McKinsey Talks Operations: How the best from 2022 can power 2023

It’s been one year since the launch of McKinsey Talks Operations—a year challenged by uncertainty and complexity. In this episode, cohosts Christian Johnson and Daphne Luchtenberg take a look back at 2022, with highlights featuring McKinsey experts and business leaders. Highlight discussion topics include inflation, building operational resilience, managing supply chains, decarbonizing operations, and the role of digital twins. Their conversation has been edited for clarity.

Christian Johnson: Your company’s future success demands agile, flexible, and resilient operations. I’m your host, Christian Johnson.

Daphne Luchtenberg: And I’m your host, Daphne Luchtenberg. And you’re listening to McKinsey Talks Operations, a podcast where the world’s C-suite leaders and McKinsey experts cut through the noise and uncover how to create a new operational reality.

Christian Johnson: Each episode considers the challenges companies and economies are facing and the opportunities leaders can seize for competitive advantage. We’ll look at how to increase perfor­mance and connect boardroom strategy to the front line, where and when to infuse operations with technology, and why empowering the workforce with capabilities is key to success.

Daphne, it’s been a year since we launched McKinsey Talks Operations, and a lot has changed during that time.

Daphne Luchtenberg: That’s right, Christian. When we launched, we were still in the midst of the Omicron wave of the COVID-19 pandemic. Since then, we’ve had the invasion of Ukraine by Russia, and ongoing impacts in the form of inflation, energy price hikes, and continuing supply chain challenges.

Christian Johnson: Recent tech industry announcements notwithstanding, there’s still a lot to be said around workforce availability and skills gaps. Plus, the effects of climate change are becoming so much more evident as well.

Daphne Luchtenberg: In short, I think we can both agree it’s been a complex backdrop.

Christian Johnson: It’s certainly a complexity that’s given us a lot to talk about. We’ve been lucky enough to be able to bring together the right folks to talk about it with—experts from McKinsey and from industry who are deep across the entire range of these challenges. We’re able to explain why they’re important and how business leaders are dealing with them.

Daphne Luchtenberg: That’s right. As we’ve just closed out 2022, it seems like a good time to remind ourselves of some of the highlights of the past 12 months.

Christian Johnson: There are really five core themes that our guests have covered: resilience, people, digital, sustainability, and the implications from inflation.

Daphne Luchtenberg: What a lineup of topics. Let’s start where we began our journey—with resilience.

Christian Johnson: Yes, let’s go back to that very first episode where we were looking at supply chain risk. Before the pandemic, not many people really thought about supply chains. But as COVID progressed, everyone started talking about them, and leaders started to recognize their strategic vulnerability. Here’s supply chain expert and McKinsey partner Knut Alicke, talking about how our thinking about supply chains has changed.

Supply chain resilience: Is there a holy grail?

Knut Alicke: If we look back, it was a function that was only recognized if something went wrong. For example, if you had a product availability problem, you’d next have a customer calling, saying, “Where’s my stuff?” Then, they’d look at the supply chain and ask, “Why did you not deliver on time?” Now, in the pandemic and other supply chain disruptions, a lot of things went wrong, and companies had to manage this massive disruption.

If you think about what happened over the past one-and-a-half years, we had a pretty good supply of food and other goods, right? So the supply chain did work, but for a lot of companies it meant struggling with in-bound logistics, their own sites, and distribution. They really needed to step up and make sure that the supply chain is flowing so we can deliver to our customers, and to your point earlier, the conversation made it to the boardroom. For example, we helped a couple of clients implement business continuity management, and one CEO, who never talked about the supply chain before, even addressed it in his last two investor presentations. The attention has shifted from it not only being a function that is valuable when something goes wrong but also can really help us to be better.

Daphne Luchtenberg: That’s a great clip to get us started. We’ll also be hearing more from Knut in the next episode coming up later this year, where he will discuss his new book, From Source to Sold. You’ll hear about supply chain heroes, their rigorous business insights, and how to bring value to your organization and make global supply chains a resilient place to be.

Christian Johnson: Yes, looking forward to that. The book has some really great stories from the trenches. Going back to episode one, we spoke to Airbus senior vice president Sebastian Peters, who gave us some great insights on the new digital skills the workforce is going to need. Let’s give it a listen.

Supply chain resilience: Is there a holy grail?

Sebastian Peters: There’s obviously a shift of new needed skills. Before, the supply chain capability was connecting the dots in the company to understand the sales perspective, as well as the production perspective because at the core of any kind of supply chain is the S&OP, sales, and operations planning. But obviously nowadays, with the high input of digital needs, you need to understand coding. If you would like to know what’s the right tool and translate it through the needed process perspective, software coding is a skill which is needed.

Christian Johnson: That leads us into the next couple of clips on the importance in any transfor­mation of focusing on the workforce. It’s a recurring theme we’ve heard throughout the year, and in our episode, “The Fourth Industrial Revolution will be people powered,” David Goeckeler, CEO of Western Digital, sets it up nicely.

The Fourth Industrial Revolution will be people powered

David Goeckeler: Keeping people at the center is actually pretty straightforward because people are the number-one priority in our operations. We work in a very dynamic market, and we know that our teams, and the skill of our teams, is really what’s going to define our success in the future. So, keeping them at the center is critical. And it’s not just the operations team; it’s everybody in the company. We have over 60,000 employees—from the people in operations all the way to the executive team—and everybody is involved and behind this exciting effort.

