very established one, and a lot of our listener base is working at small and mid-sized manufacturers who don’t have the resources and all the things that you would have at Johnson and Johnson. So, I would love to have you kind of pull out some of your quality improvement learnings that we can share with the audience.
Sure, so interestingly, J&J is a parent company really built up of over 200 divisions, and this was a reasonably small division, around 300 million in revenue. So, it ran like a smaller division. So, in some cases, yes, we could tap into some of the knowledge that Mothership J&J would be able to offer, but for the most part, like many other divisionally based companies, we ran as individual divisions. This one being about a 300 million revenue division, about 600 or so, 700 maybe employees at the time, just kind of putting things in perspective.
So, I was there for two years. We were able to drive some significant business transformation, so some increase in sales during that time for sure. We had tweaked the go-to-market strategy and partnered up more with J&J sister companies while we were there. But in addition, from a cost containment or cost reduction and continuous improvement perspective, we just drove a ton of inventory reduction and savings. So, we were able to get our service level up significantly, from approximately 52 percent service level up to 98 service level, so nearly a doubling in service level. What this meant was that we were able to be much more planful and highly predictive of what our demand would be and how we’re going to serve that demand. And so, that allowed us to really reduce a lot of the inventory, you know, whittle down when you’re looking at your ABC analysis, we were able to whittle down the amount of A codes, whittling down the amount of B codes, and then leaving the rest of C codes. Doing things like that, shifting our slotting strategy in our distribution center, so we could pick at a much higher rate, you know, these types of improvements were things that, you know, we really drove on the quality side of things.
The business, when we got involved with it, was not running very, very well from a quality perspective, having a lot of customer complaints and things like this. And what we elected to do, and Jack, when you say that, are you meaning that the customers were getting inferior products, meaning they were actually getting something that had a defect?
In some cases, yes, that the quality level of the product was not meeting standard and so what we chose to do was to open up a Kappa on each element of the quality system. So, we had 30 plus Capas while at that business. And when you take 30 somewhat Capas, which is a lot of Capas, and you effectively close those and actually improve these underlying systems and get those 37 Capas down to zero, which is what we did, now you have a much improved quality set of quality processes and things that are resulting in a far stronger output in your overall business. So, you know, we improved some of the running of the operations but also of the underlying quality processes, and that’s what drove the 100% quality improvement over those two years.
So, after your time at J&J and later in your career, you were the CEO of a company called Endologix, and I actually don’t know what the company does, so curious to hear about that. But one of the things that really stands out to me is that when you were there, you and your team were able to reduce inventory by 36%, and I think that is just a huge challenge for our listenership, people working at small and mid-sized manufacturers, having in some cases way too much inventory and having a big impact on cash flow.
Yes, great question, and we could probably spend some time on this, but as a CEO of Endologix, I was responsible for all of manufacturing, all of supply chain, and all of R&D. In the time that we were there, Endologix is an endovascular company, and so we play in the Triple A Space, so abdominal aortic aneurysm type devices. And we were really a pure-play company in that AAA space. Since then, we have been able to diversify the business and get into some more peripheral intervention type devices as well. But so it’s a Class III medical device, you know, implant manufacturer and designer located in the Irvine, California area. So getting back to, you know, manufacturing, we leaned out a lot of our processes and were able to drive down our COGS and drive up our gross margin while there. The inventory side of things was very, very interesting.
