Flow, Fragility & The New Industrial Real Estate w/ Rob Handfield

Rob Handfield 00:34

thanks for inviting me, Justin. It's pleasure to be here and speaking to your listeners today.

Rob Handfield 00:51

Sure. So When I started at NC State, this has been 26 years ago, I founded something called the Supply Chain Resource Cooperative. And it's a center for thought leadership, but what we also do is we have student teams of undergraduate and MBA students work on real-world supply chain problems. So we work with companies like Advanced Auto Parts, Caterpillar, John Deere, MetLife, Toshiba, and you know all

Rob Handfield 01:23

All these organizations, every organization has a supply chain and they have problems associated with them. So our students are working with them, often using AI tools or Python or you know other analytic approaches to help them solve and address some of their challenges that they face. And it it's really a real world education for these students, and they they emerge and they come out and say this is one of the best, you know. you learning experiences I've had in in college. So it's exciting.

Rob Handfield 02:21

Yeah, yeah, and and you'd be surprised a lot of them face a lot of common challenges and problems. and we can maybe get into some of those today as well in our discussions.

Rob Handfield 02:37

we we probably have about maybe eighty MBAs and probably a couple hundred undergraduates. And we also hold a supply chain career fair where companies come to NC State just to hire supply chain students. And we had over forty companies this year, which was really exciting to see. And you know there there there's a real need for talent in the supply chain field right now. There's more than ever

Rob Handfield 03:06

you know, planning jobs, buying jobs, logistics jobs, there's a lot of opportunities out there for people.

Rob Handfield 03:25

Yeah, it really is. And you know, if you just look at actually the area around Raleigh, especially there's an area called Holly Springs. the number of pharmaceutical companies that are building new facilities there is i is phenomenal. you know, Amgen is one, Fuji The other big one is Genentech is just opening up a big facility there. Novo Nordisk is expanding their facilities. Of course, they're making the the GLPs and you know others, others include Merck and Pfizer, and it's it's really a hub of activity in the Research Triangle Park. And I think what attracts companies there

Rob Handfield 04:14

Sorry, what attracts companies there is is you have three big universities, Duke, UNC, and AC State and you know, a really good educated talent pool as well.

Rob Handfield 04:58

Yeah, and and you know, nearby Greensboro is is really a a big logistics hub as well for, you know, FedEx and UPS. they have a lot of warehouses and distribution centers in in that region. And then as you go further west, obviously you have Charlotte, which is a banking center, and then even further west than that into the mountains, we're starting to see really a regeneration of the textile industry is starting to come back. And it's it's primarily for Department of Defense, you know, kinds of apparel. And we're seeing some growth there in some of the old textile mills, which is really exciting.

Rob Handfield 05:45

Yeah. Well they do and they they have shortages, believe it or not. You know, they if you think of a defense, they need you know, they need parkas for cold weather, they need you know, greens for the for the jungle, they need you know, desert wear. So there's you know, depending on where the conflicts are in the world, our our armed forces need the right clothing to go into those areas.

Rob Handfield 06:33

Yeah. Well and and the Barry Amendment requires that. You know, it's actually a law that requires that they source from domestic sources to the extent possible. So

Rob Handfield 06:52

Yeah, so my latest book I wrote, is called Flow, How the Best Supply Chains Thrive. And I I co-authored this with Tom Linton. And you know, this this book was was written, you know, just as we were getting into COVID and then just afterwards. And you know, I had the experience of serving on the Joint Acquisition Task Force, which was a task force stood up by the Biden administration at the beginning of COVID to help understand where a lot of the the PPE, the a lot of you know propofol, gloves, gowns, you know, why we were having these shortages and where we could get this stuff. And Not surprisingly, a lot of it came from China. And when COVID came, China, you know, essentially blocked off their exports. And we didn't have enough of these, you know, just basic medical supplies at a time when people were flooding into our ICUs. So it was a real disaster. And you know, I had a first you know front row seat on what was happening in that area, and that book. Came out of that, and and the idea behind it is you know, as as organizations, you know, expand their supply chains, they have to rethink how they can make them flow. And the the metaphor is if you think of a river, right? A river will flow, and even when you try to, you know, there's a there's an encumbrance, there's a blockage, it finds a way to get around it and and continues to flow. And so that metaphor was was one that we thought about is how do we get

Rob Handfield 08:41

our supply chains to continue to flow and and to avoid these disruptions which are now part of our daily life. You know, you know, you look at the Strait of Hormuz, you look at the Ukrainian war, you look at the Israeli-Gaza war, these are disruptions that are occurring and which have global impact. And so we have to be able to deal with an increasingly disruptive world.

