Transcript Blog- The Global Impact of COVID-19 on the High Tech Industry
Through the disruptions that Covid-19 has caused, the necessity of technology is even more apparent. In this episode of Industry Insights by SAP, Josephine Monberg hosts Keith Baranowski, Global Vice President and General Manager of Direct Spend Solutions at SAP Ariba, and Jeff Howell, Global Vice President and Head of High Tech Industry Business Unit.
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Welcome to the industry insights by SAP podcast series. My name is Josephine Monberg and I am your host. You are now listening to the COVID 19 special edition of our show. Welcome to our podcast. We’re doing these special edition episodes of the podcast where we zoom in on different industries and we look at how our current global pandemic COVID 19 impacting various industries. And today we are closer look at the high-tech industry and to do this, I’m so honored that I have with me in their home or their virtual home studios. Not one guest but two guests, Jeff Howell, who is the global head of the high-tech industry business unit at SAP. Hello Jeff, thank you for being with us. And then we also have Keith Baranowski who’s the general manager of Ariba for direct spend solutions. So, Keith, thank you also for joining us. So, I think we can start of very broad and just talk about generally speaking, how COVID 19 is impacting the high tech industry. But I also want to talk about it in relation to why customers should build a resilient supply chain in the longterm. That’s also why we have you with us, Keith. But to set the general scene of how COVID is impacting high-tech. Jeff, I want to start off with you. Can you give us your perspective on that?
Sure. So, one of the things that we’ve seen is probably consistent across all industries. It really affects three areas. It’s the personnel, uh, supply chain and revenue. Those are all, I would say, the three main categories that COVID is impacted. But what’s interesting for high tech is not all segments within the high-tech industry have been impacted. The same. For example, if there’s a company who’s, uh, makes and sells equipment that’s used for a home remote workers, um, you know, good luck getting an external monitor right now or a headset and that kind of stuff. So that’s in real short supply. Um, but if you’re manufacturing chips that are used in automotive applications, you may have been very negatively impacted in terms of revenue. So, in either case, or another example is cybersecurity. People who are in the business of selling cybersecurity are doing really well as well. But in all cases, uh, coming up with accurate predictions about how much you’re going to sell, uh, whether it’s to your employees, shareholders, or suppliers is very, very difficult. So, whether you’re not selling a lot or you’re selling a lot of some products, it’s the predictions that are very, very difficult at this point.
Hmm. And before we dive deeper into the supply chain piece of it, Jeff, I totally skipped this part. I first want our audience to get to know you a little bit better. So, can you just tell us all what it actually means to be the global head of the high tech industry business unit at SAP?
Sure. Just simply, uh, we’re the group that sits between development and the field? So responsible for all outbound messaging to help educate our field colleagues, whether they’re in sales or services, on what new things we’re coming out with. And then on the other side, uh, we have to take what we see that’s going on in the industry and uh, communicate that and translate it back to development.
Okay. So, you’re, you’re the middleman. You sit in between the two very important parts of the business. And Jeff, where in the world can you be found? I think I’m seeing sunshine from,
yeah, in fact, yeah, you might see that. I don’t know if I want to move my camera around too much, but yeah, I’m here in Silicon Valley, a little suburb just North of Palo Alto.
Very, very nice. And what about you Keith? Uh, what does your role at SAP be? The general manager of the Ariba for direct spend solution. Also, maybe you can tell us where you are. I don’t see sunshine cause there was no their window behind you. But um,
outside today, just cause the, normally you hear the birds chirping, but I’m, I’m actually just out the Jeff, so he’s a little North of Palo Alto. I’m a little South of Palo Alto and Cupertino and Silicon Valley. Uh, I have been at SAP for 15 years. Um, I do have an electrical engineering degree. I work at Intel. So, uh, I think like Jeff has been in and around Silicon Valley in the high-tech space for pretty much my entire career. Uh, what we do for the reman for direct spend solutions is we are taking, uh, rebbes cloud-based networking technology and we’re expanding the spend coverage to, to cover supply chain processes from manufacturing, procurement, logistics, uh, many of those topics where we’re building on that platform. And we’ve been doing that for the last four years or so.
Okay. Very cool. And Jeff just gave us an overview of what’s happening in terms of the impact of COVID 19 more generally speaking. Of course, hit on the fact that it’s different for depending on what you sell as a business. So, we also want to talk about in the context of building a resilience, resilience, sorry, supply chain and why it’s so important. So, tell us a little bit more about that.
Yeah. And, and I’ll even generalize it a little bit more beyond COVID. I would, I would call it supply chain disruptions and we’re all focused on COVID right now. Cause we’re in the middle of it. But if we look back in, in the not too distant past, we had, we had tariffs on China, we had Brexit, we had the Fukushima earthquake. Uh, there was even a case several years ago where a plant that made adhesives that you glued pieces of plastic chips together, the chip body lit on fire and that caused a disruption. So, the idea here is there’s always going to be something. This is a pretty big disruption. This is one of the biggest ones that in recent memory, but it’s not the first, and it sure isn’t going to be the last. So how do we handle supply chain disruptions and why is supply chain up at the top of the list?
