CHAPTER 1
Strong Operations Drive Growth and Profits by Adjusting to an Ever-Changing World

The COVID-19 pandemic marked the end of an era. Pandemic effects rippled through supply and labor markets, geopolitical tensions mounted, and the climate crisis increasingly took its toll. We are experiencing the biggest remaking of the global economy since the end of World War II. As with other global rewirings, such as the industrial revolution, the unleashing of the internet, and the move to offshoring, the only thing we know for sure about this new business environment is that it will be less stable than the economic conditions of past decades. External conditions keep changing-and firms' operations struggle to keep up. Businesses are realizing that they need to be more flexible. They need resilience.

Resilience Across the Value Chain

Resilience is the ability to recover quickly from difficulties. Yet in a fast-changing world, you should not recover to some previous state-because the previous state contributed to your disruption in the first place. The world will never go "back to normal." In the new business reality, there is no normal anymore-only continual disruptions. Thus, businesses need to adapt quickly to any type of difficulty by proactively strengthening all links in the supply chain. To do this, they need a clear operations strategy that combines business, financial, and other strategies. Wider trends are bringing companies back to basics. How do your operations work, and how effectively can they adjust?

This new imperative amounts to a fundamental restructuring of global value chains. "Lean" no longer reigns supreme. The philosophy is still important, especially in its original vision of balancing cost, efficiency, reliability, and resilience.1 But the old, single-minded focus on driving down costs resulted in rigid and brittle operations. To succeed in a post-pandemic world, companies must transform. Supply chains must be more agile. Operations must be more flexible and more sustainable.

The definitions of operations and supply chain may seem self-evident, but let's take a moment to note their relationship (see Figure 1.1). Your company starts by wanting to sell something to customers in markets. You create products and portfolios, and plan for how to make them. Suppliers make inputs to your manufacturing sites, and then your logistics functions distribute products to customers, ideally with some customer-service follow up. In a narrow sense, the supply chain may be only the part between the two middle segments of this figure: suppliers and manufacturing. But really the supply chain, and all of these operations activities, are components of a more holistic value chain. To build stronger, more agile supply chains, you can become more resilient at every step in this chain. You can prioritize responsiveness as well as cost and performance.

Figure 1.1 A holistic value chain includes operations and supply chains

Source: Kearney analysis.

Resilience and Competitive Advantage

Operations resilience was not necessarily valuable in the previous globalization paradigm. Then, competitive advantage often arose from customer focus or innovative products. Operations were seen as an enabler of the overall firm strategy, rather than a differentiator: To get the product to the customer as fast as possible and tailor it to their preferences. To get all required inputs to design and manufacture an innovative product. To be as efficient as possible to keep costs low.

Naturally, some firms did leverage operations strategy as a differentiator-often to achieve growth through cost leadership or shorter lead times. For example, in the 1970s, FedEx (then named Federal Express) revolutionized delivery with its then-radical idea to fly almost all packages to Memphis and then back out again. In the 1980s, Toyota engaged in a David-and-Goliath battle with US carmakers, carrying only a slingshot in the form of its unique operational culture. In the 1990s, Walmart promised nationwide consumers ever-lower prices, trusting that its attention to operations detail would make those prices profitable. In short, operations have previously been a path to profit and growth.

What is different now is that we are experiencing supply chains breaking down on a never-before-seen scale due to intensifying global disruptions. We are moving from a global economy in which supply was generally available toward an economy of scarcity. The critical inputs didn't magically disappear-the new challenge lies much more in the allocation of goods. For example, transport systems have broken down due to the pandemic and related labor shortages. In the resulting congestion, critical goods cannot be delivered on time. Trade barriers and import quotas are on the rise as global sentiments become increasingly protectionist. Energy shortages and adverse weather events cause production outages and price hikes around the globe. These effects may eventually drive structural scarcity, rather than scarcity that varies by time and location. But for now, the main result is that global supply markets have become much more volatile.

Can your firm respond to these conditions by creating operations excellence that goes beyond cost optimization? If so, you will secure logistics capacity, identify and develop critical suppliers, and plan for price hikes and supply failures. And you will be able to grow in this disruptive climate, while your less resilient competitors will wither. But only if you spend at least as much effort developing and ensuring supply as you already do developing and ensuring demand.

Resilience as a Differentiator amid Crises

The 2020s so far have already presented crises in labor, raw materials, logistics capacities, and energy. In early 2020, people hoped that "shortages" would be a simple story involving temporary closures of Chinese factories. But as events played out, the pandemic caused on-and-off closures of factories worldwide-as well as ports, distribution centers, and other essential functions. Supply chains remained in crisis. Soon other crises arrived. The Ukraine war had ripple effects on global flows of grain and natural gas. Increased US-China tensions posed risks to supply bases. And climate change had ever-more-visible, ever-more-devastating effects. Suddenly everything seemed more complex. Semiconductors became impossible to find. The supply chains for rare-earth metals and pharmaceutical inputs clashed with environmental, social, and governance (ESG) goals. Ports became congested, and an entire fragile system became destabilized. Supply chain managers often found creative solutions, but in a world of the great resignation and quiet quitting, they risked burnout.

Are these accumulating and concurrent crises just coincidence, just bad luck? Just new sets of risks to anxiously track in gigantic spreadsheets? We believe that on the contrary, they indicate deeper problems. Most companies' operations simply were not designed to handle this degree of volatility. And so it's time to change that operating model.

The stakes are high. All companies seek unique strengths to drive profit and growth. Resilient operations are such a differentiator-when implemented at the core of the firm. Since 2020, we at Kearney have seen highly differentiated financial returns for companies that have resilient operations. Specifically, we have worked with companies that have harvested low-hanging fruit, such as product segmentation or operational improvements within warehouses to achieve benefits of a few percentage points of earnings before interest, taxes, depreciation, and amortization (EBITDA). This book can help point you toward such projects, although you may already be familiar with some of them. What we really want to do in this book is put such projects in a wider framework and point out the benefits of moving holistically toward that framework. If you truly transform-as we have seen by supporting companies in broader transformations-you can achieve double-digit EBITDA growth.

How do companies achieve such returns? First, they transform broader corporate strategy. Second, they transform themselves. Third, they transform the careers of the people who drive those changes.

Operations as the Path to Profits

Many smart chief operations officers (COOs) are already addressing resilient operations. In a 2022 Kearney survey, 56% of leaders considered resilience a top-five priority. Nearly 80% have embedded resilience into their decision-making processes, quantifying it as a key performance indicator (KPI). Nearly 85% are altering their manufacturing footprint by reshoring, nearshoring, and/or offshoring at a granular level. To address inflation, more than half have formed alliances with existing suppliers and embraced design thinking, rather than merely passing price increases on to customers.2 As Figure 1.2 shows, operations leaders can undertake projects to improve resilience at each step of the value chain.

Why are they prioritizing resilience? You can think about the answer in two ways. First, the pandemic forced firms to rejigger their supply chains on the fly. Now COOs are seeing benefits. So they're seeking to institutionalize the ideals...