Rob Handfield 09:27

Yeah and and you know one of the

Rob Handfield 09:31

Yeah, yeah, they recognized early on, you know, we interviewed people from the Strategic National Stockpile and they said, you know, we we just didn't keep enough you know masks and gloves. the stuff we had was was was old. I mean the masks were so old if you try to put on the the the elastic band would snap and break. So, you know, they they they really were c caught flat footed and we realized as a country that We've become very dependent on these supply chains that extend all over the world. And one of the key findings or or or recommendations that comes out of flow is we have to better understand who is in our supply chain. And by that I mean not just your immediate supplier, your what they call the tier one supplier. But also the tier two, your supplier, supplier. And then your tier three, who is your supplier, supplier, supplier, right? And when you start doing that, it's difficult because we don't have a lot of visibility into that stuff. But when you go down that path, you discover that there's some real vulnerabilities that exist the further upstream you go into your supply chain.

Rob Handfield 10:59

Well, you know, one of course is you know one of the biggest disruptions right now is in RAM. computer RAM, right? D RAM. And every

Rob Handfield 11:16

Yeah, well, you know, and and it's the you know the the the DRAM problems originate with the larger DRAMs like the forty nanometer ones. And what's happening is you know those are used in a lot of automobiles. they're used in a lot of medical devices. We had someone from Medtronic talking about the this with us. They're used in electron all electronic products like Toshiba, DRAM. Is everywhere and there's a critical shortage of it at the moment. And that shortage is because the the cycle of production for these chips isn't keeping up with the massive growth in demand. And where's the growth in demand coming? Data centers, right? So the data centers are are scooping up all of the the memory and they're paying top dollar for it. And all the other industries that also rely on them are not able to get them.

Rob Handfield 12:18

And for instance, capacity for DRAM orders, the backlog is already through 2027, 2027 is already booked up. So you know that's how urgent that particular problem was. And how do you forecast that? It's very difficult to do. and there really isn't a substitute for it either, right?

Rob Handfield 13:00

Mm-hmm.

Rob Handfield 13:33

Mm-hmm.

Rob Handfield 13:44

Yeah.

Rob Handfield 13:56

Yeah.

Rob Handfield 14:04

No, that's that that's exactly right. And it's it's almost a a catch twenty two situation, Justin. So if you think about it, you know, more companies are saying we wanna bring stuff onshore. You know, we wanna bring I'm working on a project on generic drugs, for instance. Generic drugs are largely produced in India and China. there's quality issues there, and so there's subsequently shortages, even for basic drugs like like metformin and and and and others. And so people are saying well let's build a domestic drug industry. Okay, but who's gonna buy those drugs, right? Because they're gonna be more expensive. They're gonna be more expensive than ones you buy in India and China. So who's gonna be willing to pay That extra amount for the same drugs they could get at a cheaper price overseas. And that's that's the hundred thousand dollar question right there, because is it gonna be the government? If the government has guaranteed demand that they will provide for those drugs, that will give incentive to the real estate people that you work with to say, well, I'm okay with investing because we know there's gonna be demand. We know there's gonna be an ROI. But

Rob Handfield 15:28

What happened after COVID was, you know, all these domestic manufacturers started producing you know masks and gowns. And then the minute China came back into the market, the government said, well, you know, we're not gonna continue to pay these higher prices, and they all went bankrupt. Right. So that that's that's the downside is you have to have a a guaranteed market for people to make that investment in in onshoring and bringing production back into the United States.

Rob Handfield 17:04

Yeah.