Uh, it seems like forever ago, but it was probably only 90 days where everybody was talking about AI and ML. Right? And tell you about how artificial intelligence and machine learning, uh, impacts our business. Well, you know, the reality is now we have world leaders talking about supply chains every day. Uh, you know, president Trump is on, is on video, you know, every day, every other day for hours talking about the supply chains from respirators to masks to, to now meat, beef, pork. You know, you can argue whether he knows what he’s talking about or not, but he’s talking about it. So supply chain is back up at the, you know, at the top and forefront of people’s minds on how are we going to respond to these, these either demand or supply shocks that we see across our industry.
Mm. And yes, you could definitely argue whether or not he knows what he’s talking about, but you are right in his, definitely a very, very, very big topic. And I also did another episode with a VP of sales at SAP who also, uh, talked about how supply chain was so important because he actually managed to secure around 500 hospital beds for a hospital in a matter of 30 seconds, which seemed like a totally impossible task. But he managed to do it. And of course, that was critical in saving lives. Um, which is the situation we’re in right now. So Jeff, to put this a little bit more in, in contact with the high tech industry specifically, what are you seeing in terms of how companies in the high tech industry, how they’re leveraging their supply chain or maybe what they should do better? Can you comment a bit on that?
Yeah, there has been. Um, so one thing is a background. Uh, outsourcing has been part parcel to the industry. So, all of our computers that we have and cell phones and iPads and um, even the monitor you have, they’re designed by what we call an OEM. Someone like Hewlett Packard or Apple and Dell. Uh, but most of that is actually manufactured in Asia. In fact, 70% of the manufacture of semiconductors is in Asia. And so, um, knowing that that’s where the supply basis, you have to keep in mind, like when you’re in the fundamental thing, anytime there’s a piece of code somewhere, there has to be a chip. So, whether it’s a consumer package, good or, or a computer, there will be a chip. Well, chips take long time to make. Um, typical process is 12 to 15 weeks. So if you imagine in Asia we had several, um, weeks if not a month or so where you didn’t have people coming to work.
So there’s a big air pocket in that core supply chain. Uh, and it’s unclear because a lot of, uh, high tech companies are also, uh, trying to predict and plan how their year end is going to look. And when you have like 12 weeks, that just sort of vanished from the supply chain. Everyone’s very focused on their Q4 right now and being able to understand, um, who’s going to get the allocation of shortage chips in this one. So a lot of the big guys will probably be okay, but there’s a lot of smaller companies who are going to be, um, in a lot of trouble to make their year end number. And so there needs to be some mechanism to identify who the single source suppliers are, where they can get alternative sources, what are the upside, uh, capabilities of their suppliers, uh, in the very near term in order to make their, their year end number.
And Jeff, you kind of just gave a bit of advice about what companies should do. Keith, can you, from your perspective and especially related to building a resilient supply chain, what do you think companies should do right now to prepare?
I think there’s a, there’s, there’s a few things and this will vary highly by industry and one of the things is, let’s not repeat the mistakes of the past. We talked a little earlier, not the first disruption, right? But what did we learn from those previous disruptions? Um, probably nothing cause things wouldn’t be as bad as they are right now. I think the high tech industry in particular with the, uh, heavy use of outsourcing, you know, they know how to beat up their suppliers. They know how to chase cheap parts and how to drive their costs down. That’s part and partial of the, of the nature of the high tech product life cycle. But how can we build flexibility and resilience in the supply chain at all? And I’ll give you a, an example. Um, Jeff said 70% of the, uh, production of chips is in Asia.
That means 30% is not. Well, you know, can you use a American based supplier or a European based supplier for a portion of your demand? It’s probably gonna cost you a little bit more. But what is the cost and balance and trade off of resiliency, uh, with, with cost. So Hey, it might cost me an extra 3 cents a chip. How much of that 3 cents is goes into the total cost of my bill of materials? And is it worth that particular trade off to have a second source? So in that hole that Jeff talked about, and that’s what I’ve heard from my customers, yeah, pretty much about three to four weeks they didn’t get supplied. But when Asia was down, us and Europe were still producing. And then when the us and Europe were down, Asia was back online. So if you had made these kind of basic simple trade off to say it’s a little bit more costly but it’s a little bit more secure, you would be a lot less impacted than some of the others who were single source with the cheapest supplier in one geographical location.
