Bayer: building the supply chain of tomorrow
With over 20 years’ experience within the supply chain and logistics industry, Michele Palumbo is currently the Head of Supply Chain Management at Bayer S.p.A. (Italy). Palumbo has worked at a number of companies during his career. Prior to joining Bayer in 2010, he worked at SDA Bocconi School of Management, Hoechst Italia S.p.A., Gruppo COMIFAR and various pharmaceutical companies as a consultant in operations and supply chain management. Currently, Palumbo is a member of the Scientific Committee of Il Sole 24 ORE Formazione|Eventi and Adjunct Professor at Università Cattolica del Sacro Cuore in Milan.
With his broad range of experience within the industry, Palumbo is well placed to discuss the evolution of supply chain and logistics, and the impact that Coronavirus (COVID-19) is having on the industry. He also has an acute understanding of the technologies - such as cloud computing, advanced radio-frequency identification (RFID), and more - that have both contributed to Bayer’s own digital transformation journey, and are driving the supply chain of the future. He joined us to discuss both areas.
Pre-COVID-19: old perspectives
Palumbo describes the transformation of the industry as a Copernican revolution that we are in the middle of. However, he believes that the onset of the global pandemic is only accelerating the effects of this revolution. He says: “The impact on industries we are seeing today, I believe, were already rooted a long time ago in the first economical crisis back in the 1930s. Many have previously tried to explain and provide solutions for this revolution, from economists and politicians, through to tycoons, ideologists and more, each one putting profit, capital, the workers or the environment at the center of this economic universe. However, none had a comprehensive perspective.
“Deming and Juran, for example, tried to put the customer at the center of the system, but found an audience only in the post second world war Japan,” he reflects. “This disruptive culture reached its peak in the 1980s, with the development of new computing power and the emerging internet allowing the world to connect and forever diminishing the boundaries between countries. Companies that started to connect at that point began to compete to gather the best core competences.
Palumbo explains that growing pressure on margins as a result of global competition was problematic for the long-term sustainability of the entire system. As a result, the perspective became increasingly short term and short sighted, based around a quarterly ROI. “The new rules were fixed to compete, survive and prosper,” he states. “But, at the end of 1990s, the concept of continuous improvement was mainly reduced to certifications, audits and procedures designed to mitigate the main risks. The spirit of progressing towards zero defects became the spirit of greater ‘resilience’. However, I believe it is possible to streamline processes and to project systems that are able to resist predictable events, not ‘black swans’. And, we have to admit that the more over-structured the systems are, the more fragile they reveal to be.”
Reflecting on this, he muses: “Compare this financial short-sighted perspective with the ones of Cristoforo Colombo, Leonardo da Vinci, Galileo Galilei, and many other visionaries who changed the world with their long-term perspectives. Or, consider those who built cathedrals without knowing if they could have seen them completed or not. In my experience, we have a great opportunity today to change our perspective very easily. If we change it to immunity, we can switch to a more natural and sustainable concept: threads, after all, are opportunities. We are meant for that, every organism exposed to natural threads struggles to develop antibodies that become part of its survival assets. Resilience stands to immunity like a snail to a seed - a snail relies on his shell to cope with threads. A seed falls to the ground and is immediately attacked by microorganisms that try to eat it. But, in doing that they free the vital energy imprisoned in the rind and life starts rooting and, as a paradox, eating the same microorganisms. Life takes advantage of threads.”
Personal, Automate, Local
Reflecting on challenges and opportunities in more general terms, Palumbo considers the impact of the global COVID-19 pandemic. It is, he says, “only the latest disruptive event that is accelerating the evolution of supply chains towards collaborative ecosystems able to cope with big challenges and take advantage of them by improving their response capabilities.”
Supply chains in the future, says Palumbo, will have to take into account the concept of ‘Personal, Automate, Local (PAL)’, as described by transformation expert S.A. Culey. “Personalisation and customer centricity is increasingly important. Amazon calls it ‘customer obsession’, and it’s something that we have all experienced - it’s set the modern benchmark,” he explains. “Working in the pharmaceutical industry, where customers are often patients and drugs are called ethical products, it is not difficult to get the concept.”
Automation, he notes, is driving collaboration and visibility. “It is the end of invisible supply chains where no news means good news,” he explains. “In the future, customers and all the actors involved in the supply chain processes will be interested in having full visibility on the distribution processes.” Finally, Plaumbo notes, the idea of Local is driven by the concept of density of value. In terms of volumes, in the last 30 years the miniaturisation of electronic components has enabled both a noticeable technological enrichment and a reduction in size or dimensions of products. This would immediately drive a higher density of value, if it were not for the more than proportional cost decrease of the technological developments.