Rob Handfield 17:46

Yeah. Well, you know, it's also interesting in in Southern California, and you must see this, that, you know, prior to the current administration, there was a lot of growth in Mexico. So a lot of companies were sourcing in Mexico because the labor rates in Mexico are actually lower than they are in China. The transportation, the distances they're a lot closer. communication is a lot easier. I mean, most of the

Rob Handfield 18:19

Folks down there speak English and Spanish and a lot of people here speak Spanish. And so we could communication was easier. And and they had a great workforce. I mean the work force culture is is excellent in Mexico. It's it's really productive. so we were seeing a lot of growth in actually warehouses in DCs along the Mexico US border for a time there. And then you know since the tariffs have come in, it's it's really disrupted that that flow and and the flow with Canada and and to me that's at

Rob Handfield 18:57

doesn't make sense. I mean these are our neighbors. We should be building industry to have a pan-North American economy where we can all you know contribute to one another and and and grow around our our our joint capabilities. I mean Canada has a lot of you know natural natural goods you know oil and and wheat and and potash Mexico has you know very low cost labor and the US has a lot of cash So it makes a lot of sense for the three countries to work together more as opposed to raising raising tariffs.

Rob Handfield 20:40

Yeah, that's a great point and and it's very difficult to forecast and plan ahead, especially on on new facilities and so forth. A lot of the companies that I've I've worked with, you know, they've been able to sort of mitigate the effects of tariffs through what they call tariff engineering, which is saying, you know, what can we can we source it differently? Can we do some value added in the US before, you know, after it comes in and and then label it as a domestic product? You know, but they they're they've sort of exhausted all of their options. And unfortunately what we've seen with the now the combined impact of the tariffs and the war in Iran, which is now limiting the flow of oil in the street of Armuz. And oil, as you know, is a commodity that people bid on. And so based on the the you know, the the the f reduction in flow, it's flow again, you're seeing the the The price of oil goes up and oil goes into everything, including transportation, domestic transportation and jet fuel and everything else. So we're seeing a significant increase in in prices and in inflation as a result of these combined forces. And ultimately it's it's a supply chain issue in the end. That's where it all originates.

Rob Handfield 22:17

I I'm sorry, sp the specific

Rob Handfield 22:23

okay.

Rob Handfield 22:29

Yeah, so I I focus my main area of focus is in purchasing and supply management. So I teach a class, I actually call it it's actually called supply chain relationships because it really focuses on the relationships between buyers and sellers. So we we talk

Rob Handfield 22:53

Exactly, exactly, yeah. And I you know, I have a textbook that I've written on procurement and I've written a lot of articles in procurement. but and a lot of it focuses on you know taking procurement rather than just buying stuff is building a a buying strategy or what we call a category management strategy. And what organizations are doing is they're segmenting their procurement teams by category. So maybe one for electronics, you know, one for plastics, one for transportation.

Rob Handfield 23:30

And they become specialists in those areas and they build strategies. Well, a a lot of what they have to do to build strategies is have good market intelligence, right? They have to build insight into what's happening in those markets and monitor what's happening. And as they get that intelligence, they can build and adapt strategies that's you know, with outcomes such as like how many suppliers should we be using? Should we be investing in some suppliers? Should we be developing

Rob Handfield 24:00

Should we be also focusing on risk, what risks are in the market. You know, do we have any single source suppliers that, you know, are vulnerable. And and so I I I teach that class and it's you know we start with everything from the beginning through to contracting, end to end. And we get a little bit into negotiation as well. So we have some negotiation role plays and and it it it's a fun class to teach. There's a lot of different stuff going on in there.

Rob Handfield 24:45

Okay.

Rob Handfield 25:59

Yeah. Yeah, and it's it's really interesting too in that space where you know with all of the disruptions and all the uncertainty in the world today, you know, people are used to having you know fixed price contracts with you know fixed SOWs and fixed SLAs. Well, those are difficult to manage when you've got a highly volatile environment. And this is where, you know, it it becomes critical to have, you know, not only good contracts that allow flexibility, but also to build that relationship. And I'll I'll tell you the number one thing that's important in some running supply chains is relationship management. You know, you have to have solid relationships. You have to solve problems collaboratively, you have to share information that can be helpful to the other person. and and we're seeing that

Rob Handfield 26:56

role of human relationships is is really key, is the driver of success in managing these extended supply chains.