Okay. So it’s about better planning and I guess also distribution of your supply chain in that sense. And you also both touched on a little bit on the role that technology plays in all of this and what I’ve seen as a just fundamental truth for all industries in terms of how COVID is impacting them as this acceleration of digital transformation. Because suddenly industries are like, wait, we can actually, you know, do a lot of things digitally. Not even we can, but also we, we have to. So Jeff, what are you seeing in terms of the role technology plays? If you can go a little bit deeper on that and maybe also, I don’t know if you have any examples of companies you’re seeing in the high tech industry that have done something to kind of, maybe they’re not reimagining their own business models yet, but maybe they’re doing something along the lines that’ll lead them on that path.
Yeah, there’s, um, so I think there’s two parts to your question, right? There is the, what things could they do? And I think some examples of what people might be doing now. So one of the things they could do is, um, really, um, focus on, I would say, um, uh, triage, pardon me. There’s the here and now, like what can they do immediately and then what can they do maybe in the next month and then the next quarter. That’s probably the lens that I think people could possibly should be looking at it. So what they could do immediately is get a pulse on their suppliers. You know, who’s, who’s, uh, who out there is not going to supply my single source components. Because as I’ve been working with Keith on this, he’ll tell you that, um, you know, a 3 cent resistor is worth just as much as a $700 CPU if he can’t get them.
You know, you need all the ingredients of the pie before you can put it in the oven. So if there’s still a lot of value even in the small components, so, but you understanding what the upside, uh, uh, is our capability to respond to immediate upsides, um, how much liability is if they drop the demand. So kind of getting that pulse at a, at a very high level across their supply base, whether it’s regions, component level, company level, really understanding at that granular level. So then they can take action. And that’s where we’d say it’s that next tier of saying, how do I take action, um, to identify alternative sources of supply, et cetera. And then they need to be able to monitor and model that risk going forward. Because as Keith said there, we don’t know what’s going to happen next, but we do know there’s going to be some kind of risk or some kind of failure in the system at some point in the future. There’s another number of examples that we can talking to one OEM who is looking to, um, employ a risk based approach to this where they’ll get the feedback not just at the company level of who’s doing bad things to the planet, but who is able to within their supply base, uh, supply them with their single source components. Because that’s probably the first triaged level of risk exposure. And then this company is now looking at, um, finding alternative sources of supply through our Ariba product. And that’s something Keith could probably elaborate more on.
Yeah. Well thank you for creating that perfect segue cause I was actually going to ask, I mean I know we at SAP, we’re doing our part to help our customers and we’ve opened up our offerings and made them free as well. And one of them is, um, Ariba discover. Keith, I’d love for you to talk a little bit more about, so what are we doing to help?
Yeah, so we’re, so we’re doing a number of things. We actually have a Ariba discovery and it’s a bunch of great use cases. You mentioned one earlier about the hospital beds. We’re, we’re allowing our customers to use the network to find alternative sources of supply. And that’s actually in these times of, particularly for personal protective equipment or other hospital based, uh, pieces of equipment. There was a real crunch during this, you know, one month long hole that we had in the supply chain. I think as we’ve started to get over that hump, I think now there’s generally not everywhere, but generally enough PPE, there’s enough respirators, there’s enough hospital beds. Now we’re starting to look at a little bit more longterm. And we have a customer, I won’t a few customers, I won’t use their names to protect the innocent or, or the guilty in this particular case where, um, they really don’t have a great handle on the visibility of, of their supply chain.
So for, for example, if they look at their ERP system, they have their whole swath of every supplier they’ve ever bought from. They don’t really have, if that’s what’s in there in the master data, but they don’t really have an easy way to say, who am I buying from right now? And so we’ve actually added in our collaboration product, that’s our primary visibility tool. Supply chain collaboration is a way to say, show me all the open orders. Who are the suppliers? Let’s look at the ship from location. So not just where their corporate headquarters are, but where the exact plant is that we’re getting this from. So we know, are you in the lumbar region? Are you in the Wuhan, China region? Where are the most effective regions that effected regions that we have from the COVID virus? So I can really better assess my risk, but that visibility goes both directions.
So we always think about it, you know, me as me, as the buyer, you know, ha, let me go find what I need. But also let’s think about the needs of our suppliers because they’re buying components too and they’re supplying components. So if you can become a better buyer from those suppliers by providing a forecast, here’s what I think I’m going to need. Here’s my current on-hand inventory levels of my demand. Maybe you have different levels of demand. This is actual demand for production. This is inventory demand. Give me at the minimum what I need for production. I’d like to have some stock on hand just in case to handle variances, but let’s prioritize those. So by providing this visibility, there’s benefits to buyers and suppliers so they can all work better to, to get through this, uh, this crisis, uh, until it’s over and things stabilize.
