McKinsey – The OM Blog by Heizer, Render, & Munson

Good OM Reading: Enhancing Sales & Operations Planning with Integrated Business Planning (IBP)

As we note in Chapter 13, Sales & Operations Planning (S&OP) is a critical element in making aggregate planning work. A recent report by McKinsey & Company advises that the unprecedented challenges created by Covid, the war in Ukraine, and what have become chronic supply chain issues, suggest that S&OP be replaced by a more encompassing approach. They call their approach Integrated Business Planning (IBP).

McKinsey’s more encompassing IBP approach consists of five essentials:
1. A business – focused design that covers the midterm time horizon (3 – 24 months) and enables strategy implementation and target achievement.
2. High-quality process management with cross-functional decision makers empowered to resolve issues immediately.
3. Accountability and performance management with shared metrics to encourage collaboration across stakeholders with set targets and clear direction to resolve the trade-offs among conflicting Key Performance Indicators.
4. Effective use of data, analytics, and technology so timely integrated information is available to optimize real-time decision making.
5. Specialized organizational roles and capabilities with specific process owners to promote functional excellence and cross-functional collaboration.

McKinsey’s research indicates that this more encompassing well-functioning IBP process, can yield one or two additional percentage points in EBIT and increased service levels, while lowering freight costs and capital intensity. Additionally, customer delivery penalties and missed sales are reduced, as well as making planners more productive.

Classroom discussion questions:
1. How does McKinsey’s IBP differ from the standard S&OP discussed in Chapter 13?

2. What are the organizational changes appropriate to move from a S&OP process to an IBP process?

OM in the News: Corporate Footprint Grows for Sustainable Packaging

Operations managers need to better understand modern consumer trends relating to sustainable products and packaging. According to McKinsey & Company (March 1, 2022), consumers believe that brands have as much responsibility as governments to create positive environmental change.

Over the past five years, there has been a 71% rise in online searches for sustainable goods globally, according to The Economist. Consumers are engaging with sustainable businesses in ways that they previously ignored. This trend isn’t just in first-world countries, please click on the graphic. Consumer satisfaction in developing and emerging economies is also tied to concerns around climate change, and many want businesses to commit to protecting nature and natural systems.

According to McKinsey:

Consumers often consider a company’s environmental footprint before purchasing products.
77% of the public thinks plastic is the least environmentally responsible type of packaging. Paper was deemed the most environmentally safe material.
66% of the public (and 75% of millennials) say that they consider sustainability when they make a purchase.

Customers now align themselves with brands that are compatible with their values and priorities. With environmental stability as a high priority for many people, it’s important that operations managers do their part to lower their carbon footprint. “The shift in consumer buying, with more consumers willing to pay extra for environmentally friendly products, reinforces the need for companies to increase their commitments to responsible business practices,” said the head of sustainability at a large consulting firm.

Industries and companies are listening to their consumers about what they want. Over 50% of C-level executives in the fashion and textile industry have claimed that consumer demand is driving their brands to create sustainable products and best practices. Many of these companies have been sourcing sustainably produced raw materials to create their apparel. The trend of sourcing organic and sustainable materials has also been seen in the food, cosmetic and pharmaceutical sectors. These industries have been making a concerted effort to use sustainable materials.

Classroom discussion questions:

What are some examples of successful product designs that are sustainable? (Hint: see pages 197-8 of your Heizer/Render/Munson text).
Why is corporate social responsibility becoming more broadly accepted in C-suites?

Good OM Reading: McKinsey’s Report on Supply Chain Shocks–Part 2

Companies need an understanding of their exposure, vulnerabilities, and potential losses to create resilience strategies for their supply chains, writes McKinsey Global Institute in a new report. Targeted measures taken before an event occurs can mitigate the impact of a shock or speed time to recovery. As more physical assets are digitized, for example, companies will need to step up investment in cybersecurity tools and teams.

