In 2024— productivity, technology enablement, and sustainability are the key drivers of future success.
Navigating the new normal: Operations insights for 2024
November 10, 2023. McKinsey Podcast
Cost Reduction through Productivity Improvement is Industrial Engineering.
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Under Editing (One round of editing done) - This article is a Top 10 for 2023. Hence more needs to be written highlighting the issues and supporting points.
McKinsey Podcast
What are the three things companies should be thinking about when it comes to their operations agendas?
Number one, how to apply generative AI and automation to the back-office and shared-service functions.
Number two, purchasing under inflationary circumstances; there are huge gains to be had quickly if you navigate this space.
And third, sustainability. In operations, we’ve long been optimizing for efficiency, quality, and cost. Now, it’s also about sustainability and carbon footprint.
Your company’s future success demands agile, flexible, and resilient operations.
There is an increasing demand on supply chains and organizations to deliver productivity.
The second thing is that supply chain executives are also being asked to deliver on sustainability and to help improve the carbon footprint and reduce the impact on our environment. And they’re also being asked to increase the resiliency of their operations coming out of a global pandemic, not to mention the many other disruptions we’ve had.
Consumer-facing industries are relatively weak as the consumer has less money to spend and Europe being quite affected by high interest rates. At the same time, some industry sectors are booming. For example, green-energy transition and battery factories. So the combination is an unusual one. I would say in both of these extremes, operations has never been higher on the CEO agenda.
A new trend is purchasing in an inflationary environment. We have had 25 to 30 years since we saw something similar. So the capabilities needed to purchase the tools are quite different from what we’ve seen for a while. We also have new technological opportunities, opening up brand-new opportunities to restructure back-office and such functions. And given the macroeconomics, tying back to that, I think the urge to move has never been bigger among our clients. And it’s not just a COO topic; it’s really a CEO topic.
Where are clients placing their big bets and using consultancy services?
The reality is that for a lot of operations leaders, productivity is a nonnegotiable. It’s just the reality of where we sit and the reality of the cost pressures a lot of people have faced—whether you’re a product manufacturer and input costs and raw materials or whether you’re a services company, you’ve seen the cost of labor grow meaningfully. The need to drive productivity has never been higher. So I would say for most of our clients and companies, that’s kind of a nonnegotiable.
Then what we see on top of that is a lot of supply chain leaders and executives thinking really hard about where they’re going to make their big bets.
For example, resiliency and how to build in more operational flexibility were supercritical capabilities that were front and center for everybody over the last couple of years. But the question is, how much will companies invest in that supply chain and operational resiliency as we return to something that feels more normal? And will the importance there continue to be as high as it has been the past couple of years? While we can’t predict what the next disruption will be, we are quite confident that there are more and more disruptions coming down the pike.
On the sustainability front, we’ve also got to tackle head-on where the emissions sit today. A lot of companies are heavy emitters, and a lot of that is upstream from their individual supply chains, so they are having to place big bets on how they can improve impact and the environment through their operations. And some of those things actually reduce costs, which is a very good thing. Others potentially require investment.
Automation now a savior for how we get the work done.
Now, there are nearly a million manufacturing jobs open in the US.1 And that’s before we add the billions and billions of dollars of investment that will come from IRA [Inflation Reduction Act], the CHIPS [and Science] Act, and the [Bipartisan] Infrastructure Law that the US government has passed. When you look at that, the increasing demand for manufacturing jobs, construction jobs, etcetera, is going to put real strains on our ability to fill them and, therefore, to produce the products we need to make and get the jobs done that need to get done we welcome automation.
The capital intensity in the world is seemingly going up, driven by a number of megatrends. We touched upon electrification, battery factories being built, the electric grid needing to be rebuilt, and more power generation needed in Europe. There’s a huge need for infrastructure investment, and infrastructure investment is going up. So any type of capital intensity is increasing, also driven by IT and different digital innovations that also require investment.
Therefore, capital excellence, or how to deal with large capital-consuming projects in an efficient way, is also a theme seeing increased traction. I think this trend will probably become more prominent in the next 15 to 20 years.
