In his current role as managing director of Leonardo International, Enrico is in charge of managing a number of subsidiaries worldwide that are tasked with industrial maintenance and repairs. And he also manages contacts with Leonardo's partners during the extent of any given contract and, indeed, with its clients as well.
Now, that's a lot of moving parts, especially considering the extreme complexity of modern military equipment, and even more so considering that lots of countries are increasing their defense spending and buying more military equipment. So there is more activity in lots of countries in buying military equipment. And that also means more manufacturing for companies like Leonardo.
And an efficient supply chain is key to making sure that government defense spending actually results in the equipment that these governments are trying to procure.
Now, Frederick Gentile is WTW's director of risk engagement and has worked on all manner of risk for many years. Decades, I think it's safe to say, Frederick.
So welcome, Enrico, and welcome, Frederick.
FREDERICK GENTILE: Thank you.
ENRICO SALVO: Hello, everyone.
ELISABETH BRAW: Enrico, I want to start with you, since you look after globe-spanning supply chains. And what is clearly a challenge already, given the complexity of supply chains, is becoming even more difficult now that geopolitical tensions are rising. So I'm keen to hear from you. How are Leonardo's supply chains structured? What sort of countries are involved, and how do your parts travel between these different countries?
ENRICO SALVO: Given the international footprint whose example is-- we are providers of major similar producing companies of parts. And the supply chain would be aligned between the production phase, the transfer phase, and the final assembly phase, which is quite a challenge in itself. And this, let's say, is framed in a context which sees 85% of our turnaround placed worldwide in more than 140 countries.
ELISABETH BRAW: So 85% of all your manufacturing activity is conducted outside Italy?
ENRICO SALVO: Yes. Correct. Yes, 85% is outside Italy. And that makes us one of the 10 more relevant global players in aerospace and defense. And to keep up with that challenge, we need to be performing in the way I just explained.
ELISABETH BRAW: And if I can just ask you about the realities of those disruptions that you mentioned-- I think everybody remembers the disruption caused by COVID. And that was, in a sense, a wake-up call for lots of companies that had, for example, the single sourcing. And all of a sudden, that single source was no longer available.
So we have the risk of another pandemic. We also have the risk of climate-related disruption, and that risk is increasing. We also have geopolitical tension that can cause disruption to supply chains, either on the production side or on the transportation side.
So, again, I'm not going to ask you to divulge any company secrets. But where are the vulnerable points for a company like Leonardo at the moment in getting the supplies to where you need them to be at any given moment and, indeed, in assembling your extremely complex product?
ENRICO SALVO: Yes. It's a very, let's say, targeted question. And I'm not a scholar or an economist. But based upon the experiences of the past year, we say that the pandemic's marked a turning point in the overall strategic approach to procurement, as well as to management of supply chains.
Prior to that, we were all, in a way, embedded in a globalized feeling and a globalized mechanism which brought us to pursue economic advantages. So the cheaper the sources of procurement were, the easier it was to place some, let's say, source of supply from that area of the world.
The post-pandemics, as well as the wars that are going on, are bringing us theorists, we used to say, toward a deglobalization, in a way. So bringing back reshoring, in a way, as they say, some of the capacities.
I think that the extremes never focus on the target. Maybe the truth is always in the middle. So it's an appropriate and balanced approach, which we need to pursue in order to maintain, again, autonomy of procurement and independence of choices.
The more you are dependent on a given source the less you may be responding not only to the market needs, but also to your country's needs, since there is no sector nowadays that is not in a way fully integrated into the capacity of a country to sustain itself on a longer term basis.
So from food to culture, to electronics, to components, semiconductors, whatever you want to take, it's not only a matter of defense materials. It's an overall strategic approach that we need to maintain, also because we have seen the strategization, if I may use this bad wording in English, of the energetic sector of the communication sector. How strategic are they?
And we see it happening every day. Look at the event in Finland, for instance, which took place a few days ago. This gives you a clear answer to that.
ELISABETH BRAW: Absolutely. And this is also, I think, a changing mindset for companies that are in the consumer product business and, as you say, in energy or telecommunications companies that have been thinking of themselves as global operators. They are realizing that they have some sort of responsibility for the countries in which they are based.
Frederick, I want to turn around Enrico's points and ask you about that reality as well, companies trying to re-examine their supply chains. Because it can't be assumed that the ease with which they've been able to manufacture and transport their products can continue. And, in fact, it's already seeing, as discussed, more disruptions.
And I think the first acute reminder of that was Fukushima, the accident that-- well, it was a tsunami that turned into a nuclear accident, obviously. And a local company making that sort of shimmery or glittery paint that goes on cars had to close, which meant that cars could not be finished. The cars that needed that paint could not be finished, because automotive companies had been single-sourcing that pigment.