“The final result is counterintuitive, a general decrease of the density of value,” says Palumbo. “In logistics, this is one of the most basic but important elements to consider in the engineering of a distributive network: decreasing density of value allows higher stocks to be distributed and an increase of the service level possible for the customers. This is exactly what we are experiencing with ecommerce during the current lockdown situation.”
The impact of COVID-19 on the pharmaceutical supply chain and logistics industry
Considering the current state of supply chain and logistics amidst the COVID-19 pandemic, Palumbo is impressed by the response of the industry. “COVID-19 in late February emerged with the first three cases of coronavirus in Lodi, where our LSP Silvano Chiapparoli Logistica principal warehouse is located. We immediately engaged the second warehouse, located in the center of the country, to switch roles in the distributive network and minimise the impact of quarantined areas, where it was difficult to enter or get out. Special medical assistance was immediately settled, and a specific COVID-19 protocol was implemented to grant safety conditions for the active workers. Redundancy in the distributive network and distributed stock in two warehouses allowed an exceptional result.
“It is impressive,” he continues. “I have to say how reactive the supply chain has been in particular to cope with this disease, certainly in relation to transporting the medical supplies that are required worldwide, as well as the level of collaboration between colleagues from all around the world. I would have never imagined having meetings in the middle of the night, 24-hours a day, seven days a week. That's really impressive and something that we'll never, never forget.”
Palumbo, who believes that the future for supply chains will change as a result of the virus, explains that “the logistic system will become extremely local and decentralised as a result of COVID-19, which will be a huge challenge for the future for organisations to compete with a completely different shift in approach. As I mentioned before, COVID-19 is accelerating the trends of the Personalised, Automated and Local approach. From my perspective, it’s very important that in the future there will be local abilities to serve the customers in an extremely agile, reactive and proactive approach. It will be a fundamental change.”
Bayer: digital transformation and preparedness
Bayer has, for the past 156 years, used science and technology to provide a better life for all. Innovation, as a consequence, lies at the heart of the organisation. With that in mind, it should come as little surprise that Palumbo recounts a more than positive response to the COVID-19 crisis.
To understand that response, and the wider ambition for technological innovation in the company, he explained in more detail Bayer’s transformation journey. “Today the competitive advantage has changed to competing as ‘systems’ rather than as companies. Technology provides the industry with the ability to escalate, therefore companies need to be interconnected with their systems. At Bayer we have implemented multiple technologies to escalate our operations over the years including RFID trackers across the supply chain to monitor the flow of goods and Blockchain in the near future to increase accessibility, traceability and reliability, he concludes”
Bayer is no stranger to frontier-pushing innovation; its research team discovered and later distributed Prontosil, the world’s first prominent antibiotic, which won the 1939 Nobel Prize in Medicine and went on to save countless lives. The company’s presence in Italy consists of three divisions: Bayer S.p.A. (human and animal), Bayer CropScience (botanical) and Bayer Healthcare Manufacturing (production, packaging and distribution). With a regional revenue of €1.02bn, three state-of-the-art production sites and approximately 2,000 local collaborators, the company is representative of the professionalism, dedication and transformational creativity that has defined Bayer for over a century.
Palumbo tells us that it is this spirit that first drew him to the company. “Bayer is really pursuing research and development,” he explains. “It spends more than €5bn on R&D every year, meaning that we can experiment freely and treat any failures as simply the necessary steps towards success.” This creatively fertile atmosphere has allowed Palumbo to develop a range of different ideas and projects over the past 10 years. Serving over 17,000 customers across Italy, Bayer S.p.A. maintains a complex flow of supply channels, yet the company is able to balance the myriad elements within it with transparency, traceability, efficiency and flexibility. The origins of the system that make this possible, Palumbo says, can be traced back to 2010.
Building a collaborative ecosystem
At that time, Bayer had the vision for a digital transformation that would see the inception of a ‘collaborative ecosystem’, combining TMS (transportation management systems), cloud and advanced analytics capabilities. This was to be a ‘from the ground up’ journey, starting with system automation via the integration of software with legacy technical structures and then progressing onto more qualitative developments. “Phase one was to move from the focus on processes, such as pre invoicing, contract management and so on,” elaborates Palumbo. Doing so was no easy task, as marrying old systems with new software proved to be highly challenging.
However, he continues, pursuing 100% automation in these aspects was a practical necessity, not just because it increased the efficiency of transport costs but also to ensure business continuity in an increasingly complex environment. “Bayer moved to a cloud platform, a pilot project for the company worldwide. We were the first to move outside the boundaries of Bayer’s IT system and use a new, unique platform in order to monitor and track deliveries.”
A shift towards cloud computing edged Bayer towards the overall goal for its transformation: increased collaborative capability. Now with a centralised platform from which to share and store information, various elements of the supply chain (warehouses, carriers, agents and customer service representatives) could pool strands of information in a flexible manner. Even so, with new data streams now open, the company also required a way to leverage this new resource in a method that would allow the supply chain to continually adapt and stay ahead of trends.
