Delve podcast: Using International Supply Chains For Peace in Times of War with Juan Camilo Serpa (Read Transcript)

Delve podcast, March 17, 2022, hosted by Robyn Fadden: Using International Supply Chains For Peace in Times of War with Juan Camilo Serpa
Robyn Fadden – host: Risk is a fact of life in business—it’s also an ever-present reality in times of war. Though international supply chain issues and inventory stockouts have dominated headlines during the COVID-19 pandemic, the wars and armed conflicts that embroil 60% of the developing world, and now Ukraine and Russia, are a constant threat to commodity production, the flow of international supply chains, and the economic lifeblood of these nations. New research by Desautels Professor Juan Camilo Serpa looks at how businesses can shield their supply chains in the face of war-related risk and how good international supply chain management keeps the door to peace open.
Robyn Fadden – host: Welcome to the Delve podcast, the official thought leadership platform of McGill University’s Desautels Faculty of Management. I’m your host for this episode, Robyn Fadden. Growing up in Colombia, a country that has endured the longest-running armed conflict in the Western Hemisphere, Professor Serpa experienced first-hand the effects of war and ongoing conflict on his family and community, as well as family businesses. His recent paper, Inventory in Times of War, examines how armed conflicts in Colombia affect inventory across firms’ production facilities. Not only do inventory policies shift under the threat of war and during actual civil conflict, but these shifts ripple into international supply chains, affecting everything from businesses’ economic stability to national food security in countries an ocean away from conflict. Welcome to the podcast. Professor Serpa.
Juan Camilo Serpa: Thank you very much for having me and for inviting me.
Robyn Fadden – host: Your research is especially important today in terms of what’s going on in the world right now, with Ukraine and Russia, and for understanding the intricacies of international supply chains, whether we’re looking at hydro-carbons in South Sudan, steel in Libya, sugar in Somalia, wheat in Ukraine or oil in Russia. Your research looks at Colombia specifically but has broad applicability. What initially led you to look at decades of inventory data from production facilities in Colombia during a time of conflict or war?
Juan Camilo Serpa: Well, I actually grew up in Colombia. I spent many years of my childhood on my uncle’s farm. It was a sugarcane farm, by the way. This farm was [functioning] in the middle of the Colombian Civil War conflict. And what happened is that rebels would come to the region, and sometimes attack infrastructure, or steal the inventory across farms. So my uncle, just like business people in the region had to figure out how do they produce their sugarcane, for example? How do they store it? How do they hide it sometimes? Or how do they transport it so that they could it could export it to international businesses? And so these attacks as you can guess, would pose lots of problems, some businesses would start to act very differently. This story always stayed in the back of my mind.
Robyn Fadden – host: That’s a visceral lived experience that your family through. The war affected not only your family’s lives but their livelihood.
Juan Camilo Serpa: It is a very personal story. And, you know, when I left Columbia, my teenage years, I came to Canada to pursue a PhD in operations management, which, by the way, it’s the science that studies how businesses manage all aspects of their operations. When I eventually turn into a professor, I, as I told you, I had this story in the back of my mind. And, by different a different set of coincidences, I ended up partnering with a PhD student who was also Colombian. And we were able to collect data from 38,000 production facilities in Colombia to study this in a systematic way and see what was going on.
Robyn Fadden – host: What did these data show you about the effect of war on inventories at the time?
Juan Camilo Serpa: That was the biggest challenge because, as I told you, it was a personal story, but at the same time, that was only anecdotal evidence, but I could feel that there was something going on. And that firms were doing something different. I couldn’t eat point out on my fingers what makes war different as a risk that say a hurricane or a tornado, but actually I eventually figured out that war poses a very unique firm to risks and is that when you think about it, firms usually use inventory as a hedge against risk. So if I have more inventory, because if there is a hurricane, I can use that inventory as a little cushion. But when it comes to war inventory is used by insurgents or by rebels as a way to sustain work to feed their armies. So inventory attracts surgeons just like honey attracts bears, right? So unlike a tornado, or like war, a tornado doesn’t attack more frequently or stronger where firms hold the inventory. But the very act of holding inventory attracts risks. So that makes it extremely risky for a business. And an extremely unique type of risk compared to other types of geopolitical events.