So, we had a lot of money sitting in capital, basically on the shelf in the form of inventory in all phases of the process, right? So, we had raw, WIP, and finished goods. That type of inventory, or the levels of inventory that we had, I should say, were just rather high, rather extraordinary for the size of business that we had and the amount of turns that we had the capability of driving through our sales force. And so, we looked at, we did some benchmarking, so we went to Gartner Group, and we looked at other medical device companies and what their typical inventory levels were, and we were on the high side, which is in all fairness, we were on the high side. Typically, what we found in our space was that in typical fashion, finished goods, we would have around three turns of finished good inventory per year. We were not there. We were in the two turns or so per year. So, our drive was to try to get from two turns to three turns. We did that in 2019, so we sort of met that benchmark level. And then in 2020, we exceeded it. We actually set a new benchmark, got to three and a half in some cases, four turns of inventory and finished goods. And then on the raw material side of things, four to five turns per year was the benchmark that Gartner had shared, typically was at. We got there in 2020. So, we basically were at the forefront in terms of inventory efficiency, and it was just finding out, you know, what is best in class through benchmarking, identifying where you’re currently at, and then building a project plan with proper milestones on what is it going to take to get there. And so, you know, we looked at every category of inventory, we updated our ABC code process…
We update our slotting strategy, as I mentioned earlier, we brought down, you know, we took a number of codes from A to B and from B to C, and that allowed us the luxury or the ability to bring down the amount of inventory and some of those extraneous codes. And so, you know, with some of the driver, that allowed us to drive some of that inventory improvement, but it was about $25 million of inventory reduction for our business, about 36% of overall inventory. So great job by the team. Actually, if John Washington is listening to this, he is a giant part of it, and his team are just an absolute giant part of how the team got to 36% inventory reduction. So, I’d love to just appreciate him and thank him and his team’s efforts. And again, for people working at small and mid-sized manufacturers, I mean, reducing inventory by even half that is a big impact on cash flow, and sometimes you have to make decisions on, do I buy inventory or do I invest in people or do I invest in technology? So very, very important to get inventory under control and then keep it under control ongoing.
For our conversation today, you told me a story about a time, but I’m not sure which company this was at, that you uncovered a massively mismanaged direct supply chain. So, would like to have you share that with us and what were some of the key learnings and takeaways from that?
Sure. So, a lot of supply chain comes down to risk management, right? And understanding, okay, what is our target service level? Do we want it to be 98%, do we want to, can we accept 95% service level, you know, things like this? In the particular case of this company, and to be honest, I would rather just leave this company nameless, some folks in the audience might be able to figure it out, but it was a med device company, and when I got on board, I uncovered some surprises, for sure.
The levels of inventory, let’s put it this way, supply chain had been sort of an afterthought for this company. They didn’t quite know how best to manage supply chain. They had an incumbent in the role before I had joined, and that person took off before the stuff hit the fan during COVID. And what I found was scary, to be quite honest. In some cases, we had critical raw materials, in some cases, that are, you know, between one and three days of inventory on hand. Think of one to three days, and you would be stocked out. In some cases, on the finished good side, you know, we could have three days as much, on the heavier side, we’d have about 14 days, 14 days. So two weeks, you could literally be stocked out, but in many codes, it was less than that. It was like three days of inventory on hand.
So, what I did in this particular case was I, again, instead of it just being my opinion and in this, for this company, the CFO was a very strong individual, and this company was basically managed from a cost containment perspective. Inventory, if inventory, you know, what inventory was sort of an afterthought, and it was just all about controlling cost, not managing risk, just controlling cost. So, instead of this just being my hairbrained idea that, you know, we need this much more inventory, and this is why, and this is how it’ll de-risk the company and our supply chain, I again leaned on that Gartner benchmarking information that showed, “Hey, this is what other companies like us have on hand from an inventory perspective, and this is why, and this is how it reduces the overall risk within your supply chain.” And this was right in the COVID period, actually just about coming out of COVID, so they had definitely felt some of the pain and were wondering, “How did we get here? Why are we in such thin inventory levels and things like that?”
We basically had an intervention, and we had to do a massive amount of purchasing across all different categories of raw materials and then converting those, of course, into finished goods. The company had some challenges on the quality side that were being worked out as well.
So, converting those into converting that inventory into finished goods, there were some hiccups in there, but that got better with some time. But the raw material side was unbelievable. So, it was really shocking, and what we actually were able to convey to the leadership team was, “We are days away from putting this company out of business,” and they finally understood that, again with some better data and some hard conversations. So, we went through the process of fixing that, and then, to be quite honest, I had moved on shortly thereafter from the business due to some personality conflicts and things like that and, yeah, anyway, so we fixed the company. We got them into a position where they were not as at risk, certainly at some risk, but they were in far, far better shape.