Fundamentals of operational excellence, COOs cut their teeth on the lean methodologies, and we’re seeing that back-to-basics approach happening now, but enhanced with technology and thinking differently, holistically, about purpose and how people are involved in delivering excellence.
Our practice was initially founded on the lean principles, and for many years, the vast majority of the work we did was around lean methodologies. I think over the past 15 years or so, we’ve seen a shift from classical lean toward more technology-driven operations of various forms. I would still say that for those of us who remember the old lean principles, they still apply. It’s now evolved into different types of lean—it’s morphed into new shapes. As a result, most of our clients are pretty good at doing it. Now our clients are thinking more about the next wave of lean and digital manufacturing and leveraging the latest procurement tools in digital.
We already spoke about service operations, automation, and what generative AI can mean for that. All of this is, of course, based on lean principles, but it’s really the technology-enabled, next-generation version of that. And I think the macroeconomic environment that we started talking about is driving a much faster adoption of these new technologies and new practices with our clients.
How are CEOs engaging with some of these typical operations topics?
For a lot of companies, things went wrong in operations and were very challenging over the last couple of years. Naturally, it has become more of a board- and a CEO-level topic. And I think there are a couple of big things behind that.One is obviously, with some of the major disruptions we had, it was impossible to run your supply chain. And one of the things I think has been lost in the discussion around the supply chain disruptions over the past couple of years is the crazy spikes in demand that we saw in different industries.
The second is this led to some challenging conversations and big strategic discussions. Early on in the pandemic, what we found in all of our surveys was that people were basically trying to increase inventory, and that’s fine. You can do that in relatively short order, etcetera. But as we’ve seen it evolve over the past couple of years—and it’s not just been the pandemic; there’s been the war in Ukraine and all these other disruptions—all of a sudden people are saying, “Should we be doing more nearshoring or reshoring and doing more production closer to the consumer? Should we be rethinking our talent profile? And are we overconcentrated in certain countries around the world? Should we be thinking about changing the specifications of our product?”
A lot of those things led to really strategic, important discussions that brought supply chain to the forefront of not just the CEO and the executive room, but the boardroom as well.
It’s a record time for the amount of different operations-related topics that reaches the board. Manufacturing and supply chain footprint has been a huge topic, given political tensions, and increased supply chain resiliency needs to be more focused than it was ten years ago. Sustainability is also a key consideration. A certain supplier of nickel can be thousands of times more environmentally hazardous than another supplier of the same metal. So your supplier selection matters greatly from a sustainability point of view. That’s also on the board agenda.
Then operations, of course, is on the agenda. How do you save money? We have a shortage of some professions, so we can’t hire for some jobs. Why do we have unemployment in other areas? There’s just a record number of very different operations topics that all reach a CEO or reach a board. And then prioritizing where we start and how we make sense of this is, of course, much more difficult now than it ever has been before.
And of course, part of that is around transparency, data information, and having that at your fingertips at a much faster pace. Which is presumably an opportunity for the technology and the innovations that are coming down the pike and then also, potentially, the impact of generative AI.
The opportunities, leveraging data on digital across the operations space, are more or less infinite. We’ve seen it for a decade or more in digital manufacturing and in various next-generation digital applications. But now, we are expecting a new S-curve driven by generative AI. You can see applications of generative AI in most areas within operations. I think the shift will be almost as big as when the computer hit the desk in the office: what you can do, how it will change clients, how it will change the software industry, and how it will change customer service. It will be a big new revolution.
But to benefit from that, you need to have your data strategies well sorted. You need to have control of what data you are accessing, should be accessing, and should be leveraging to make your corporation even better.
The CTO [chief technology officer] and the COO have to be in lockstep right?
When you look backward at some of the technology implementations within operations, one of the failure modes you see is that sometimes the CTO and the head of operations or the head of the supply chain weren’t in lockstep. So what you end up with is a tool implementation that hasn’t reaped the benefits or had the impact that one might hope. We see this all the time, whether in advanced planning or technology implementations or whether we see it with more source-to-pay in the procurement arena, where people have put the tool in but haven’t gotten the value.