One of the most important steps is building more redundancy into supplier networks. Relying on a single source for critical components or raw materials can be a vulnerability. In fact, even if a company relies on multiple suppliers, they may be concentrated in the same place. Taking the time to identify, prequalify, and onboard backup vendors comes at a cost. But it can provide much-needed capacity if a crisis strikes. Auditing and diversifying the supply chain can have the added benefit of reducing carbon intensity, and raising environmental and labor standards.

One way to achieve supply chain resilience is to design products with common components, cutting down on the use of custom parts in different product offerings. Auto manufacturers are perhaps the most advanced in this regard, having implemented modular manufacturing platforms that share components across product lines and production sites.

Physical assets may need to be hardened to withstand natural disasters. In regions that are vulnerable to worsening hurricanes and storm surges, this may involve installing bulkheads, elevating critical machinery, adding more waterproof sealing, and reworking drainage. Plants located in earthquake-prone areas may need seismic retrofitting. Companies can also build more redundancies into logistics.

Classroom discussion questions:

What protections can be added to manufacturing plants?
Refer to Table 11.3, “Supply Chain Risks and Tactics'” on page 450. What additions could you provide relating to the current pandemic?

Good OM Reading: McKinsey’s Report on Global Value Chains–Part 1

In recent decades, value chains have grown in length and complexity as companies expanded around the world in pursuit of profits. Since 2000, the value of intermediate goods traded globally has tripled to more than $10 trillion annually. Businesses that successfully implemented a lean, global model of manufacturing achieved improvements in inventory levels, on-time-in-full deliveries, and shorter lead times.

However, these OM choices sometimes led to unintended consequences.. Intricate production networks were designed for efficiency, cost, and proximity to markets but not necessarily for risk. Now they are operating in a world where disruptions are regular occurrences. “Companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll,” reports the McKinsey Global Institute. This new research study, which we summarize in a two-blog series, explores the profound shocks facing value chains from financial crises, terrorism, extreme weather, and, yes, pandemics.

Some manufacturers will use technology and devise other strategies to come out on the other side of the pandemic more agile and innovative. McKinsey reminds us that the COVID pandemic is only the latest in a series of disruptions. In 2011, a major earthquake and tsunami in Japan shut down factories that produce auto components, halting assembly lines worldwide. It also knocked out production of silicon wafers, on which semiconductor companies rely.

Forty weather disasters in 2019 caused damages exceeding $1 billion each. And the number of ransomware attacks doubled from 2018 to 2019. Interconnected supply chains and global flows of data, finance, and people offer more “surface area” for risk to penetrate, and ripple effects can travel across these network structures rapidly. Companies tend to focus much of their attention on managing the types of shocks (like trade disputes, product recalls, data breaches, or logistics disruptions) they encounter most often. COVID is a reminder that outliers may be rare—but they are real possibilities that companies need to consider in their decision making.

Classroom discussion questions:
1. Relate each of the major headings in Supp. 11 (Supply Chain Management Analytics) to the COVID pandemic.

2. What changes might an operations manager make in response to this report?

Good OM Reading: Will 375 Million Jobs Be Automated by 2030?

A new McKinsey Global Initiative report cautions that as many as 375 million workers will need to switch occupational categories by 2030 due to automation. The work most at risk of automation includes physical jobs in predictable environments, such as operating machinery or preparing fast food. Data collection and processing is also in the crosshairs, with implications for mortgage origination, paralegals, accounts and back-office processing.

To remain viable, workers must embrace retraining in different fields. “The model where people go to school for the first 20 years of life and work for the next 40 or 50 years is broken,” states the report. “We’re going to have to think about learning and training throughout the course of your career.”

McKinsey believes we may see a massive transition on a scale not seen since the early 1900s, when workers shifted from farms to factories. A needed plan would include a big investment from the private and public sectors in new training programs and workforce transition programs.

