Episode 032: Johnny Rungtusanatham
Prof. Johnny Rungtusanatham, Canada Research Chair in Supply Chain Management at York University, is a leading expert on the subject of supply chain disruptions. We discuss the impact of the huge storm in British Columbia, why stores are sold out of many goods during the pandemic, and what kinds of public policies could make supply chains more resilient.
Transcript
Cameron: My guest today is my Schulich colleague, Prof. Johnny Rungtusanatham. Johnny holds a Canada Research Chair in supply chain management. His research on supply chain disruptions is timely. Climate change and COVID are both wreaking havoc on fragile global supply chains that are optimized for efficiency. Johnny's here to tell us how supply chain decisions are affected by these disruptions and what lessons supply managers and public policymakers can take from his research. I hope you enjoy our conversation.... Johnny, welcome to the podcast!
Johnny: Thank you very much for the opportunity.
Cameron: We're recording this at a time when we've just recently witnessed some severe disruptions to everything that's happening in British Columbia. We've seen highways washed out. We've seen railroad traffic suspended. There's a lot going on there in terms of environmental damage. And this is going to have a tremendous impact on the economy, not only of British Columbia, but of the rest of Canada. This is the kind of thing that you write about in your research, this idea of a disruption in the supply chain. Can you talk about the situation in B.C. and how we might expect that to affect the economy?
Johnny: Sure. So when we think about the goods we buy at stores, whether it's a clothing store or a grocery store, we often don't imagine how the products actually get on those shelves. Right? Well, for Canada, the Port of Vancouver in British Columbia is a major entry point for consumer goods coming out of Asia. And so with the transportation roots being impacted, goods coming through the Port of Vancouver cannot be redistributed to other parts of Canada. Now on the east side where we are in Toronto, fortunately we have the Port of Montreal in Quebec, but ultimately anything that comes through the Port of Vancouver that cannot then go on the trucks or on rail to be sent to other parts of Canada means that there'll be delays. Right. And ultimately when we have to reroute those goods through other options -- I've talked to other people about the possibility of sending goods down south, go through the U.S. -- but that increases the time and the transportation cost, and so not only will we see delays, but potentially higher prices on the goods that we are consuming.
Cameron: So this is obviously affecting traffic in both directions. You've got, I presume, a lot of consumer goods coming into Vancouver for distribution into Canada, and a lot of resources of one sort or another going out.
Johnny: Absolutely, absolutely. This is the economic impact, right? It's not just things coming in, but when things cannot go out, Canadian manufacturers and goods producers won't get paid, right? So the faster we can get the British Columbia situation back to well, normal, the better it is for everybody. And in this respect it was good that the state of emergency was declared, the federal government stepped in and sent in military help, that's all good. That's all what I study as it relates to supply disruptions, what triggers them, how do organizations, entities, humans, react and what can we do to sort of minimize the negative consequences of disruptions.
Cameron: I want to talk to you about a paper that you published in 2018 in the Journal of Operations Management, it's called "Supplier Non-Retention Post-Disruption." And the subtitle of that is "What Role Does Anger Play?" And I think this paper is getting at the question of, it's not just the fact that a disruption took place, but the way that people react to this depends on, kind of, who was responsible for it, whether the disruption was controllable or uncontrollable. I guess it's fair to say that the situation in British Columbia, most people would regard that as uncontrollable for most supply chains.
Johnny: Yes. So when I talk about events that trigger supply disruption, some of the events are beyond the control of any person thinking or any organization. The fact that we have heavy rain, flooding, then, cutting off transportation routes in and out of British Columbia, that is uncontrollable. On the other hand, when manufacturers forego regular maintenance because it's expensive, but that is a controllable event because by not doing the maintenance, causing the plant to shut down, definitely will impact goods flowing out of that manufacturing side. So controllability is one attribute of how we describe events that trigger supply disruptions and ultimately whether supply disruption themselves would be avoidable. And in this particular paper, looking at the supplier that is actually responsible, or the location of the trigger event, then the question that comes: if I had selected the supplier, okay, how do I react to the fact that now the supplier is causing or responsible for a supplier disruption to me? Does that lead me to make post-disruption decisions that may not be in the best interest of the employer that I work for? And what we are saying there is that we often think and hope that our decisions are rational, but in reality, emotions do come into play. And in this case, the emotion of anger is being showcased as anger, leading to post disruption conditions that may not be in the best interest of the firm.
Cameron: The whole premise of a lot of research in this area is that selecting a supplier is just this very rational economic decision. And so you're getting at the role of emotions in this, which make it much more complicated.