Rob Handfield 27:18

Yeah, yeah. And and the lawyers, you know, lawyers when they draft contracts will often talk about, you know, what happens if we end up in court suing each other and if you sue me, what is the limit limitations of my liability? Right? And and they only look at the worst case, but they don't look at things like, well, how often should we meet? You know, what are the KPIs that we're gonna use to to manage this relationship? What happens if there's problems down the line? And what do we do if the bottom falls out of the market? You know, so You don't want to think about these things happening, but they do happen. And it's better to have a relationship where you can problem solve with your partner as opposed to, you know, suing each other and ending up in court. Because I I I've been on some of those court cases. I I sometimes serve as an expert witness and you know, a lot of those issues could be could be avoided if if people had collaborated earlier on.

Rob Handfield 28:27

Yeah, exactly. Exactly. Yeah. And and and you know, a lot of times it's it's just you guys need to talk to each other. You need you know and and you know there's gonna be problems in any any buyer-seller relationship. It's there's no such thing as a perfect relationship. but that's where you have, you know, performance metrics. You have things you're gonna agree on, and and when you start seeing deterioration in performance, you've got to ask the question of why, what's happening, what can we do to help?

Rob Handfield 29:00

Help you, you know, or or if you see your your your production is ramping up, you you need to be able to tell your suppliers, hey, we need you guys to ramp up, right? We need you to invest in your capacity. So it it's a two-way relationship, and both parties, if they really work together, are gonna benefit. And I I firmly believe that. That's something I believed in my entire career, and I've and I've observed it as well.

Rob Handfield 29:36

Yeah, yeah.

Rob Handfield 30:11

Right.

Rob Handfield 30:49

Yeah.

Rob Handfield 31:02

Yeah, so three PL is is a growing industry, third party logistics. you know, some of the bigger ones include you know, XPO, I think they changed to GXO.

Rob Handfield 31:17

DHL, FedEx, UPS is a very big business. Radial is another one. And yeah, they do exactly that. They will lease the warehouse. They will bring in the equipment. They will set up the warehouse management system. They will go out, recruit, train, and hire employees and sustain the employee base. And they will operate your warehouse or distribution. Center for you. So just about every major company now has a 3PL managing its logistics, just because it's so complex and it really requires people with a high level of expertise to operate a warehouse or DC. If you ever go into a warehouse center DC, you'll know what I mean. It's there's so much stuff going on all the time, and it's it's it's a very exciting, dynamic place. i things can go wrong very easily there as well. It's interesting too. I I actually taught an executive education class to a group of business development people at a large 3PL and I was teaching them on how to work with procurement. and a lot of them at the time said, you know, procurement I hate working with I hate working with procurement. You know, they're they're they're they're all all they care about is price, you know, they're always nickel and diming me, you know, they're they're just standing in the way of of c you know value.

Rob Handfield 32:51

Creation. And so I actually spent some time educating them on well, here's how to work with procurement, right? I mean, you you need rule number one, you need to make them look good, right? You need to find ways, you need to ask them what what are you being measured on? What's critical for you? What do you need to achieve, and how can I help you get there? And again, it's that collaboration piece, you know, and and understanding their objectives is is critical.

Rob Handfield 33:21

You know, a lot of times they may use contracts, like three-year contracts are often typical with three PLs. And in the three PLs I work with, they said, you know, at the end of those three years, we don't want them to go out and go out for another bid. You know, we want them to extend the contract and continue to work with us. And to do that, you need to be thinking at least one or two years ahead of time, just think about, well, how are we doing? What are we gonna do? How are we gonna demonstrate the value that we're showing to this customer?