Despite the looming challenges, the report revealed how workers can move forward. While the introduction of PCs in the 1980s eliminated some jobs, it created many more roles. Workers who are willing to develop new skills should be able to find new jobs. “The dire predictions that robots are taking our jobs are overblown. Yes, work will be automated, but there will be enough jobs for everyone in most areas,” McKinsey writes. The company adds that automation will not displace jobs involving managing people, social interactions or applying expertise. Gardeners, plumbers, child and elder-care workers are among those not facing risk.

Classroom discussion questions:

What do your students think about the concept of career-long training and learning?
How does this change impact the field of OM?

Good OM Reading: Robots Probably Won’t Steal Jobs

“There is no shortage of angst about the relentless advance of digital technology and what it means for the work force, if not humanity,” writes The New York Times (June 8, 2015). Dire warnings have come from no less than Elon Musk, Stephen Hawking and Bill Gates. So, to paraphrase many recent headlines, “will robots eat our jobs?”

Not necessarily, according to two new entries to the debate. One is a lengthy cover article in The Harvard Business Review (June, 2015), “Beyond Automation: Strategies for Remaining Gainfully Employed in an Era of Very Smart Machines.” The other is a new McKinsey study, “A Labor Market That Works: Connecting Talent With Opportunity in the Digital Age.”

The McKinsey study analyzes and forecasts the potential impact of so-called digital talent platforms. The report looks at three types of such platforms: job-finding and employee-seeking websites (such as Monster.com and LinkedIn); marketplaces for services (Uber and Upwork, for example); and data-driven talent discovery tools (like Evolv and Knack). By 2025, McKinsey estimates, these digital talent platforms could add $2.7 trillion a year to global gross domestic product–and companies that make efficient use of the digital platforms can increase their productivity by up to 9%.

The HBR article concedes the advance of automation, but adds: “Instead of seeing work as a zero-sum game with machines taking an ever greater share, we might see growing possibilities for employment. In an era of innovation, the emphasis has to be on the upside of people. They will always be the source of next-generation ideas and the element of operations that is hardest for competitors to replicate.” Competitive advantage will be lost by those organizations infatuated with technology alone. Automation, the article states, is often useful but rarely a game winner for most companies. “That realization will dawn as it becomes increasingly clear that enterprise success depends much more on constant innovation than on cost efficiency.”

Good OM Reading: The Productivity Challenge

Global economic growth is set to slow dramatically

“Over the past 50 years,” writes McKinsey’s Global Initiative Report (Jan., 2015), “global economic growth was exceptionally rapid.” The world economy expanded sixfold. Average per capita income almost tripled. Hundreds of millions of people were lifted out of poverty. Yet unless we can dramatically improve productivity, McKinsey thinks the next 1/2 century will look very different. The rapid expansion of the past five decades will be seen as an aberration of history, and the world economy will slide back toward its relatively sluggish long-term growth rate.

The world isn’t running out of technological potential for growth. But achieving the increase in productivity required to revitalize the global economy will force business owners, managers, and workers to innovate by adopting new approaches that improve the way they operate.

McKenzie found that about 3/4 of the potential productivity growth comes from the broader adoption of existing best practices, or catch-up improvements. The remaining 1/4 comes from technological, operational, or business innovations that go beyond today’s best practices and push the frontier of the world’s GDP potential. Efforts to improve the traditionally weak productivity performance of the large and growing government and healthcare sectors around the world will be particularly important.

Business must play a critical role: aggressively upgrading capital and technology, taking risks by investing in R&D and unproven technologies or processes, and mitigating the labor pool’s erosion by providing a more flexible work environment for women and older workers, as well as training and mentorship for young people. In an environment of potentially weaker global economic growth, and definitely evolving growth dynamics, executives need to anticipate where the market opportunities will be and the competitors they will meet in those markets. Above all, companies need to be competitive in a world where productivity will increasingly be the arbiter of success or failure.