Johnny: Correct. And in the field that I'm in, the role of emotions is often ignored or underestimated. And this piece of work and the subsequent piece of work I'm working on is just really trying to bring in the emotions into behavioural supply chain management research.
Cameron: Tell me what you learned from this study. I presume that you had some sort of way of testing the scenario where the supplier was responsible for what happened and compare that to a situation where the supplier was not responsible. And how do you go about doing that kind of research?
Johnny: Yeah. The research method itself is really an experiment. We call this a scenario-based role-playing experiment because we ask the subjects, the individuals who are our guinea pigs in the experiment to basically assume a role within a story. The scenario is sort of a story. And the story then provides information about whether the trigger of the supply disruption was avoidable and controllable, or not avoidable. And whether that individual -- the role that individual, the subject, is actually assuming -- has been responsible for selecting the supply in the first place. And so by putting subjects into different experimental conditions and then asking them to react and recommend decisions, we're then able to compare and contrast whether controllable, being responsible, leads to different decisions, then uncontrollable, being responsible versus controllable, non-responsible and so forth. The method is -- it's not unique in the sense that I didn't come up with the method -- but about 10 years ago, I came to realization that we use complex cases in classroom teaching. We asked the students to say, "Oh, pretend you're that manager, how would you deal with the situation? How would you come up with your recommendations?" And I realized that, well, the same approach can actually be used to actually gather data about decisions that individuals make facing those situations. So, sort of like a simulation without the fancy computer coding that I'd need to do, because the scenario based role-playing things that I've been working on are textual-based.
Cameron: So you hand out a story, a printed story to people, or a story on a screen they can read, and then they do what?
Johnny: They read and they answer questions based on what they've read. And then we ask them to make recommendations based on information. Of course, we go through the regular process of making sure that manipulation checks, we also don't get compound checks, Hawthorne effects, and make sure that these are not the reasons why they made the decisions that they made.
Cameron: So this is not my research methodology so you're going to have to explain some of these things. So I think a manipulation check I'm fairly familiar with, but could you explain that to me?
Johnny: Sure. A manipulation check is making sure that whatever experimental factor we are manipulating actually is understood or felt by the person that's in that experiment.
Cameron: So in this case, you're testing to make sure that the person who's participating in the experiment actually understood that they were in the scenario where it was uncontrollable or the scenario that it was where it was controllable.
Johnny: Sure. I mean, in a clinical experiment, the manipulation could be giving you a placebo versus giving you an actual drop of the formula that I'm trying to test for efficacy. And so in that kind of experiment, the placebo, you know that the person, the subject, got the placebo. Whereas the other subject got the formula. But in the kind of experiment I do, I cannot really poke or inject subjects.
Cameron: You're not actually injecting your subjects?!
Johnny: [laughs] Yeah. That would be really unethical, so we have to come up with ways to check that the subjects that are in an experiment actually felt or understood that they were given that particular piece of information. And what's also unique about the method that we're using is that we are using real practitioners who actually are working in this context.
Cameron: I was going to ask who are the subjects that are participating and how many of them do you need for a good experiment?
Johnny: How many depends on the number of treatments that we are testing? And so, well rule thumb is approximately 25 to 30 subjects per set of conditions. And they can easily see as the set of conditions that I'm looking to compare and contrast increases then the number of subjects that we need also increase.
Cameron: So if it's just an A-or-B scenario you'd need about 60 people, half and half.
Johnny: Minimum.
Cameron: Minimum.
Johnny: Of course, the more subjects, the greater, the more power, to your statistical analysis and results.
Cameron: And if it's a two by two, then you're doubling it again.
Johnny: That's right. So there's 120, rule of thumb, but then of course, you can also do a power test to make sure that you actually have sufficient power for detecting the differences that you want to, you know, you're hoping to find.
Cameron: And so this would be a statistical test that you do on your data to make sure that it would work properly.
Johnny: Absolutely. So with this particular 2018 paper, we actually recruited sourcing managers who have familiarity. And we actually check that they actually have familiarity or have been exposed to similar kind of story that underlies experiment.
Cameron: So you're looking for sourcing managers who actually have enough experience to have been through this kind of disruption before.
Johnny: And the reason because these are complex situations. And so the designs themselves, designing the scenario, designing the vignettes under each cell, takes time. And we have to go through the proper steps of making sure that it's realistic and that our subjects or the sourcing managers won't look at this, this doesn't happen, or this is a toy situation so I'm not going to be serious about it as I go through the exercise.
Cameron: Given the disruptions then that we saw in B.C. with this horrendous rainfall, how are sourcing managers going to react to this disruption, do you think?