So, Frederick, if we look at today, what sort of risks are you seeing grow in supply chains, and which other ones are likely to emerge?
FREDERICK GENTILE: OK. Right. I think that's an interesting question. In terms of risks, obviously, the geopolitical instability is an obvious one you've already alluded to that in your opening remarks, Elisabeth. I think there's an increasing level of concern around the stability of suppliers and the territories that they're operating within and how nationalistic policies can affect their trading approach.
I think there's concern also around the solvency of some of the smaller suppliers, particularly as you start going deeper into the supply chain. And then added to that or compounding that is almost the sliding scale of reduced visibility as you go deeper into the supply chain.
I think there's been almost-- there's been a shift over the last 5, 10 years. And companies generally have a reasonably good visibility of their Tier 1 and possibly Tier 2 suppliers. Anything beyond that starts to get very, very difficult.
ELISABETH BRAW: Oh, not-- Frederick, is it even possible for a main manufacturer, let's say, an automotive company or another company manufacturing complex products-- do they even have any way of knowing all the companies in their supply chain? As you said, beyond a first tier, Tier 1, it becomes difficult. But second tier, they may know. But third tier or even fourth tier, do they even have a chance of knowing who is in that supply chain?
FREDERICK GENTILE: I think they certainly have a chance of knowing. If we take the term resilience, there's an expression that's been attached to resilience. Resilience has a cost. So it all really depends on how much they're prepared to invest in understanding who their Tier 3, Tier 4 suppliers are.
There are companies that purport to specialize in being able to break down the supply chain and give that level of data. But, again, it depends on how much you're prepared to invest in terms of financial and resourcing, et cetera.
And as I said, over time, that knowledge is slowly increasing. Of course, the other risk is clearly cyber.
So in terms of the supply chain and the ability to move goods from A to B, C, et cetera, there is an acceptance and an awareness now that these supply chains, in their complexity, have an increased vulnerability.
And so going back to Enrico's point about reshoring, that, to a limited extent, begins to address that point. Reshoring isn't just about eliminating the cyber risk, but it's certainly a contribution to reducing it. So I think those are the big risks.
The other one, of course, longer term-- and there is a discussion here about short termism versus long termism. But the longer term is the reliability of supply of raw products from territories that can be affected by climate change, et cetera, and the availability of raw materials. So that's a longer term consideration as well.
So I don't know whether that answers the questions. These are the bigger picture risks.
ELISABETH BRAW: It certainly does answer the question.
And, Enrico, if I can go back to you, you mentioned-- and now, Frederick also mentioned raw materials. And it struck me or occurred to me that with climate change causing more devastation, we could face a serious disruption in raw material availability.
And so on that point, what does contingency planning look like for Leonardo's supply chains today, bearing in mind all these different risks we have discussed? And is your company adding that cost that Frederick just mentioned of knowing-- trying to every company in your supply chain and perhaps adding duplicates to avoid single-source vulnerability?
ENRICO SALVO: Yes. Thank you, Elisabeth. It's an equation. And actually, that has to be resolved, in a way, because you have, on the one hand, the profit and loss structure of our, let's say, Western economic-oriented model. On the other side, you have the need for diversification, which implies additional costs.
You have to invest. You have to diversify. The reshoring is a costly process. We cannot think and give it for granted. You have to delocalize, relocalize. And that's the reshoring in a row. In front of an overall-- which was very well described by Frederick, an overall complexity which is very difficult to navigate.
There are events-- actually, the history of mankind has been difficult to navigate, as, I mean, we may admit nowadays. Because we always think in our times that we are facing additional complexities. I don't know. In ancient Troy, complexity was not there. I expect it was there, in a way.
But in order to answer your question, It's a set of measures. It's not a one-way solution in our view.
So Leonardo is approaching that in terms of, first of all, HR. You have to develop skills. You have to develop competence and invest on the human capital so that you may organize that human capital, which is phase two, in a way that, if a pandemic comes here, we maintain the production continuity at our helicopter factories, because we organize the people in batches of eight.
So if one of the eight was hit by the virus, the entire set was going away, and the other eight were coming in, which is, of course, costly. Because it takes time to organize. It takes time to keep people on hold while the others are working. But this will allow you, at the end of the day, to maintain continuity into the production phase.
So these are HR processes. I said organization comes to follow and, also, a continuing planning activity. You have to plan and replan, and we adapt.
Like in the strategic view of, let's say, human activities in general, it's a circular process. It never stops and always takes nourishment from its previous phase and foresees and goes to the following one.
