Building Resilient Operations
Building Resilient Operations
Building Resilient Operations
Building resilient
operations
In the face of rising uncertainty, get ready for the unexpected.
To build resilience, accelerate productivity improvement and
operational flexibility.
© EyeEm/Getty Images
May 2019
Economic and business uncertainty is rising Lessons from the past
across the world. After more than a decade The most significant period of volatility in recent
of strong growth, expansion in many major history was the global recession triggered by the
economies has slowed significantly in recent financial crisis of 2007. Over the ensuing 18 months,
months. Businesses are feeling the repercussions global GDP fell by 1.9 percent, its steepest and most
of political and economic tensions, from widespread contraction in the modern era. Industrial
disputes over trade to questions over the growth output, trade, and investment plummeted in most
trajectories of economies from China and India to developed countries. The US unemployment rate
the European Union and the United States. doubled.
At the market level, meanwhile, further forces are Some companies rode out the turbulence far
at work. From the rise of e-commerce in retail more successfully than the majority of their peers,
to the impact of alternative power trains, new however. McKinsey analyzed the performance
mobility solutions, and autonomous driving in through the crisis of around 1,000 large, publicly
the automotive sector, few industries have been traded companies from multiple industry sectors.
spared the impact of technological disruption. That research identified a subgroup of resilient
New digital technologies are also reshaping the organizations that delivered a growth in total return
way operations are done, with sophisticated to shareholders (TRS) that was structurally higher
automation powered by the Internet of Things (IoT), than the median in their sector. The performance
for example, or the use of advanced analytics and of these companies dipped less overall during the
artificial intelligence technologies to support or recession, and improved faster during the ensuing
augment human decision making. economic recovery. By 2017, the cumulative TRS
lead of the typical resilient had grown to more than
These changes bring significant opportunities as 150 percent over their non-resilient counterparts.
well as risks. In response, companies in multiple
sectors are already transforming their products, That difference wasn’t down to luck. Resilient
processes, and business models. Now they need companies were not insulated from the impact of
to go even further, accelerating internal initiatives the downturn: their revenues fell in line with their
and pursuing new forms of collaboration with peers during its early stages. By 2009, however, the
customers, suppliers, and partners. With so many earnings (EBITDA) of resilient companies had risen
variables in play, however, the challenge for many by 10 percent, while industry peers had lost nearly
organizations will be to learn how to thrive in a 15 percent.
world of continual turbulence.
Our analysis suggests that these companies
The past provides a clue. Some companies have succeeded because they moved further and faster
made structural, strategic, and operating decisions before, during, and after the crisis. In 2007, for
that dramatically improved their ability to perform example, resilient companies were cleaning up
in the face of volatility and uncertainty. In this their balance sheets, reducing debt while most
article, we draw on proprietary research that shows companies were accumulating it, and selling
how these resilient organizations succeeded. We off underperforming businesses. They doubled
explain why future challenges may require an even down on operational effectiveness too. By the
bolder approach, and why companies should strive first quarter of 2008, resilient companies had cut
to build greater flexibility into their end-to-end their operating costs by 1 percent, while those of
value chains. their peers continued to grow. That decisive action
meant resilient organizations had access to more however, helping outsiders slice through barriers
cash, and they used it wisely: maintaining their to entry even as incumbents slash performance
relationships with key customers through the constraints. The steady annual productivity
recession and acquiring assets and companies improvements that have become the norm in many
from distressed rivals as the upturn began. manufacturing plants may not be enough to keep
a company ahead in a world where digital tools are
delivering improvements ten times faster. Put simply,
Tomorrow is not yesterday yesterday’s bold moves may be too timid in the face
The experience of the past can inform companies’ of tomorrow’s challenges.
planning for future challenges, but it doesn’t
provide a blueprint for action. In part, that’s
because history is unlikely to repeat itself in The resilient value chain
the same way. While there were significant Companies can’t avoid volatility and uncertainty, but
regional differences in the impact of the 2008 they can, and should, take specific actions to build
crisis, markets and supply chains are even greater resilience into their value chains. We define
more fragmented today. Then there’s the digital resilience in this context as an organization’s ability
difference. The large-scale adoption of new to keep generating economic profit through cyclical
technologies, such as IoT, advanced analytics, and structural changes in supply and demand.
and machine learning, is redefining the size of the
opportunities available to companies, and the In practice, resilience has a productivity component
speed at which they can be captured. and a flexibility component. High, and continually
rising, productivity helps a company protect its
Take the example of one global consumer margins, allowing it to ride out smaller changes and
packaged-goods company. It recently transformed giving it the financial firepower to respond to larger
a long-established plant in the Czech Republic ones. The flexibility of a value chain, meanwhile, is
using a portfolio of Industry 4.0 tools, including determined by its ability to continue generating
digital performance management, IoT-enabled profit under different supply and demand conditions.
automation, and widespread use of modelling Can a company bring its costs down as demand
and simulation to evaluate and improve its falls? Can it ramp up output to take advantage
manufacturing operations. Together, those of market peaks? Can it adjust its procurement
changes helped boost productivity by 160 percent, activities to benefit from fluctuations in input costs?
with reductions of more than 40 percent in both
quality deviations and inventory.
The need for new metrics
Digitization can be a double-edged sword,
We believe that the development of effective The leaders of most organizations already
ways to measure, develop, and manage value- understand the critical role that operations play
chain flexibility will be critical for companies in overall business performance. We believe
over the coming months and years. It will the next frontier for many companies will be the
also be challenging. Value-chain flexibility is development of operating models that embrace
multidimensional and context-specific. Measuring resilience: able to withstand shocks and capture
it will require detailed, granular analysis. In emerging opportunities faster and more effectively
logistics, for example, flexibility might be affected than those of their competitors. Where should your
by the fraction of material purchased from local organization focus its efforts? Your answers to the
suppliers, as well as by the nature of contractual three questions below may provide a guide.
arrangements with logistics-service providers. In
R&D, key factors might include the percentage of 1. Which opportunities have been difficult
engineering hours that are outsourced, as well as to pursue due to a lack of resources or
the size and duration of major ongoing projects. responsiveness in your organization?
Companies grappling with this complexity need 2. What are the most inflexible points in
a better understanding of where to target their your current operations, and what are the
efforts to become more resilient. Research underlying reasons for the rigidity?
into the factors that matter most has led to
the development of the McKinsey Operations 3. Where could the use of digital and analytics
Resilience Index, which helps pinpoint the parts solutions achieve meaningful changes to the
of a company’s cost base that are most rigid, and performance indicators that matter most to
why. Some automotive players, for example, have your organization?
committed significant resources to their future
electric and autonomous vehicle programs,
Dominik Lelièvre is an associate partner in McKinsey’s Munich office, where Philipp Radtke is a senior partner and the co-
leader of McKinsey’s global Operations Practice. Based in Milan, Marta Rohr is a director of practice operations, and Rafael
Westinner is a partner in the Madrid office
The authors wish to thank Antti Ryytty for his contributions to this article.