Johnny: Well, even before BC, early on, early in the early days of the pandemic, when supply chains were -- think about toilet paper! -- when supply chains were disrupted, there were already calls, so like, "Let's do more sourcing locally. How can we buy goods locally? Let's shut down the country and make sure that we're self-sufficient." I mean, these are idealistic notions that practically won't work. And the reason is very simple. The principal of economic comparative advantage suggests that we never will be in a situation where a country makes everything that we want. We have to trade. And as long as we're trading, that means that we will be buying goods overseas; some may be far away, some may be closer. And so how we source and where we source from will continue to ensure that supply disruptions will occur. This won't be the last time. Neither will we be able to completely avoid supply disruptions. The question is, can we make sure that we don't put all the eggs in one basket? This is where perhaps we are sourcing globally, but at the same time, we don't buy a hundred percent of what we need overseas. Perhaps we can reserve a small percentage so that we actually buy within the country, within the province, within the city that we're in, understanding that this will increase the cost of procurement. This is where some sort of recognition at the industry level, at the government level, will be important, especially for critical goods. Think about PPEs, vaccines. To get private sector, to bear the entire cost of that is against profit maximization. And so what are the incentives that government policies may enact to actually motivate some local sourcing so that we don't put all our eggs in one basket and buy everything I would say, from another country, far away.
Cameron: So if we want resilience and, and diversity in our supply chain, so that we're not dependent completely on one source, we're venturing into economic arrangements that are less than optimal for profit maximization. So therefore government needs to provide some sort of an incentive to make sure that diversity happens. Is that the argument?
Johnny: Absolutely. And, if you think about being resilient, which actually has two meanings. Being resilient means that it doesn't matter what happens to my supplier, it doesn't affect me. And in the balance of supply disruption, what that means is that I wasn't disrupted. My firm, my organization, irrespective of what happened in BC, was not disrupted. Now think about how can that possibly happen? Well, two possibilities. One is that I kept so much safety stock inventory that even because of the blockage, I can still continue to make my goods to send to my customers. That's a very expensive investment. The other option is what I've used as a term, that's "strategic capacity." I have local vendors, local suppliers, local contract manufacturers who can step in and actually start making the part or the material that couldn't be shipped out of the Port of Vancouver so that I can continue my business. So this is resilient in the sense that whatever happens upstream in the supply chain, I'm not affected. Which is the same as saying, I didn't face any supply disruption. But resilience also has a different dimension, which is how quickly can I get back to normal. And so when people use the word resilient, I often have to ask, "what exactly are you referring to when you talk about resilient?" Resilient in the sense that I'm robust, I continue, nothing, it doesn't impact me. Or resilient in terms of how quick it can get back to normal.
Cameron: So I bent, but I didn't break.
Johnny: Mm-hmm. And so the British Columbia situation with the rail transportation being able to get back to trains operating again after three or four days, that is resilient in the sense of, they were able to quickly recover. So we're talking about recovering capability. That is something that most organizations and the provinces and federal government need to think about. And the reason I say we need to think about is that, remember, we have events that are uncontrollable. So until we get to the point where we can be God and say, "No more weather patterns, no more tornadoes, no more blizzards," we're going to be affected again in the future. And with climate change and everything, we're going to see more of these severe weather type events that may shut down power to a city, power to a manufacturing plant. So I've been asking or been talking about resilient in terms of being able to quickly detect and then quickly mobilize. Find ways to increase your ability to actually get resources, to start working on bringing things back to normal. Getting the water on the highways to actually be removed as quickly as possible.
Cameron: You wrote a second paper along these themes and published in Decision Sciences in 2021, looking at supply chain disruption and emotions. So the first paper was about anger. You're angry about the situation, you may be angry at the supplier, depending on whether it's controllable or not. In this case, you're looking more inward. You're looking at the guilt of the person who made the decision. The title of the paper is "Supplier Selection in the Aftermath of a Supply Disruption and Guilt: Once Bitten, Twice (Not So) Shy." And so here, you're looking at the way that a person reacts who, this purchasing manager, this sourcing manager, who has made a decision to select a supplier, and somehow that supplier has let them down through disruption. And now the decision maker is feeling guilty about having done that. They've got to find another supplier. What kinds of effects did you find for whether or not guilt affects the decisions that are then made?