If we live in a paradigmatic way and wait for, let's say-- and follow a sort of quantitative approach, I'm afraid we can be fooled by reality. So it's a continuing process that we need to adapt to the situation. That's how we survived and maintained production during the COVID era.
And this is also why we are-- how we are reacting to some, let's say, needs that may come from the military domain in relation to the crisis that's going on at the moment.
ELISABETH BRAW: I guess this is the question for both of you. The reality of this is that having to make supply chains more resilient is increased costs for the eventual buyer, whether that be a consumer, or a government, or a business, right? I mean, it is inevitable.
ENRICO SALVO: Yes, because the question is quite complicated on that side. So there has to be more, let's say, attitudes from the market, from the buyer side. But also, it's a push to optimize, because the digital era is providing us with loads of capacities.
Imagine. We are making a huge investment in terms of digital twinning of our platforms. Now, imagine what it means managing, from a distance, our helicopters in Australia through the digital twin and guaranteeing MRO's services from a distance and also guaranteeing, for instance, proactive, preemptive maintenance programs which, on, let's say, machinery in general, can be assessed, studied, and managed very, very accurately.
You know that a certain part is a number of hours prior to becoming exposed to a failure or malfunctioning in general. And then if you preset that and maintain that, that would be a-- let's say you can recover resources from that. So we take advantage of the digital solutions.
On the one side, taking advantage of that means, of course, investing into that. So we have super calculator, supercomputer capacities enacted right now. And we put them at the disposal of the supply chain and the market to follow.
On the other hand, it's a process that may be continuously rearranged. Because situations may arise where the client asks for more and for more in a very short time period. So maybe, also, a reflection.
And this is something, let's say, we are thinking about, about warehousing and how to manage warehouses as well as spare parts. Because nowadays, it's driven only by an economic principle. You produce when you receive an order.
Then, this will make you not ready if an additional demand is hanging out there and you can't respond to that. So that's another issue. So maybe we have to go back a bit if not to the ancient times, where you used to stock huge warehousing in order to supply the typical Fordist chain of production in sequence. But it's a mix which, with the added value of the digital capacities, can be thoroughly managed.
Also, because if you put too much in the warehouse, these materials will decay at a certain point. So you have a decay management which is also subdued to other regulations, economics involved, and so on. So a balance must be, let's say, drawn in order to maintain a balance.
And at the end of the day, the diversification of the sources is key, is paramount for whatever material, in my experience.
FREDERICK GENTILE: Just to of build on Enrico's point, the more stock you have in the warehouse, the more capital you have tied up. And that's money. Money costs money. So that's another component to be added on further down the line.
And I think just a couple of other quick points to build on Enrico's extremely interesting commentary there.
I believe that if I can use the term the just-in-time bubble that we've lived in the last 10, 15 years has been blown up and blown up and has now probably burst. And we're now into a just-in-case bubble. And we're developing that.
And I think it's interesting to note that not only have costs simply been passed on, and we're seeing them at retail level, for example. So I'm talking about B2C. But actually, companies and retailers in particular are really starting to be more transparent about it. I'm sorry. Our costs have gone up, and we have to pass them on. And that's the way it is.
And probably, as a society, we need to begin to change that mind shift and understand that if you want things, you want them according to certain parameters. So I want them quickly. I want choice. I want availability, et cetera. That's going to cost.
ELISABETH BRAW: It's going to cost. And actually, a question for both of you. From my perspective, all kinds of products have been artificially cheap, because we have lived through three decades of just exceptionally favorable manufacturing and transportation conditions. And that was always going to be an anomaly, and we are leaving that extremely advantageous era at the moment slowly, but it is happening. And so we are returning to higher prices.
So my question for both of you is, do you think companies can actually make a virtue out of necessity if they have to move from single sourcing, if they have to move to refashion their supply chain so that their suppliers are particular countries, i.e. friendshoring. That is going to be more expensive not just in terms of wages and so forth, but of course, the investment in building those new facilities and, indeed, in new supply chains. So the price will be more expensive for that point.
But do you think there is virtue in this? Could it be that companies can then tell their customers, prospective customers, and, indeed, shareholders, we are prepared? We are resilient?
Other companies may have cheaper products, but their supply chains are vulnerable. Whereas, we have shored up our supply chains. And as a result-- and indeed, manufacturing. As a result, we are more expensive, but we will be able to deliver under circumstances that our competitors will not be able to deliver.
So maybe starting with you, Enrico, and then you, Frederick.