So the idea of being super clear on the business case, understanding where the impact comes from, and also recognizing the nontechnological factors that are required to deliver the impact are crucial. For example, how do you build the capabilities of your organization to actually use the tool? How do we put the right performance management and metrics in place to measure how we’re doing, both in terms of compliance with tool usage and the outputs? As these technologies get better, and as people get clearer on what it requires to deliver impact, the CTO and the CEO will need to be in lockstep.
The other way we need to look at it is for each area where you’re trying to improve your business, what’s the full potential of the technology in generative AI? We should never do a planning transformation that isn’t really looking across "how do you improve the process and the capabilities of the people? How do you leverage traditional technology, such as an advanced planning system? And do you leverage generative AI, etcetera?" So not only should we be looking at it as generative AI end to end across your company, but we should be asking the question, “For each business problem, what full suite of tools, including the more advanced technologies, do we have to solve that problem?" And that’s a learning and an adaptation for people across a lot of client organizations.
Global Lighthouse Network
I know we’ve been working on the Global Lighthouse Network with the World Economic Forum, and it’s encouraging to see the number of lighthouses being called out; they’re growing each year.
Value of Industry 4.0 Technology Set
This is super exciting. We’ve been able to generate several lighthouses proving the latest and greatest in different operations technologies—most notably, various types of digital manufacturing or digital tools, generating results that bring them to the top of the top in their respective industries. Speaking of the impact and common thread across those cases, I believe the key concept is value. I think that’s an evergreen topic, something every operations leader needs to bring with them. All these lighthouses began by identifying the applications for new technologies within operations that can bring them the biggest value. Then within those areas, how do we apply the technology in the most efficient way and get the most bang for the buck? Then actually do it so you have a proof point—a lighthouse—to show that it can be done, and you can prove the impact with it.
This staging, starting value back, and then deciding which technology to apply sounds very simple. But actually, very few do that. We all have a tendency to go with the latest trend and get excited about some tool and then invest many millions of dollars in applying various tools without always getting the value for it.
One of the things that’s been really interesting is making sure companies are thinking about scaling the impact from these use cases and the digital journeys from the very beginning. In the good old days, people would try something, see if it worked, then have the proof point, and then think about how they scale it. Well the reality is, what you need to do to scale it could be very different from what you need to do to prove that it works the first time.
We see a lot of leading companies changing their mindset of trying to figure it out in one place. And not only [are they] doing that, but also they’re thinking what are the things that I need to put in place so I can scale this across my entire network from the beginning, and that is a massive shift in thinking.
As C-suite leaders and the boardroom are thinking about their planning for 2024 and the opportunities, but also the challenges that need to be navigated, what are the three things they should be thinking about when it comes to their operations agenda, Axel?
Number one, how to apply generative AI and automation to the back-office and shared-service functions; there’s a huge opportunity for every company I know of regardless of industry.
Number two, purchasing under inflationary circumstances; there are huge gains to be had quickly if you navigate this space. It has been a long time since we faced a similar environment. So most people in the purchasing department are not up to speed with what can be done.
And third, sustainability in operations. In operations, we’ve long been optimizing for efficiency, quality, and cost. Now it’s also about sustainability and carbon footprint. There are many methodologies to do both at the same time, and you can make money from that.
Another Three
One is, while I think a lot of our clients feel enormous pressure to deliver productivity in this environment, I would encourage people to use this environment as a chance to change the mindset around productivity within your organizations.
There’s never been a better opportunity to get heads of marketing, CFOs, and heads of sales focused on productivity to tackle some of the things that an operations executive can’t do on their own, but that require collaboration with others.
The second thing I would think about is, how do we infuse technology enablement into everything we do from an operations perspective and have it not be a tech agenda versus an operations agenda—but bring those two things together?
And the third mindset I encourage people to have is, how do we ensure that supply chains and operations remain a boardroom topic and a CEO priority? As we return to something that feels more “normal”—I’m not sure any of us know what normal means anymore— this has been a unique time where operations and supply chains have moved into the boardroom, and I think that’s a really good thing. It’s especially good for companies to have more boards and CEOs thinking about supply chains and operations every day.
The CEO: Architect of the new operations agenda
December 6, 2021 | Article
29.12.2023
Pub. 13.11.2023
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