Robyn Fadden – host: Regarding the current war in Ukraine with Russia, I’d like to touch on the part of your research that differentiates between different kinds of conflict and its effects, which you categorize in your paper. How does the Colombian inventory and supply chain data you analyzed map to other countries in conflict or at war? Are there cases where it’s more applicable or less applicable?
Juan Camilo Serpa: That’s a great point, and that’s actually the first thing that comes into mind when many people read about my research and they say, “Is this just an account of the Columbian war?” What I tell them usually is that what I found is that war has many faces, but it always punches with the same fist. If you think about it, Colombia is not a monolithic country, it has a lot of different geographic areas, it has a lot of economic regions, it has a very number of business sectors that produce from agriculture to textiles – diametrically opposed regions.
Juan Camilo Serpa: I find that largely, the behaviour across an entire decade was always systematically the same across almost every type of business across almost every type of sector, bearing the difference I just mentioned about the supply chain. But if you look at war itself – I looked at a database from 170,000 attacks worldwide, in different wars – and they’re very much like Colombia, attacks and war behaves pretty much the same way across any territory. After all, if you think about it, people still care about their businesses, about their safety, about their well-being and about their profits, and will react to violence, pretty much the same way, as if the conflict was in Canada, or in Ukraine, or in Colombia.
Juan Camilo Serpa: With this war, Ukrainian war, I always put a very big disclaimer. And this war is an outlier, much in the same way as COVID was an outlier when it came to pandemics or epidemics. And mainly in two ways. And it’s first of all, the way that businesses have reacted towards the Russian hostility, and also in the way governmental sanctions have crippled the current economic order, and how there is a sense of fraternity that radiates towards Ukraine. So numerous businesses, or numerous people have already shown their willingness to go out of their way to help Ukraine and to punish Russia. So that makes me think that the way businesses or international supply chains might embrace Ukrainian goods, isn’t like goods coming from other war-torn regions. For this reason, I’m somewhat cautious when it comes to particularly this specific war.
Robyn Fadden – host: The history behind the Ukraine-Russia conflict is embroiled in international interests, including trade and international alliances like NATO, and all of these issues shift not only the public’s point of view, but how businesses decide to operate in this climate. Obviously business is done differently at these times, but could you identify what the main priorities for businesses or firms should be during a time of conflict like this?
Juan Camilo Serpa: I have seen that the biggest risk is psychological. And firms right now, what there will be is a fear that goods sourced for war regions will cease to flow. And what they do usually there in the beginning of a war is they start changing their strategy business abroad, changing their supply chain strategies. And these anticipatory actions unravels a chain of reactions, and whole supply chains get disrupted, not because of war itself, but these anticipatory psychological fear of war that creates just as much damage as the war itself.
Juan Camilo Serpa: So showing that actually, for example, businesses in war-torn regions, arguable operate, barring some small differences, much in the same way that they did before they were in war. That provides a little bit, or I hope it provides a little bit of reassurance that yes, war is very damaging and business need to prepare, they need to understand this risk, but also that they’re doing much more damage by the fear of anticipation than by the actual damage of war.
Robyn Fadden – host: It’s hard not to have that fear, even though logically, if firms continued business as usual, they might do better than limiting themselves. But it’s hard not to anticipate problems or be motivated by anxiety about what might happen.
Juan Camilo Serpa: Something that managers fear is that if they retaliated at, or they are pointed at for not taking action when there was a war. But having said that, there are things that they could do to take to take into account the risk of war. And that’s a lot of long-term horizon inventory planning, with their peers, as I already mentioned. Redoubling forecasting from Ukrainian sourced goods, or from goods sourced from war regions more in general, that’s a very good strategy. They shouldn’t move away from their peers in war-torn regions – that only creates more problems, they should stay and stabilize demand patterns and actually create much stronger bonds with them that’s going to make supply chains at the end of the day more stable. And yes, they should find ways to get emergency shipments from other regions, but that doesn’t mean completely abandoning their peers in war-torn lands.
Robyn Fadden – host: As you said earlier, comparing war to a hurricane or tornado where the inventory gets destroyed, is a different and more constant threat of businesses being attacked. Is there anything businesses can do to ensure that their inventory is less at risk in times of war? In what ways do inventory policies shift under the threat of war?