When you said one to three days, I was absolutely cringing. I honestly don’t think I’ve ever heard something that crazy in my career about being that at risk. I mean, one little thing happens, and your entire supply chain is shut down, exactly. And they did feel that. As a matter of fact, Gartner, they have, like, a four-panel talking about the amount of inventory and the level of risk and growth in the company. They were at so much at risk they were off the chart. They were literally off the four-panel, and I showed that to them. I said, “So, here’s all the other major competitors in our space, and I want you to guess where we stand, you know, on this chart.” And, you know, they all made their guesses, and I said, “Here’s where we actually are,” and it was literally, like, off the page in the highest risk corner of the four-panel. And so, they were aghast, they were shocked. Suddenly, their ears opened up, and it wasn’t so much about cost containment, it was more about, “How do we keep this company alive?” And that’s exactly what we did. We kept it alive, and we had to scurry quite a bit.
So yeah, so Jeff, one of the other things that I’ve heard you talk about a fair amount this year is the conflict between China and Taiwan, huge, huge impact on every single supply chain, but in particular, people working in direct materials procurement. Why is that so? And this is a big question of our time between China and Taiwan. Hopefully, there’s not a conflict, first and foremost, hopefully, we do not ever have a conflict between those two countries. But if we do, it stands to become the most impactful, potentially impactful supply chain catastrophe, possibly in history. And the reason is that the U.S, being such a, you know, the most demand-driven country in the world, we allowed the majority of our supply chain to move into the Far East, in China, in particular, in some cases, Taiwan, but other countries in the region as well, Malaysia, Vietnam, Indonesia. China, though, is really the base loader, and they have the vast majority of the manufacturing from the U.S, which used to be a manufacturing juggernaut. Most of that moved to China, and now they are the manufacturing juggernaut. So, if they turn it, you know, if this conflict actually arises (again, I’m not here to talk about the politics or things like this, but just the supply chain risk), if this were to happen, we will be looking at massive, massive impacts. You know, most of the product that comes out of China and in this region comes by sea, right? So cargo container ship lanes would be massively disrupted. You’re talking about instead of going east towards California, Long Beach, and LA (the two biggest ports that take in 40 percent of all the product in this country from outside the country), come through two ports: Long Beach and LA, and it’s really coming from China. So, all those seaport lanes would be massively disrupted, and you’re talking about sending now product west, possibly past Africa, past Europe, in order to try to get it to the U.S. You’re talking about a massive impact. Then folks often will say, “Well, then, you know what, I’ll just flip it to air, and we’ll just go airship.” Well, in a battle zone type environment, you’re talking about a situation where there’ll be no-fly zones all over that region.
And so for the same reason, reasons that shipping lanes would be disrupted, you’re going to have, you know, air shipments being massively disrupted as well. Again, none of us want this to happen; I sincerely hope it does not ever happen. But you’re talking about incredibly massive impacts to the supply chain, not just chips, although chips are a big category, but not just chips. Anything electronic is certainly coming from there, whether it’s a second-tier supplier or certainly a third-tier supplier, it’s coming from that region. Many non-electronic type devices as well are being manufactured in that region, so I can’t stress enough, you know, the things that we need to look at doing are as follows: you need to reduce the risk of your supply chain. Take a look at your tier-one suppliers, your tier-two suppliers, and if possible, even your tier-three suppliers. How much risk resides in that Far Eastern region of the world, and then try to take measures to reduce that level of risk, whether it’s alternative suppliers or what have you. Safety stock levels would need to be revisited, and so if you do find, shoot, you know, we’re looking at tier-two suppliers and they’re littered all over that region, how we’re going to offset that is perhaps with, in the short term, with safety stock level increases, right? So something to take a look at there. The other thing is near-shoring, so starting to bring the supply chain out of that region back to the Western Hemisphere. A couple of countries that are big targets: Mexico was a big target right now, Costa Rica is a big target, especially in the healthcare space. But, you know, in some cases, people are leveraging and building in Canada and in other parts, but you know, you want to get your supply chain, any sort of critical aspects of the supply chain, into regions that have very favorable trade agreements with the United States, right? So Mexico, Costa Rica are excellent examples, and there are many others in this hemisphere. So that’s bringing the supply chain, you know, back over here. And then, if you want to take it another level and have it be more of a long-term strategy and thinking very strategically here, think of vertically integrating your supply chain, so starting to make more of your product yourself. Not only does this give you far more control in your supply chain, but whatever margin that you’re going to be paying to those suppliers, you get to put that in your pocket.
