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In 2019, rising volatility was an issue for many companies around the world. In 2021, it’s an issue for everyone. The past 18 months have been an object lesson in just how quickly and dramatically market conditions can shift. As the COVID-19 pandemic swept across the globe, some businesses saw demand collapse to almost nothing in just a few weeks, while others faced an unexpected and sustained surge.
At the time of writing, the aftershocks continue to rock the global economy. Some regions are still battling the health crisis, others wrestling with the recovery. The unlocking of economies is releasing pent-up demand in many sectors, putting further strain on supply chains already stretched by months of disruption. Plenty of other factors compound the challenge, from the impact of Brexit to the necessity of accelerating the transition to Industry 4.0 and of building environmentally and socially sustainable business models.
In this environment, operational resilience has become a key strategic issue for COOs, adding an extra layer of complexity to an already crowded agenda. In addition to the traditional focus on controlling costs, maintaining quality, and meeting delivery expectations, companies now want to ensure that their operations are robust and flexible enough to deal with unexpected shocks.
Hard-pressed operations leaders may find it tempting to delegate responsibility for resilience to individual sites and functions. That might seem logical, since disciplined execution and detailed, granular frontline decisions determine so many other elements of operational excellence.
Yet resilience is very difficult to build using a fragmented, bottom-up approach. To see why, take the perspective of the management team at a high-performing midsize manufacturing site, part of a global production network. That team will have spent years optimizing processes to produce the required volumes at the lowest possible cost. Asking it to add redundant capacity as insurance against volatility will almost inevitably compromise some of the characteristics that have made the site so valuable. And even if it can increase its production flexibility, that will not be useful if local ports are congested and customers on the other side of the world need its output urgently.
In our experience, frontline actions can help companies boost their operational resilience, but only if implemented as part of a cohesive effort spanning all sites and business functions. We have found that adopting a holistic, cross-functional approach can improve a company’s overall resilience 30 to 40 percent more than traditional functional optimization does (Exhibit 1). The changes required to achieve this impact are diverse, however, and the best combination of actions depends on each organization’s circumstances. In this article, we highlight five strategies that can be usefully applied by many businesses.
Reassess make or buy decisions
When companies seek to improve their operations, they usually think about changing the way they do things. Yet it is also important to consider what they should do. The production networks of many large organizations have grown organically or through acquisition, with only limited attention to the strategic fit of the network as a whole. That approach can lead to a host of problems, including high costs, underutilized facilities, assets located far from their major markets, and performance that’s well behind best in class.
To overcome these issues, every organization should consider reviewing its operational footprint periodically. That review should ask two fundamental questions. First, is this or that activity something we should do ourselves, or are external suppliers better equipped for it? Answering that question requires a clear understanding not only of whether certain activities, technologies, and capabilities are core elements of an organization’s strategy but also of the structure and capabilities of the supply base. If it makes sense for a company to retain an activity, it should ask the second question: is the current footprint optimal? Rather than conducting specialist production processes at multiple subscale sites, for example, might it be better to consolidate that technology at one or two centers of excellence?
Analyzing the operational footprint in this way allows an organization to build a blueprint for an optimized network. The transition from the current state toward this optimal one may require creative thinking. Companies can often transfer the activities of sites devoted to noncore activities, for example, to more appropriate owners—often suppliers in the sector. This approach can involve either a contract manufacturing (CM) arrangement (the original owner retains responsibility for design and development) or a deal with an original-equipment manufacturer (OEM) or an original design manufacturer (ODM), which takes on design and development itself.
Rethink asset strategy
Once a company knows what it wants to do, it must decide where each activity should be done. That requires careful analysis of the existing asset base to decide how to distribute activities across those assets and where the company should focus its improvement efforts.
One simple, but powerful, way to begin this process is to evaluate assets (such as manufacturing plants or distribution centers) on four dimensions: the level of operational excellence at a site, usually determined by benchmarking against industry top performers; the site’s factor costs, such as energy, labor, materials, and transport; the scale of its output, usually determined by the plant’s size and the degree of automation employed; and the distinctiveness of the site, a qualitative measure that takes into account its advantages in market access, technology, or specialized capabilities.
Exhibit 2 shows the manufacturing network of one consumer-goods company plotted against these dimensions. The size and color of the dots indicate, respectively, the scale and factor costs of sites; the position of sites in the chart reflects their degree of operational excellence and distinctiveness. This kind of analysis gives companies a high-level indication of the strategies that would allow each site to generate the maximum value.
Sites in the top-right corner, for example, are the most distinctive and highest performing. They could become “lighthouse” facilities, where companies push the frontiers of operational excellence and set an example of best practice for the rest of the network. Plants in the middle of the chart are targets for incremental operational improvements or for consolidation if they could take volumes from lower-performing sites to capitalize on scale advantages. Sites in the bottom-left corner are neither distinctive nor high performing and might be candidates for divestment.