Juan Camilo Serpa: That’s a great question. And before answering, I need to distinguish between two cases. The first case is when you look at regions that are under intense fire, destruction, total war. So for example, if we look at areas in Ukraine, in these regions, I cannot or my research cannot say anything new other than what is already known. So simply put, business activities will largely come to a halt, businesses will almost entirely disrupt operations as attacks continue to hit them directly. But if you look at most war regions, at territories, the majority of the territory is under the threat of war, but intensity is moderate or low, just like if you look at the center of Ukraine right now. And in these cases, life continues, mostly as usual (under quotation marks), because war is not being destructive, and firms still have business interests, and they still want to operate.
Juan Camilo Serpa: I started studying what happened to these businesses. The first thing that I found is that businesses still care as much, if not more, about being reliable and about honoring their partnerships with their international affairs. So a lot of times, international businesses fear that supplies coming from war-torn regions will suffer intense disruptions. But most of the territory actually will continue to provide goods to the world as it did before to the war. And actually, these firms will be more reliable than they were before the war. The reason is these fears – they are paranoid about losing business ties with the world because of the threat of war. So they start actually outperforming a firm in a peaceful region.
Robyn Fadden – host: They’ve got to do more to ensure they deliver, so they end up outperforming. So, the case of war, a nation or a business, is at a disadvantage, they’re going to work harder to achieve these goals and be seen in the eyes of others as reliable, successful.
Juan Camilo Serpa: Exactly. What really changes and there are changes in these fears, but what really changes is that they will begin to adopt a lean inventory strategy. What is a lean inventory strategy? It’s a strategy where firms only produce what is strictly necessary to fulfill their contractual obligations. So usually firms produce more than is needed – they hold something that is called a speculative inventory. What is speculative inventory? They hold extra inventory. So for example, my uncle would hold extra sugarcane in case there is a price hike in sugar cane, and he could sell it at a higher price. Or in case a supply buyer needs an emergency shipment of sugar to supply it as an emergency shipment.
Juan Camilo Serpa: But when the firm is in war, they begin a zero-inventory policy. They produce more than what is strictly necessary, and they begin shipping in smaller quantities more frequently. And the reason is, they don’t want to have that inventory in their firms; they see it as risky. So they produce and send immediately, produce-send immediately, produce-send immediately and more frequently. So you see that shipments in these supply chains start flowing all the time is much smaller quantities.
Robyn Fadden – host: How does this affect international businesses who rely on goods from suppliers who are navigating their inventories through conflict or war?
Juan Camilo Serpa: This finding brings good news and bad news for international businesses. Good news is that they can count on, for example, their Ukrainian suppliers, and they can rely on them as much, or if not more than they could do before the war. The difference is that, and as I told you, they will expect not to receive – and this is normal – smaller, more frequent shipments from abroad as opposed to larger infrequent shipments. The bad news is that if you’re counting on these suppliers to fulfill your last-minute mistakes in a forecast or spiking the month, they will not be able to satisfy you in that sense, right? They’ve lost any flexibility when it comes to inventory.
Robyn Fadden – host: What do you suggest firms do to continue functioning at a high standard if they rely on suppliers based in places experiencing conflict and war that threatens to disrupt supply chains?
Juan Camilo Serpa: In general, my suggestion is for international businesses to redouble and stabilize demand from, for example, Ukrainian-sourced goods. So if I’m importing, for example, wheat or some commodity from a Ukrainian partner, I need to redouble all the forecasting, I need to be much more accurate about how much I’m going to order from this peer. And if possible, do long-term contracts that are stable, as opposed to relying on last-minute demands. It needs to be a much more long-term horizon planning.
Juan Camilo Serpa: The other thing that I find is that a lot of difference between downstream and upstream firms. Downstream firms are retailers, firms that interact directly with consumers and there are like the, you know, retailer stores that sell their wares. Upstream firms are the ones that produce commodities and typically deal with the downstream businesses. In downstream sectors, what I find is that they react very quickly to war, but much more subtly. Whereas upstream firms, like agricultural farmers, etc, the effect of war will be felt for many months, just because production leakages are very big or you know, agricultural production takes months. But when the impact of war is felt on the upstream, it will be a very much larger impact. So, if you’re sourcing from upstream commodity producers in Ukraine, you will feel the war and you will feel this impact quite strongly in six, seven months at a time, versus if you’re sourcing from a retailer, you’ll feel a much more moderate impact in just a couple of weeks.