Yes, it takes some capital to set this up initially, but if that’s not a constraint for your business, then setting up vertical integration, building it yourself, really gives you a lot of long-term benefits from a profitability perspective and things as well. So just a few different considerations, you know, while diving deeply into your supply chain and really need to understand your level of risk, so I recommend that to everybody. And yeah, that’s really what we’re looking at with China-Taiwan.
So, Jeff, one of the things that come to mind when you were going through some of the things that procurement teams and supply chain leaders can start to focus on to prevent risk is, how do I or how does somebody go about developing a level of understanding of their risk? How do I even know what my risk levels are now?
Yeah, sure. So you need to go through a number of different scenarios, and I usually recommend, you know, four to seven various scenarios of, you know, if we did have a China-Taiwan conflict, what’s the likely impact of that? How long in duration, timing is going to be everything. What’s the duration of the impact? And it’s like, well, and you’ve got to go through a number of assumptions, right? And you may assume, well, what if this had a two-month duration? What if it was a two-quarter duration? What if it was a two-year duration? And running through various scenarios of, okay, I do not have product for that long a time. What’s the level of impact to my supply chain? And in case, you know, most cases, you’re going to be dramatically shocked at the level of massive impact. This is why I keep talking about China-Taiwan so much, the level of massive impact that this will have, and it really should light a fire under the folks that say, well, if we really want to remain in business, how are we going to offset this? Are we going to just plan on assuming a two-month duration? Well, then you could probably offset that with added Safety stock levels, right? If this is going to be two quarters or a half a year, you know, are you willing to take that much Safety stock? Maybe there’s some key critical elements that you want to pull back and start to qualify backup Supply in Mexico, for example. You know, and what I like to look at is I do what I call a reverse Apex calculation. So if you have your Apex calculation, and I want to calculate if I have certain levels of impact, what is the impact of that on my service level.
So am I still at a 98 service level? Does it take me to 90? Does it take me to 85? What is, and if it’s, let’s, for example, let’s say it takes us to 85 service level based on a number of assumptions you make in duration and level of impact, okay? So 85 service level, that means 15% of your revenue is at significant risk. Statistically, what does that mean? So 15% of your revenue is that $100 million, is that a billion dollars, is that 30 million dollars? I mean, it depending on the size of your company, and then put it into dollar figures for the executives. This is what gets them to really understand it very, very quickly. And they say, “So, wait, you’re telling you’re telling through these scenarios we’d have an 80% or 85% service level probability, and 20% of our revenue is at risk, and for our $100 million business, that’s $20 million? That’s unacceptable. Okay, great. Well, then here’s a number of scenarios that we could go through that would offset that risk, right? And here’s an added amount of inventory. Here’s, you know, some, some, you know, new backup suppliers that we could qualify. And there’s going to be costs that are associated with every one of those scenarios, but you’re going to need to make a trade-off set of decisions of, well, we’re going to need to invest in some more inventory or need to invest in qualifying backup, you know, new suppliers, but the trade-off is potentially being out of business for a certain amount of time that you work into your assumptions. And so that’s how we typically would do this. And again, translate it into service level impact and what that means dollar-wise, and all the executives should start to perk their ears up.
The other thing that comes to mind for me is if I’m working at a smaller mid-size manufacturer, we have a pretty small supply chain procurement team. Who at the company should own and manage this risk assessment? Like who, what title, what person? I mean, I feel like all people in the company will be involved if you’re a small group, but someone’s got to take ownership and lead it.