Rob Handfield 34:02

In terms of not just cost savings, but efficiency, continuous improvement, innovation, you know, all of the things that that are gonna have them at a point where they can look at it and say, hey, we don't we don't need to do another bid. bids are a lot of work, you know, r running RFQs, and it it really disrupts the relationship because you know, the relationship will be a wow we're all friends here and then we're not friends anymore. But if you win the contract we'll be friends again, right? So it's it it can be very disruptive.

Rob Handfield 34:48

Right.

Rob Handfield 35:15

Yeah, shifting shifting to another facility is a huge pain. You know, that's why, you know, companies that that are going into a new one need to really think through it carefully and and identify, you know, their long term their long-term planning as well. Because again, shifting all that material out of one facility to another, all the put away challenges, the layout challenges, is is not is is not worth the expense. expense of going through that in terms of the benefits achieved. So I I always advocate try to try to work through issues with your existing 3PL if you can and and and you know if you can renegotiate the contract and continuously improve, that's a better way to go almost every time.

Rob Handfield 36:14

Sure.

Rob Handfield 37:24

Yeah, no, it's it's absolutely part of my curriculum this year. I'm using a in my MBA class I have a a three-part case which involves a supplier selection problem for a a microprocessor that's used in a cell phone. And we're using real companies like Intel, Qualcomm, Huawei, Samsung. And I'm having students actually use AI to do research again, the market intelligence on these companies. Like what are the risks, what are the benefits, w how can they evaluate these companies? So this is where AI can be really helpful. It can really help gather information on suppliers that allows you to make better sourcing decisions. And I think that's the key for the use of AI is is

Rob Handfield 38:22

How can it augment the material that you're teaching? You know, at the end of the day, the student, the kids, I call them kids as well because I'm I'm an old timer, but yeah, the kids have to make their own decisions. Like they have to decide what what supplier to select and which one. AI can't tell you what to do. you really need to make that decision based on the evidence, based on the data, the context, but but also

Rob Handfield 38:52

again on that human element of of the relationship and what's key. So I I think in my mind AI will continue to be part of the work we do. I think it will not supplant humans, but I think it will help humans become more efficient. Maybe give them, you know, a couple hours more in their day. you know, supply chain executives are slammed all the time. And they have to respond to, you know, disruptions, to updates, to tariffs, global issues. And so if we can give them more time in their day to do value added work, let AI do the do the grunt work, if you will, you know, the the boring work.

Rob Handfield 39:55

Yeah. And and I think one of the keys to AI is is, you know, prompt engineering. If you're not asking the right questions, you're not going to get the right information. So really fully understanding the question you're trying to solve, I think, is is really key. And being able to articulate that to to an AI engine.

Rob Handfield 40:56

Yep, definitely can help you learn. There's always more to learn for sure. Th there's you gotta be careful because there can also be misinformation on AI. So if you have, you know, a one of the AI platforms like I've been working on is is one that also has all the references behind it so you can check the veracity of the sources behind the information. Yeah.

Rob Handfield 41:23

well it's it's called a supply chain maturity model. the system is called a quizio and it and it's intended for procurement people who want to learn more about suppliers, who want to learn more about supply chain risks, who want to know what the sustainability record is of different suppliers. And so we've we've have like over 20 years of of data that we've collected as training data. And so the the the system is in its early pipeline. It's actually been used to help generate the list of companies used in the Wall Street Journal best managed companies. So they they use it as as part of that as well. So yeah, we're I'm I'm pretty excited and we're continuing to move that along and we're starting to see some interest in the market around that as well.

Rob Handfield 42:45

Sure, you're sure.

Rob Handfield 42:56

Well No, I mean it's a it's an exciting time to be to be working in this field. You know, there's a lot of moving parts, a lot of things going on in the world today. And so I would encourage, you know, anyone listening, if they want to learn more, by all means, you know, you should you should get get some good articles on this and I can refer people to some good readings. I write a blog actually on the it's at scm.ncsu.edu. So I write a a blog keeping up on So if if people are interested, they can go on that. It's free.

Rob Handfield 44:02

Yeah.

Rob Handfield 44:22

Great. Well thank you, Justin. It's been a real pleasure to be here today. And feel free to reach out if anyone has questions. So

Rob Handfield 44:34

Thank you. Bye.