Today we launch the fifth and final part of our knowledge partnership with CNBC. In this edition, we focus on resilience with senior partner Katy George, who discusses why organizations need to build resiliency in their operations to prepare for an increasingly disruptive next normal.
COVID-19 has had a significant impact on global supply chains, but our research shows that companies can expect to see more shocks ahead—and with more frequency and severity. According to the McKinsey Global Institute (MGI), companies report that supply chain disruptions lasting a month or more occur almost every four years, resulting in losses worth almost 45 percent of one year’s EBITDA over the course of a decade.
What do we mean by resilience? What does a resilient organization look like?
Put simply, resilience—whether in physical supply chains or service delivery—means your organization has the ability to continue operations if there’s some disruption in some part of your value chain. That disruption can range from a supplier no longer having inventory, or suddenly facing a threefold increase in demand from a customer. Resilience is the ability to flex and accommodate that disruption by having redundancy in your supply chain and inventory, and flexibility in your operations so you can switch gears.
In the CNBC segment, you share that 90 percent of supply chain leaders said they needed to change their approach after the pandemic. What impact has COVID-19 had on resilience planning among CEOs?
Most companies had some kind of business continuity planning effort, where they look for and address vulnerabilities in their operations, but we’ve seen a real step change in how robust those plans need to be and how much value there is in creating a more resilient supply chain. CEOs have really seen that it’s about more than having good plans on paper.
We’re also seeing companies become more flexible in how they manage supply chains through digital technology—using autonomous planning techniques, for example, to provide greater visibility and transparency into their operations—or using analytics capabilities to fundamentally change the way they deliver services. These digital technologies were designed to improve productivity, but we’re seeing how they are allowing organizations to operate more flexibly, too.
Finally, our MGI research also finds that supply chains are becoming more regional. Even before COVID-19 companies were finding it more economically viable to have nearer sourcing, and I think we’ll see that trend continue.
How can organizations become more resilient?
Prior to COVID-19, a lot of companies identified the most strategic components—for example, dual sourcing—and they would create continuity plans around those. But during the pandemic, we saw that a company’s supply chain could be disrupted by something as small as a simple commodity bolt that a company couldn’t get because it came from a supplier halfway around the world. So companies can’t segment like they used to. They have to segment by risk and think about global planning in rigorous way, whether that’s deciding what they make versus buy, or where to locate their excess supply.
Elsewhere, we’ve seen how aggressive adoption of new technology is enabling greater flexibility at less cost—companies can produce smaller quantities at less cost and then more easily enable distribution of those goods and services. Through our partnership with the World Economic Forum to look at industrial lighthouses, we saw one company use digital technology to create more flexibility in their assembly line. While the set-up itself looked the same, IoT capability in product components meant that every product that came down the assembly line could have a different configuration. So it’s just as productive as before in terms of cost per unit, but think about how flexible it is that every product is different.
And finally, it’s important for CEOs to see that resiliency is a core competency that cannot be underestimated or a priority only in challenging times. End-to-end digital approaches can transform the customer experience and benefit both the financial and cultural value of a company.
What’s an example of resilience work we’ve partnered with a client on that really inspires you?
I was recently talking to a client I first started working with 10 years ago. At that time, we were helping them understand their supply-chain risk and how to create segments to understand which products were most important to them, not just for financial impact, but also to their reputation and mission, and those three aren’t always the same. The levers 10 years ago were all about where to build excess capacity or where to have dual sourcing—so the organization could be more resilient.
What’s interesting to me is that a decade later, we’re still solving some of those challenges, but in a much more holistic way and with an increasingly exciting set of digital solutions. Now, we’re leveraging digital innovation when partnering with the client to redesign how their supply chain operates, and where they can create more transparency on where things sit along the supply chain. That evolution of our resilience work is really inspiring.
Tell us about your journey at the firm, where you co-lead our Operations Practice globally. Why is this work important to you?
I’ve been at the firm for almost 25 years. I came after completing a PhD in operations management and labor economics, where I looked at the different production systems for a children’s clothing factory, and it was all about productivity versus flexibility.
Our MGI work shows manufacturing significantly contributes to productivity growth, so there’s a tremendous opportunity in terms of meeting new customer needs and creating new benchmarks around cost or value. We’re just at the beginning of the Fourth Industrial Revolution, and I think the firm has an important role to play in bringing operations and digital knowledge expertise, and business strategy, to connect the dots and shape how it will play out to support the world’s needs.