Sure, so let me just tell you I’m a big believer in the SCOR model for supply chain, so you know, Plan, Source, Make, Deliver. Make, manufacturing, is part of supply chain, so when it comes to manufacturing and you would ask about manufacturing risk and understanding this, I usually have the manufacturing folks focused on manufacturing, right? So how to take raw material, convert it into finished goods. But I mean, the Make or manufacturing is an element, is one step in the overall supply chain. So to answer your question, I usually have the head of supply chain be the owner of the overall risk plan, not manufacturing. That manufacturing tries to work on running efficiently, converting raw materials to finished goods, that sort of thing. But when it comes to overall supply, this is supply chain, right? So this is really the head of supply chain should be the ultimate owner of this. Whether they delegate a number of or some of the analysis to, you know, directors or managers or team members on the team, that’s up to them. But they should be the ultimate owner of our overall corporate risk plan is the head of supply chain. So how much risk? What’s the level of impact? How do we mitigate that risk? So coming up with mitigation plans like I was mentioning earlier about, you know, we can do this with inventory, we can do this with backup suppliers, we could do this with vertical integration. You know, coming up with mitigation plans, this really, to me, falls in the lap of the head of supply chain. So, you know, that’s how you earn your money in the supply chain world is really de-risking the overall supply chain and understanding what’s coming around the corner. You and I have had this conversation before about, you know, understanding the current level of risk and what’s in front of us, like COVID in the case of 2020 or 2021. Understanding the level of the current impact of the current issue, great. That should absolutely be part of the job. But a big part of the job is starting to ask the questions and figuring out what’s around the corner. What are we not seeing yet? What is not yet happening but is highly likely to happen coming out of COVID or coming out of a China-Taiwan conflict situation, for example? What would be the next level, the next tier of impact, and then how do we start preparing for that now? That’s where you really, really earn your stripes from a supply chain leadership perspective.
The other thing that I want to call out that you mentioned is if you’re listening to this and you’re thinking, “Well, I’m okay, I don’t have suppliers in China or Taiwan,” but if you have suppliers in Singapore and Vietnam or Indonesia, does not necessarily make you safe. I want to just really be very clear and call that out and maybe have you reinforce why that is.
Yeah, so as I mentioned earlier, the shipping lane disruption and air shipment disruption will impact not a very, very small area; it’s going to impact a very large area. And you think, or some people think, “Well, Taiwan’s a very small area, and so if it’s just around Taiwan, not that big a deal.” Trust me, these areas are very all-encompassing, and they don’t want any ships, whether they be cargo ships, military ships, or whichever, anywhere close to that region to set off or make the military very concerned about, you know, is that truly a cargo ship or could that be a clandestine military ship of some sort, whichever. And so these zones would likely be very, very large. So they’re going to engulf Indonesia, Vietnam, Malaysia, Singapore, so don’t necessarily think that you’re safe if you’re just in those countries. So, yeah, so hopefully that answers your question.
Well, thank you for discussing your supply chain journey and the seriousness of the China and Taiwan conflict on people working direct materials procurement and manufacturing with me today, Jeff. Where would you like to send people to find you that want to reach out or continue the conversation?
Sure, they can just hit me up on LinkedIn. There’s a number of Jeff Browns, but if you type in “Executive Jeff” in the search bar, I come right up. So yeah, LinkedIn is the place.
If you missed anything, you can check out our show notes. You can find us by typing in “What the Duck?!” Another Supply Chain Podcast in Google. To have optimal results, make sure to include “Another Supply Chain Podcast” at the end of your search to ensure you don’t miss a single episode. Make sure to follow this podcast and subscribe to us on YouTube. I’m @SarahScudder on LinkedIn and @Sscudder on Twitter. This brings us to the end of another episode of “What the Duck?! Another Supply Chain Podcast.” I’m your host, Sarah Scudder, and we’ll be back next week. Thank you.