The right combination of assets can boost an organization’s resilience in multiple ways. Highly automated, flexible plants can absorb peaks in demand without the additional costs and challenges of engaging temporary labor, for example. Highly efficient, high-volume plants keep production costs low, providing extra headroom to absorb cost or price volatility. And operational excellence equips teams at all types of plants with the tools and skills they need to make rapid changes in volumes or the product mix when circumstances require.
Operating in a highly competitive and volatile market with tight margins, one European building-products company systematically transformed its production and distribution footprint. The company, which had grown through acquisitions, recognized that too many of its assets were concentrated in high-cost locations, exacerbating the challenges of rising raw-material prices and broader social uncertainty. The company doubled its margins and made its supply chain dramatically more responsive by simplifying its footprint, streamlining its portfolio, and focusing on cross-functional integration throughout the business. Those changes helped it not only to navigate the challenges of Brexit but also to benefit from the growing popularity of e-commerce in its most important markets.
Transform for agility
Once a business has its network and asset strategy in place, it can focus on frontline actions that bolster its operations against shocks. For many manufacturing organizations, that involves steps to increase agility: the ability of production operations to react quickly and effectively to changes in supply or demand.
Agile manufacturing builds on the lean principles that most high-performing manufacturing organizations already use. Indeed, core lean ideas (such as small batch sizes, fast changeovers, and just-in-time production) already help manufacturers to flex their product mix quickly if necessary. Truly agile organizations go further, however. Standardized, modular manufacturing systems help sites reconfigure their production lines rapidly to make different products. Giving staff the skills to work on different kinds of projects or in different parts of plants makes it possible to allocate the workforce flexibly according to need.
This strategy can be especially powerful when multiple plants use the same basic architecture, so production can move between them in the event of major demand fluctuations or facility outages. Leading companies are also using Industry 4.0 technologies to link sites to a common digital backbone that lets them share data and best practices quickly.
Deciding how and where to invest in agility requires careful analysis, however. Companies often find that the most disruptive issues are not the obvious ones. One rail operator, for example, believed that large but infrequent shocks had the biggest impact on its service levels. When it reviewed past failures systematically, however, it realized that slow responses to regular and relatively minor disruptions created the biggest problems. By introducing a flexible scheduling approach, selectively increasing capacity, and investing in technology to detect congestion early, the company cut service failures by 15 to 30 percent.
Build a robust supply-chain risk-management function
The issues that create the most disruption for companies often come from unexpected places—especially complex upstream supply chains, where trouble at second- or third-tier suppliers can make critical parts unavailable. Manufacturers in several industries, for example, have announced unplanned production stoppages resulting from global shortages of semiconductor components. Congestion at major ports has caused supply-chain delays for multiple industries.
To minimize and mitigate these issues, companies must understand their supply chains and the associated risks. Leading organizations are now building a specialized supply-chain risk-management function to handle this task. The function is responsible for mapping the supply chain through multiple tiers—identifying vulnerabilities while monitoring suppliers, logistics links, and other critical points to surface problems early.
Successful supply-chain risk management works on multiple levels. It evaluates individual suppliers for vulnerabilities, such as poor quality control, financial distress, weak IT security, and plants in flood-prone regions. It also considers each supplier’s role in the overall network. Does the company rely on a single supplier for critical parts? Are multiple suppliers concentrated in one place, increasing the impact of transport disruptions, natural disasters, or political instability?
Facing a significant spike in demand at the height of the COVID-19 pandemic, for example, one global electronics manufacturer conducted an in-depth risk analysis of its network of 5,000-plus suppliers around the world. The assessment not only pulled together data from the manufacturing, supply-chain, and procurement functions but also evaluated risks across multiple dimensions, including lead times, single-sourced components, and geographic risks.
The company found that more than a quarter of its spend in three critical categories of components was concentrated at high-risk suppliers. To mitigate those risks, it increased multisourcing, developed risk-monitoring dashboards for high-risk suppliers, and built resilience into new product-development and sourcing processes.
Digitize channels to market
The final resilience strategy is just as applicable to service-sector companies as to manufacturing ones. Accelerating the ongoing transition to the digital delivery of products and services helps organizations to modify their offerings more rapidly and to scale volumes up or down almost at will.
Digital delivery offers other advantages too. Companies that engage with customers digitally gain rich insights into their behavior and preferences. Combined with the inherent flexibility of digital technologies, that knowledge lets providers proactively fine-tune and modify their existing products or capture opportunities in emerging market segments early in the game.
A digital transformation must be truly cross-functional and involve rethinking the way companies design, develop, market, deliver, and support their offerings. They will also need to accommodate customers who wish to shift between digital and analog channels at different times and for different tasks. Leading companies therefore approach digitization systematically by designing a new operating model to support their digital offerings. Then these companies test and refine their ideas with customers in pilots before scaling them up across the organization.
In the face of unpredictable markets and increasingly frequent shocks and disruptions, companies are striving to improve their resilience. Getting this right requires action that spans traditional functional boundaries: a transformation not just of an organization’s operations but also of its whole operating model.