Robyn Fadden – host: Yes, due to the lead times, as you said, with regard to how much inventory exists. I’m wondering how possible it is for different kinds of businesses, such as maybe a restaurant chain in a city versus an agricultural facility, to adapt.
Juan Camilo Serpa: Well, I think we saw something similar, we’re in a similar dilemma with COVID. Something huge came, the economic and social orders have changed when COVID has started erupting. Something that businesses show, just like individual beings showed, is that we’re extremely resilient. And we can adapt. There’s a surprising amount of flexibility in business practices in supply chains, and they managed to work around the crisis. And the worst thing is the panic. There are horrible things about war, but for a lot of the business impacts, the worries come out of panic and not from the [war] actions itself.
Robyn Fadden – host: Typically, most businesses have some built in policies around times of crisis. They’re prepared to some extent or another for crisis to happen. Not necessarily war, but something that’s going to make them pivot or adjust. So I come back to the question of is it possible for companies to shield their supply chains in times of war or should they look mostly at making adjustments to fit whatever circumstances they’re under?
Juan Camilo Serpa: I love this question, because I actually learned something these past two weeks. To answer your question directly, it is impossible to chain a supply chain, and we shouldn’t try to shield supply chains from war. But in fact, what I learned is that supply chains are perhaps the most important way to suffocate war today. It is the best weapon that we have right now. We see Maersk, the shipping giant, is using supply chains to put pressure on Russia, retailers are moving out. Financial supply chains are an extreme source of pressure to suffocate war. So what we’re seeing right now is that for the first time, I think I’ve ever seen, supply chains are used as a weapon for peace. And I think the biggest lesson is that supply chains should not fear war, but war should fear supply chains. Because supply chains care about peace and order, and if we use them correctly, they can be extremely powerful for this.
Robyn Fadden – host: That is heartening to hear. And it reminds me that if the thought of another world war is on people’s minds, we do live in a very different time than the last one, in that today, international supply chains connect every country. I think most of us hope that entire countries and business sectors are not looking at this war as a profitable situation.
Juan Camilo Serpa: And with all the damage that supply chains have done to the world, you know, from our corporate social responsibility, environmental destruction, all the evils that supply chains have brought out to society, this might be one of the redeeming qualities that it has – that it cares about international partnerships and economic order.
Juan Camilo Serpa: Just war shouldn’t be a reason, by itself, for shielding from developing countries. I think the fact that getting involved in developing nations brings a lot of evils into supply chains or brings a lot of evils out of supply chains, but it also creates international ties that prevent war. So war and supply chains are just inherently bonded. And businesses could be doing better visible efforts of peace by getting involved in in war-prone regions.
Robyn Fadden – host: And as you said earlier, keeping the supply chains flowing is still an act of peace, at this point at least. Yes, there are companies in developing nations whose success may go hand in hand with conflict, but your research is saying let’s look at what business as usual is and what business during war is, that it’s possible to maintain livelihoods and industries, but maybe the way we do business needs to change.
Juan Camilo Serpa: That’s completely right. I don’t want to be a defendant of international supply chains, because I’ve shown also in other research that there are many evils. I have my own personal reservations against supply chains, international supply chains, for many reasons, but I don’t think war itself is a reason to shield it.
Robyn Fadden – host: That’s something people need to hear. Thank you, Professor Serpa for talking about your research and its immediate relevance to the war currently going on in Ukraine. While every war and every conflict happens under different circumstances in countries with different histories and politics, they are all connected to international supply chains today. So while it’s vital to look at these conflicts in specifics, it’s also important to understand them in global terms, whether politically or entwined with the intricacies of supply chains and business management.
Robyn Fadden – host: You’ve been listening to the Delve podcast. Delve is the official thought leadership platform of McGill University’s Desautels Faculty of Management. I’m Robyn Fadden, your host for this episode, and our guest was Professor Juan Camilo Serpa. You can find out more about Delve at, Facebook, Instagram and LinkedIn. Subscribe to the Delve McGill podcast on Apple podcasts, Spotify and other podcasting apps. Thank you for listening.