Focus on business operations

For CEOs, these trends bring up hard questions that are mostly about how things work. Can we meet today's and tomorrow's customer needs?

These changes provide challenging questions for chief executive officers, the majority of which are centred on the company's operations. "Can we meet today's and tomorrow's customer needs? Should we increase capacity to get ready for a long period of fast growth, or should we cut it to get ready for a slowdown and the possibility of stagflation? Where will we find the skilled, tech-savvy workers we'll need in the next few years? "How do we reduce carbon emissions, keep our business going, and keep regulatory risk to a minimum?" Too often, the answers show that a company's operations don't work well in a world that is complex, uncertain, and constantly changing.

Modern global supply chains and lean production systems are made so that high-quality goods and services can be made for as little money as possible. They work best when everyone in the value chain does what is expected of them and when supply and demand are well understood. That's turning out to be an expensive guess. Modelling by the McKinsey Global Institute suggests that over a decade, supply-chain disruptions will cost the average large company the equivalent of about 42% of its annual earnings.

In a survey of supply-chain leaders done by McKinsey, 93% of those surveyed said that the COVID-19 crisis had shown problems in their global manufacturing and supply footprints. As a result, however, by the middle of this year, only 15% had started to make structural changes, such as moving production closer to home or using more suppliers.

There are also differences between what a business wants to do and what it actually does. Take the use of digital technologies as an example. The widespread shift to working from home was a digital success story, and the pandemic caused some companies to speed up the implementation of digital projects by a lot. But in other areas, like the digitization of manufacturing processes, progress is still slow, even as companies reach the limits of methods like lean management that have been used for years to improve productivity.

For example, over the past four years, experts from the Global Lighthouse Network (GLN), a project of the World Economic Forum and McKinsey, have looked at more than 1,000 manufacturing companies around the world to find "lighthouse" examples of how Fourth Industrial Revolution technologies are being used. By 2021, 90 facilities had been approved. And of those, only a small number can say they have figured out how to digitise processes from start to finish.

And most companies say they don't even know how to fix their medium-term problems because they don't fully understand what they are. For many products, 80–90% of greenhouse gas emissions come from scope 3: indirect emissions that happen throughout the company's value chain, such as emissions that are built into goods and services bought, employee travel and commuting, and the use and disposal of products sold. Most of the time, two-thirds of these emissions come from the beginning of the supply chain. Tier-n suppliers are also harder to keep an eye on, which makes it more likely that bad labour or environmental practises will go unnoticed. In a recent survey, the people in charge of the supply chain said they knew about half of their tier-one suppliers' key risks. At tier three, this number goes down to just 2%.

Even when companies know how much risk their suppliers pose, they don't have good ways to deal with some of their biggest problems. Many of the technologies needed for a net-zero economy are not yet technically or commercially viable or widely available. When one car company made a plan of the steps needed to get rid of emissions from making cars, it found that less than 25 percent of its path to zero emissions has a positive net-present-value at current costs. In a survey of more than 1,000 senior manufacturing and supply-chain executives done by McKinsey in 2021, only 3% of those surveyed said they thought their companies could decarbonize their footprints economically by 2040.

Based on the same survey's results, it seems that companies do at least know that they need to change how they do business. About 70% of those who answered think that using digital technologies more will be a key part of their efforts to improve productivity over the next three years. And 66 percent of those who answered in the consumer packaged goods sector said they plan to move warehouses and logistics centres closer to their customers in order to decentralise their supply networks.

So, why do so few companies succeed in making the changes they know they need to make to their business? We think that most people set their goals too low. Small changes to supply networks, digitising parts of existing processes, and reducing the use of a few materials that are bad for the environment are helpful, but they won't give industries the big jump in performance they need. Instead, the new business operations agenda calls for a big picture and wide-ranging changes across the whole organisation. So, it's a challenge for the CEO.