This is where data analytics and simulation software come in: “[These] are very important when re-engineering the distributive network in a country,” says Palumbo. “With this software, I have the ability to redesign it and find out the exact consequences of doing so. I can project; I can have a clear understanding of the effects on cost and service level of the new distributive asset.”
Added to this is the usage of RFID (radio-frequency identification) in a way which Palumbo calls “unique within the pharmaceuticals industry”. RFID is a form of identification technology that can enable the unique identification of large volumes of products, assets, people, animals and much more. For a relatively low cost, special RFID labels can be added to items or logistics supports (e.g. cartons, pallets, etc,) which give off a readable signal. Each tag has an extensive operational lifetime and emits a unique identifier that can be transmitted over a long distance at a very fast rate, enabling massive and simultaneous readings that provide a huge increase in accuracy, speed and productivity compared to barcode readings.
Using this relatively cheap method, billions of items can be accurately tracked during all parts of the logistics process, thus granting customers peace of mind through enhanced transparency which illustrates every step of their distributive journey throughout LSP warehouses, carriers’ hubs and subsidiaries, up to destination.
Moreover, RFID technology can provide value to companies thanks to its diverse applicability, from Brand Protection to production control and Industry 4.0 applications, asset management, hospital processes optimisation and many others. However, despite the fantastic opportunities that RFID technology presents to supply chains, very few industries have been proactive in integrating it; Palumbo notes that retail, airlines and convenience stores could all benefit from the cost-saving and enhanced stock control implications, yet single-digit percentages of companies opt to do so.
In Bayer Italy’s deployment, every single box of product and every GreenPallet is uniquely identified by an RFID label and tracked individually throughout the whole Supply Chain, starting from LSP facilities up to final delivery to customers. More than 30 facilities of Bayer’s LSP and transportation partners are equipped with RFID readers and stations, managed by middleware that collects and sends all data to a remote server. Products and GreenPallets are read during relevant processes such as picking, palletised Handling Unit arrangement, shipping, receiving and inventory, with an average of 10 to 15 readings per box. All this data generates added value through real-time information and a dedicated BI web dashboard that provides full supply chain visibility, detailed and accurate traceability, perfect recall capability and operational KPI monitoring.
“Increasing the level of service means a general improvement not only in operational efficiency,” Palumbo clarifies, “but also an improvement in turnover. The benefit that we expect from this project is an increase in our ability to review errors, customer complaints and returns. Bayer will be able to have a real-time visibility throughout the entire supply chain.” This will go hand-in-hand with a significantly increased rate of productivity and logistical accuracy from a relatively small investment in RFID technology. “In the future, all of this shipping information could be certified by each and every single actor on a shared blockchain,” he continues. “We will also be able to trace information like ambient temperature with embedded temperature sensors in order to get data from a cold-chain perspective.”
The supply chain of the future
Bayer’s developments and vision for the supply chain’s future are truly futuristic and the company’s focus on solutions for contemporary problems doesn’t stop at RFID. Increasing the level of sustainability in the company’s operations has been over 20 years in the making, starting with the 1997 ‘Ronchi Decree’, which redefined corporate waste as anything a company discards, intends or is required to throw away, and is consequently taxed for. This has given way to ‘circular economic’ thinking, wherein a company seeks to reduce production ‘inputs’ and reuse materials in a cost-effective and environmentally friendly manner.
It was this restructuring of priorities that resulted in Bayer’s ‘GreenPallet’. Realising that 75,000 new wooden pallets were being produced every year, the company realised that it could save large amounts of money by manufacturing reusable pallets from (recycled) plastic. “Instead of being wasted, the pallets return to the warehouse,” says Palumbo. “This has allowed us to avoid a huge amount of wasted wooden packaging, as well as tax payments for the waste. As a result we have saved, more or less, €1mn per year.”
The bold and effective evolution of Bayer’s supply chain is a model example of why innovative and bold thinking aren’t just ornaments for successful companies, they are the reasons for that success.
Referring back to those challenges outlined previously, Palumbo claims that the company’s attitude towards investment in R&D could be more valuable now than ever before. “We’ve collectively realised how fragile our supply chains are; as a result of coronavirus, it’s become clear how important it is to have reliable digital systems that show us the reality of the whole supply chain. Imagine a world where you can really trust in your partners because of the tools that you have enabled, which provide information in real time via different platforms.” It is through these systems that a new standard of best-practice for customer service in the industry can be reached, and it is this that Bayer is working towards.
“As I have previously stated, threats like coronavirus will make us stronger, because our supply chain will be able to meet the challenge,” Palumbo concludes. “This is the story of the supply chain of tomorrow, where everything is interconnected, everything is feasible and a digital ecosystem is able to cope with threats that we can’t predict today.”