Johnny: So let me back track one step, and actually say, when you look at the 2018 paper, we were looking at how does a supply disruption affect decisions that may not be optimal. In this case that decision was whether or not you retain that supplier that originated the disruption. And we are saying that be careful because you may actually end up terminating a supplier that you should not be terminating. When you think about the fact that the trigger was uncontrollable. In the 2021 paper, we're now looking at a future decision, in a sense that a manager who just went through a supply disruption, how will that shape the way he thinks about selecting a new supply or selecting a supplier for a new sourcing opportunity? And this is where, interestingly enough, we find that depending on whether they were responsible for selecting that previous supplier, whether the trigger was controllable or not controllable, it evokes feelings of guilt, which then leads them to, sort of, make a riskier supply selection the next time they have the opportunity to source something different. And the riskier supply selection of course increases, in the future, the likelihood of being disrupted.
Cameron: Why does feeling guilty about a past decision, make a person take riskier decisions. Wouldn't they be more cautious?
Johnny: You would hope so, but in the guilt literature, apparently guilt also leads to feelings of trying to compensate for a past action that may have hurt somebody else. So in an organization context, the sourcing managers feeling guilt for letting their employer down may want to actually try to make up for that by then going for the higher risk, higher reward scenario, which is the selection of that risky supplier. And again, we are trying to sensitize any firm that actually makes sourcing decisions to make sure that whoever is making that recommendation to select a supplier, who is making that decision to retain or not retain, that it is purely rational; that emotions are not coming into play. And we are detecting that there are emotions, and we need to have checks and balances in place, including maybe supplier selections, supplier retention decisions, that are based on a team, as opposed to a singular person making that recommendation.
Cameron: So because you're looking at the roles of emotions here I think that, as I understand the kind of work that you're doing here, you're not just trying to influence the individual decision that's going to be made, but you're looking at the way the whole supply chain is designed.
Johnny: Anytime you select a supplier, you are automatically changing the design of the supply chain. So they select a supplier who is in, let's say, in Vietnam. That changes the length of my supply chain, that changes the location of my supplier, and so the design changes. And so the same thing happens when you say goodbye to a supplier that has been working well with you, you change the structure of that supply chain. And so looking at sourcing or outsourcing decisions, confounds the design of your supply chain and making sure that those decisions are rational, are not influenced unduly by emotions felt by the individual, then has a direct manifestation of what that structure, supply structure looks like.
Cameron: How does the work that you're doing change behaviour? You're doing behavioural research. How does it end up changing behaviour?
Johnny: Well, we all know that behaviour starts with awareness. If you are aware that you have a preference, bias, towards some action and that action may be bad, then awareness at least gets you individually to sort of calibrate your own thought process and the way you act. The research also can inform supervision of those individuals to make sure that internally there may be infrastructure and policies in place to ensure that those non-rational factors are not unduly influencing the way decisions are being made in the behaviour.
Cameron: Tell me about how public policy is affected by this.
Johnny: Sure. So if public policy has incentives in place to make sourcing locally attractive, then it's going to change how sourcing managers make supply select decisions. Now, in the past 20 years, we've been chasing efficiency. Finding ways to cut costs in what we buy, and that has led to buying from far away. And that's because, yes, we know in Canada and North America, in the U.S., labour cost is expensive, but that's also because legal cost is expensive. So if there are not the government policies in place to actually incentivize buying locally, but not to the extreme of what we saw with the last US president, where basically we buy American, buy American only, and everybody else can go their own way. Which is my point about, there's really no way to just insulate our country, as long as we believe that we need to trade. Governments can actually enact policies to make sourcing for certain goods attractive, especially goods that serve societal needs. And we saw with the Trudeau government talking about investing again in the development of vaccine manufacturing capability in Canada. Why? Because early in the pandemic we realized, oh, nobody knew nobody makes vaccines in Canada. So we are now beholden. Now I'm hoping that we're beginning to realize that there's certain goods there for society that really benefit from incentives at the government level to be made locally. And I say locally to mean within the country, where the cost of local production may have to be offset because otherwise the cheaper alternative far away is going to always sway profit-maximizing firms to choose those locations.
Cameron: This is such an important topic at this time, as you say, these disruptions are going to continue as global warming intensifies and weather disruptions are more and more frequent. So, it's really great to be able to talk to you about this and get an insight from the point of view of research.
Johnny: Thank you. Thank you for the opportunity.
Prof. Rungtusanatham on NewForum.ca discussing supply chain disruption
Links
Johnny Rungtusanatham’s faculty webpage
Paper on supplier non-retention and anger
Paper on supplier selection and guilt
Credits
Host and producer: Cameron Graham
Production assistant: Andrew Castillo
Photos: York University
Music: Musicbed
Tools: Squadcast, Audacity
Recorded: December 1 2021
Location: Toronto
