# Opportunity

“You want friends around the world, not enemies”

Interview: Lockdowns have deeply shaken global supply chains. Expert Edwin Keh from Hong Kong advises companies to gain deeper insights and make security a priority in their strategic considerations. 

Global trade collapsed in the wake of the coronavirus crisis. But Edwin Keh sees it as the foundation of peace and prosperity. Hans-Peter Merten/Getty Images

Pro­fes­sor Edwin Keh greets the cam­era, sit­ting in his office at the Hong Kong Research Insti­tute of Tex­tiles and Appar­el (HKRITA), sur­round­ed by stacks of books and doc­u­ments. The CEO of the Institute—who also teach­es sup­ply-chain oper­a­tions at the Whar­ton School of the Uni­ver­si­ty of Penn­syl­va­nia and the Hong Kong Uni­ver­si­ty of Sci­ence and Technology—is a vet­er­an in man­ag­ing pro­cure­ment and sup­plies for notable brands such as Wal­mart, Pay­less Shoes, and Aber­crom­bie & Fitch. In recent weeks he has been—in his own words—“out­ra­geous­ly busy.” As the Covid-19 pan­dem­ic has sent demand shocks to economies around the world, his advice is sought after more than ever. In between meet­ings with offi­cials to work on an antivi­ral reusable face mask that’s good for as many as sixty wash­es, Keh takes time out for an inter­view with Porsche Con­sult­ing Mag­a­zine.

Professor Keh, what are your observations on the impact of Covid-19 on global supply chains? What messages is it sending to companies?

Edwin Keh: It’s the first mod­ern pan­dem­ic. Although peo­ple had some stan­dard play­book to refer to when the econ­o­my shut down, they found that there real­ly isn’t a sce­nario of what we are going through. In Feb­ru­ary 2020, the sup­ply side stopped when man­u­fac­tur­ing got shut out, and by March, demand dis­ap­peared. Since May, we have begun to come out of this gen­er­al hold. By now, we real­ize that our mod­ern lifestyle is only pos­si­ble because of these very nice­ly oiled glob­al sup­ply chains, which pro­vide the qual­i­ty of life that we enjoy. The shock was that we now can see the vul­ner­a­bil­i­ties that we have. It requires every­thing to be in a very sta­ble and pre­dictable envi­ron­ment. We have been in a peri­od of peace glob­al­ly for the past fifty years or so. There were no jar­ring, dis­rup­tive changes. So we have a sense of secu­ri­ty that this is what nor­mal looks like. Part of the psy­cho­log­i­cal changes that we are expe­ri­enc­ing right now is that it turns out that the last fifty years were the abnor­mal peri­od of his­to­ry, if you will. We need to think about hav­ing more robust sup­ply chains, and how to ensure that we have more secu­ri­ty of the sup­ply chains.  

Edwin Keh, CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA) Edwin Keh

Which weaknesses in our modern supply chains did Covid-19 bring to light?

Keh: There’s always a trade-off when we look at sup­ply chains. You want sup­ply chains that are fast, cheap, and high qual­i­ty. You can prob­a­bly get two out of three, but it’s hard to get three out of three. Since we have been in a very secure state; com­pa­nies were look­ing for more and more price sav­ings because they thought they could go fur­ther and fur­ther with­out hav­ing to pay extra for risks. If you look at some of the short­ages in the first phase of the pan­dem­ic, it would affect things nor­mal­ly have very flat, non-sea­son­able demand. One great exam­ple is toi­let paper. It’s all this panic sen­ti­ment that cre­at­ed this demand for some­thing that should have been very pre­dictable. PPE (per­son­al pro­tec­tion equip­ment) is the other extreme: it was such a com­mod­i­ty that nobody want­ed to make any PPE because it was so cheap and so ubiq­ui­tous. And then all of a sud­den, we find we have a sin­gle point of fail­ure on our sup­ply side.

Some would say that parts of the world saw signs of disruptions ahead, but many supply chains still failed to react in time. What do you think is the reason?

Keh: The Amer­i­can researcher Jim Collins named this the Stock­dale Para­dox. When fac­ing a prob­lem, you must not be sim­ply opti­mistic or pes­simistic. That’s because if you are too opti­mistic, you won’t do any­thing. If you are too pes­simistic, then you are par­a­lyzed. You have to be a real­ist and look at the bru­tal facts, and that is the hard­est thing to do. The scale of the pan­dem­ic over­whelmed us. The appro­pri­ate respons­es were not devel­oped ahead of time, so reac­tions were slow­er because we never account­ed for some­thing like this. 

So if stretching too much without preparing for the risk is the problem, what can supply-chain managers do to start making changes?