ENRICO SALVO: Yes. Thank you, Elisabeth. Well, actually, it's a matter of competitive storytelling in a way, so to transform the necessity in a virtue. There's a motto in Italian which is that hunger draws the wolf out of the woods. So I mean, you need to make a virtue out of whatever contingency and situation you may face, but you need to get prepared.
So I mean, we lost some time in the past living in the bubble that was growing, growing and then, in a way, cuddling us and feeling as comfortable with that and being reassured by that.
Now, many of those uncertainties have transformed themselves into uncertainties. And these uncertainties that need be faced through the prism of competition as well, because our economic model is based upon economic profit. So there's no doubt about that.
There may be the chance for a revision for a new approach to that. So the profit and loss, as tough as it is, may be reconsidered into that, but it's a long-time evolution which is required, because we start-- and it's, in this way, a vicious circle, not a virtuous one. Because if you start from the financial, then the economic will-- the industrial will have repercussions.
And it's a complex system once again. So you need to, let's say, move it accordingly and not separately, in a way, acknowledging and recognizing on the other side virtues and values in a different manner than the past.
Now, I don't want to appear a philosopher. But I think these are fundamentals and basics of an economic system. And the industrial structure is built on top of it. So there's a demand and there's an offer. That's the point.
So in the aerospace and defense industry, there is more will to spend because the entities that spend the money are safeguarding a journalistic interest, which is national interest, which is, of course, defense and, in a way, the independence and autonomy of a sovereign state.
So there is more, let's say, goodwill into undertaking long-term programs, which is a feature of the defense industry, as well as expensive problems. Which doesn't mean that those markets don't care about costs. Anyway, it's a different story, because you need to have survival capacities, once again, efficiency and effectiveness into those capacities. And this requires money, of course, and resilience as well of those system--
And then cyber, by design, is something that is no longer an add-on to preexisting technologies. But it's something that has to start with the new technologies, the new platforms, six-generation platforms for hiring platforms. I mean, I'm talking about platforms, not aircraft, because it's going to be a system of systems, something much different.
Of course, well be cyber secure by design. Of course, will be resilient in any given ECM electromagnetic emissions and environment contested, semi-contested environments, distant engagement. So these are strategic concepts that will be transformed into industrial applications which will require a lot of materials. And it's significant and meaningful, really, for a robust supply chain behind it.
ELISABETH BRAW: Yes.
ENRICO SALVO: So there's a lot to be thought about.
ELISABETH BRAW: And on that note, Frederick, I'll give you the last word. Enrico mentioned materials. And it seems to me that the world, the system we have built up of supply chains where companies specialize isn't the challenge for manufacturers or a top company in any supply chain pyramid. Isn't the challenge there that, yes, they may realize that they need to move away from single sourcing if they know who all the companies in their supply chains are?
They may realize that they need to have more resilient supply chains. But are there even enough companies, suppliers out there for them to expand to or are we having to-- will we have to wait for years for these companies to materialize that can join these supply chains and make them more resilient?
FREDERICK GENTILE: Yeah. That is an interesting point. And I don't have the answer to that, because it'll vary by sector. There are sectors where that single supplier is, for the moment, the only option, for whatever reason, either by way of peculiarity of materials, or intellectual property, or whatever.
But what I've seen over the last two or three years is that organizations, manufacturers are becoming more and more inventive in the way that they're looking at their production processes, et cetera.
So where it's not possible to either increase stocks for reasons that Enrico's already covered, where there's only one supplier, they will also consider the possibility of adapting their manufacturing processes to almost compensate, a bit like the human body.
When one part of our body doesn't work properly, the other one will compensate and balance it out. So I think organizations are doing that.
The other point I wanted to make very quickly was that traditionally, finance production sales have been almost the highest priorities on board agendas. What I think is happening now is that supply chain is very much on the board list of priorities and, therefore, is getting a lot more air time.
And if you are already under pressure, economically, commercially, or other to keep your margins up, the last thing that you want is a breakdown in the supply chain, because that really will start hurting you reputationally, brand share profitability, et cetera. And therefore, companies will give the right-- give an appropriate level of attention and resource and investment.
To answer the question, how do I make sure my supply chain guarantees me continuity? Because I can't afford to stop. So you, as a supply chain lead, you, as the management team, I don't care how you do it. Find me the solutions, and do it cost-effectively.
ELISABETH BRAW: That is so true. Companies can't afford to stop, and this is why they are willing to spend more money as both you, Enrico, and you, Frederick, have outlined.
And I'm afraid our time is up. So it's time for me to thank Enrico Salvo and Frederick Gentile. And thank you to our producer, Robin Pegg. And, above all, thank you all for listening to Geopolcast.
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