Hmm. And you kind of hit on something there, which is so key. You also have to be a better buyer. So I actually did another episode with Oshkosh corporation was a big Qualtrics customer and they have been using Qualtrics a lot to also find out, well how can we also be better, you know, to our suppliers. So I don’t know, maybe this is a for you Jeff, but can you touch a little bit on why it’s important to understand your supply chain better? Uh, in this case you could maybe also talk a little bit about Qualtrics.
Yeah. So understanding the supply chain and the suppliers, you’ll find that most OEMs have a very good relationship with their key suppliers. Um, they, they know a lot about them from a capacity point of view. Uh, of course pricing. Uh, we used to use this term when I was in industry called, uh, TQRDC. It was technology, quality, reliability, delivery and cost. And those are generally the dimensions that are, are used, um, when evaluating the supply base with, that was back in the 90s. But one of the things the factors is, R, I mean you need another R in there to talk about risk. And that’s going to be the big part of this. And cause Keith mentioned this earlier, there’s a lot of risk points out there. We don’t know what’s going to happen next. And it’s really quantifying that risk. And that’s where Qualtrics can come in, is to assess where, where the air pockets are based on the dimensions that the buyers need to know and understand about their, their suppliers and be able to model that in a quantifiable manner that lets the organization then then make better decisions about risk.
So that’s, that’s that point that I think it needs to be stressed at going forward. Because if you think about it, back in the nineties and early two thousands, it was pretty mellow. You just design a product making it sound very simple, but they would design a product within a day or two, maybe a week you might have a working prototype and then in a month you’re at volume. Well, that’s really not what we have anymore. There could be trade Wars. Uh, there could be another epidemic, there could be a natural disaster, but there’s gotta be a better way of assessing and modeling that risk. And that’s really not being done today.
Hmm. Yeah. And now lastly, cause we’ve kind of, we’ve talked about a bit about the future, but to talk a hundred percent about the future, if you could kind of have a call to action to companies that are in the high tech industry, of course also specifically related to creating a resilient supply chain. We’ve starting off with you, Keith, what would you say to your customers? Like what should they do now? What do you think nobody can really predict the future, but if you had to put out your crystal ball, what would you tell your customers? How they should prepare for the future as well? Maybe also something about how they should reimagine their business models, um, if they should.
Sure, sure. And, and, and I really reiterate some of the things that Jeff mentioned. There’s things that you can do now, um, things that can be done quickly. You don’t need a big budget. Um, and more importantly you can do remotely. Cause a lot of our customers are still locked out of their offices. So being able to understand and find those soft spots in your supply chain, how many products are single sourced, where are they located? How much do they cost from your A, most important products all the way down to your C products. And then the next step would be how do we start to ask for resiliency? We don’t need to teach our customers how to beat their suppliers up on price. They know how to do that and they’ve been doing it for decades. But what are some things that you can ask for in terms of volume commitments, vendor managed inventory, being able to source from multiple plants instead of a single plant?
Uh, a lot of times our customers that they don’t ask for those things, they’re asking for price. So start to think about those in the medium term to how to fix those soft spots. And then the last thing to figure out is let’s provide that visibility and collaboration both ways. It makes it better for the buyer. It makes it better for the supplier. Be more transparent in the information that you share. Don’t hoard information. A lot of times you may say, I don’t want to tell my suppliers what my real demand is. Your suppliers don’t want to tell your buyers what your real capacity or your real inventory is because you’re going to beat each other up over price. Well, think about it in a more cooperative and collaborative way, uh, so that you can actually run both your businesses more efficiently.
Hmm. And Jeff, how about you? Any comments on what you think the future holds or what companies should do to better prepare?
Yeah, well we talked about the TQRDC model that, you know, typically the five dimensions that most procurement organizations would look at. And every company has their own flavor of that. Um, you know, one of the things I mentioned is there’s another R in there, risk. Um, there’s also another T in their, what I would call trust. You know, when, when of these sort of desperate times where some people are experiencing massive shortages, how can you trust the supply that you’re getting? There’s actually an interesting fact from several industry reports, depending which one you read that 1 out of 10 semiconductor chips out in the market today, it’s about an $8 billion problem is presumed to be counterfeit. So there is a lot of potential counterfeit problems out there because like I said, it takes 12 to 15 weeks to make a chip. What if you just got your hands on some chips and remarked them and sold them in some channels like eBay or some other E commerce channels, they’re not vetted and some people might be making risky decisions, um, based on a lack of trust in the supply chain. So we’re actually doing some interesting work, um, with some of our high tech companies on leveraging a technology called blockchain to, uh, look at how we can build more trust in the value chain. Now that’s more of a future longer term vision of this thing, but I think that’s where things are going to be heading down the road.
Well guys, thank you both so much for coming on the show and talking about high how high tech is being impacted by COVID, what’s in store for the future, why it’s important to build a resilient supply chain. So thank you and to those who listened to this episode, thank you so much for listening in. Hopefully I’ll see you on the next episode.