Keh: What sup­ply-chain offi­cers should con­sid­er now is that except for cost opti­miza­tions, they should strive for more secu­ri­ty as well, maybe just by get­ting some insights. It turns out a lot of peo­ple didn’t have great vis­i­bil­i­ty into their sup­ply chain. They didn’t know that it was their tier 2 or tier 3 com­po­nent sup­pli­er that was cre­at­ing the holdup. On one hand, tools such as the blockchain are help­ful, but that’s the hard­ware por­tion of the answer. I think the soft­ware por­tion of it—which is the rela­tion­ship and the net­work of the peo­ple and the companies—is even more impor­tant. We should have learned this with SARS, with the tsuna­mi in Japan—there were many occa­sions in which we could have had a prac­tice run. But we default­ed back to mak­ing things cheap—so that I think is some­thing deci­sion mak­ers now should recon­sid­er. What they need to do is to real­ly spend time on under­stand­ing the inter­re­la­tions and con­nec­tive­ness of the sup­ply chain. So much com­pe­ten­cy has been out­sourced that even ask­ing the right tech­ni­cal ques­tions is dif­fi­cult for some sup­ply-chain offi­cers because it just has been so com­part­men­tal­ized. When Henry Ford built the Model T, every­thing was in-house—he owned the for­est, the mines and the assem­bly lines. The temp­ta­tion in the past decades was that com­pa­nies only focused on the con­sumer-fac­ing part of things and out­sourced the other parts. And what we are learn­ing from this pan­dem­ic is that it could be prob­lem­at­ic.

Global trade is the foundation of peace and prosperity.

Edwin Keh
CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA)

This leads to a popular discussion about “onshoring.” Do you think some kind of self-efficiency is the answer to supply-chain security?

Keh: From an emo­tion­al stand­point, local­iza­tion, onshoring, and region­al­iza­tion are all going to be what peo­ple think about. But it should begin as a strat­e­gy dis­cus­sion. If you say the avail­abil­i­ty of PPEs, ven­ti­la­tors, or cer­tain drugs is para­mount to me, you should make a deci­sion based on that strat­e­gy. But the other ques­tion you must ask is, do you want friends around the world? Glob­al trade pulled us clos­er; it cre­at­ed more under­stand­ing and rela­tion­ships; and it’s the foun­da­tion of peace and pros­per­i­ty that we’ve been enjoy­ing. So that could be a strate­gic consideration—I do busi­ness in China because I want to have friends in China, or I want to have a cus­tomer base, or to rely on China in some cir­cum­stances. So a bet­ter solu­tion may be a more robust glob­al­iza­tion, because it’s bet­ter to have friends around the world than ene­mies. 

When you con­sid­er relo­ca­tion of sup­ply chains, it also depends on which seg­ment of the mar­ket you are in. If you are a steel mill, you prob­a­bly are stuck in one place because it’s hard to move. But if you are Louis Vuit­ton, you have a lot of flex­i­bil­i­ty and can be quite dynam­ic. If you are Apple, and the value of your prod­uct is in the user inter­face and the cool­ness of your design, then for you cost may not be as big an issue as long as you keep the demand for your prod­ucts high. If you are Wal­mart, then per­haps you still have to opti­mize and think about how to make things 10 per­cent cheap­er.

China, as a global manufacturing hub, is undergoing an economic transition itself. How does it play into the shift of global supply chains as a result of the pandemic?

Keh: The process may be accel­er­at­ed by the pan­dem­ic, but it was already head­ing in that direc­tion any­way. China doesn’t want to do all the cheap man­u­fac­tur­ing jobs anymore—because of pol­lu­tion and a rapid­ly aging pop­u­la­tion. It is grad­u­al­ly shift­ing from a man­u­fac­tur­ing econ­o­my to a con­sum­ing econ­o­my. For the next three to five years, I sus­pect that it’s not China that is going to expe­ri­ence the biggest shift. It could be India—the change would be much faster and even more rad­i­cal. From 350 mil­lion to 500 mil­lion Indi­ans could be jump­ing to the mid­dle class. Their demands will cre­ate rela­tion­al changes in sup­ply chains. So all in all, com­pa­nies haven’t been giv­ing this suf­fi­cient thought—why are they man­u­fac­tur­ing in China? Because they did it twen­ty years ago when they want­ed some­thing cheap and want­ed to make lots of it. Today this is no longer valid but many com­pa­nies are still doing it the way they did back then.

Credibility is one of the things that determine winners and losers out of this pandemic.

Edwin Keh
CEO of the Hong Kong Research Institute of Textiles and Apparel (HKRITA)

Economies around the globe have been shifting towards a more sustainable way of doing business. Do you think the crisis is a chance or a threat to that trend, since it may become a luxury when companies are cash-strapped?

Keh: If com­pa­nies aban­don their sus­tain­abil­i­ty and social com­mit­ment as a result of this pan­dem­ic, peo­ple will say, “You were just green­wash­ing; you never took it seri­ous­ly.” At the end of this, those com­pa­nies won’t be able to attract the best tal­ent, and they will lose brand cred­i­bil­i­ty with their cus­tomers. If com­pa­nies go through this and say, “We are still going to be true to the state­ments about who we are,” then they will become much more cred­i­ble and pow­er­ful as brands. It is one of the things that will deter­mine win­ners and losers out of this pan­dem­ic. 

What advice do you have for companies struggling with this crisis?

Keh: It’s not only about your sur­vival; it’s about the sur­vival of every­body in your sup­ply chain. The way to come out ahead in this pan­dem­ic is for your entire sup­ply chain to come out intact. I deal with a lot of appar­el brands, many of whose first reac­tion was to can­cel orders. What I kept remind­ing them is that if you come out of this OK, and you open up your shop, but you don’t have any­thing to sell because all your fac­to­ries are down, then you are still dead. You have to come out of this with your sup­ply chain—whatever shape that is, after all the actions that have to be taken to con­serve cash. That’s a con­cern that goes beyond the four walls of people’s offices, and will chal­lenge sup­ply-chain man­agers to be think­ing about.  

Read the next topicFood for Thought