Keeping our people, reskilling our people, building that future-ready workforce is what’s critical for us but also for our employees. Any time in life when you learn new skills, when you educate yourself, I think you have the opportunity to live a better life. It’s not just about our company being better and us being prepared for the future; it’s about all of our employees being ready for that future—keeping them at the center, having them highly engaged, all of the reskilling, getting them excited about what the future holds.

This isn’t some kind of executive mandate; it’s the employees leading it, pulling the company to it. Keeping them all deeply engaged keeps them directly at the center of what we’re doing. And having our employees fully engaged, really building that future-ready workforce is going to be what defines the success of Western Digital.

Daphne Luchtenberg: Great to hear that insight from a member of the Global Lighthouse Network. And in our episode featuring Gigy Philip, trans­formation director at the Coca-Cola Company, we heard about not just the importance of engaging your workforce but also working harder to keep them building their skills.

Coca-Cola: The people-first story of a digital transformation

Gigy Philip: The broad range of digital technologies that we’re seeking to adopt as part of the transfor­mation will fundamentally change the way we work. A significant number of existing roles in CPS [commercial product supply] will require new knowledge and new skills. And several new roles with competencies that we don’t currently have will also need to be created. So, we’re seeking to bridge the skills gap and deliver the workforce diversity that’s needed to tackle the challenges ahead, primarily through reskilling and through the digital academy initiative.

This decision is really not only driven by the current talent shortage that’s really making it very, very difficult to hire new talent but also because reskilling contributes to the learning culture that we’re trying to build in the organization, and this culture of continuous learning can pay dividends on the employee front. Reskilling also makes financial sense because it’s obviously cheaper to reskill current employees than hire new ones. So, the primary focus is on reskilling, but we’re also bringing in new talent with skills that we need for the future that we don’t currently have.

Christian Johnson: David’s and Gigy’s talk about the need to build digital skills links pretty nicely to a couple of episodes I’ve hosted on the topic of digital twins. Now that’s a phrase that’s coming up more and more in our episodes, even when the immediate focus may be elsewhere. And I feel like we have a better sense now of what a digital twin is thanks, mainly, to the way McKinsey partners Kimberly Borden and Anna Herlt explained it in that first digital twin episode.

Digital twins: What could they do for your business?

Anna Herlt: A digital twin is actually a digital representation of a physical object and we always look at it in its environment. It’s important that you link it with real data sources from the environment and are able to update the twin in real time.

Christian Johnson: And Kimberly, can you say a little bit about the types of digital twins available?

Kimberly Borden: There are common archetypes of digital twins. For example, there’s a product twin, which is a representation of the product; there is a production plant twin, which could be a representation of the entire manufacturing facility; and there is a procurement and supply chain twin, often called a network twin; finally, there is sometimes an infrastructure twin. For a product twin, this can encompass various parts of the product life cycle, all the way from the initial concept design and engineering through to services—meaning that as the product is functioning in service, you are getting live, real-time data on it. An everyday example would be Google Maps, which is a digital twin of the Earth’s surface. It then links real-time data on traffic to optimize your driving routes. That’s a very simplistic version of a digital twin.

Daphne Luchtenberg: That was such a great introduction to the topic. Kimberly and Anna broke it all down beautifully. We heard more about the use of digital twins in our recent episode on electric vehicle batteries.

Christian Johnson: That illustrates the green revolution happening across the world, doesn’t it? With electric vehicles [EVs] leading the way. And, of course, EVs need batteries to power them—a lot of batteries—gigafactories’ worth. Let’s jump into the episode with our guest Stefano Piscitelli, vice president of group construction at Northvolt, and our McKinsey colleagues, Evan Horetsky and Mark Bakker, talking about the importance of digital twins in complex operations.

Batteries included: Building and operating sustainable gigafactories

Evan Horetsky: There’s a point in which I think it’s quite obvious that you need a very well-thought-out and very lean digital backbone to control all of this. And honestly, there’s also been, for 20 to 40 years, the talk of Industry 4.0, digital twin, factory of the future kind of buzzwords, but what does this really mean? This really means for battery manufacturing, you need an idea of how you put into a database the exact characteristics of the equipment, and the changes to your equipment that you’re putting in this factory.

Then you use this model or this compendium of information about your factory equipment—what’s really important, the things that make the cells—and you use that to connect to each of your other design and planning efforts. How many pipes do you need to connect for this equipment to turn on? How big should the beams be on the structure for this? It’s very important to get the first thing right, the equipment simulation, and early on, maybe two or three years before you need to start up the factory and then build off of that.

Daphne Luchtenberg: Christian, that was such a fascinating conversation. Once gigafactories are operating, there’s an opportunity to limit environ­mental impact. Stefano does a great job touching on this. Let’s listen in.

Stefano Piscitelli: It requires a tremendous amount of energy to produce batteries. If you ended up taking that energy from coal or fossil fuel, then you’re not that green after all. The key revolution is to ensure that you use renewable [energy] to feed your gigafactory. This is one of the main points that we have been pushing quite hard. Where do we find energy that is renewable and in that amount? There are not many sites. We managed to secure one in the north of Sweden, but Sweden, especially the north, is pretty rich in terms of wind and hydro plants.

Christian Johnson: That cuts to the core, doesn’t it? In most of the world, access to large, stable supplies of renewable energy is still a huge challenge. And the need to push for better sustainability has never been greater. Worth a relisten to one of our earlier episodes on sustain­ability, where John Revess, senior director of Net Zero Transformation at the World Business Council for Sustainable Development, got the conversation going.

Reaching net zero—what will it take?

Daphne Luchtenberg: John, can you give examples of some of the innovations that companies are now talking about when it comes to decarbonization?

John Revess: Innovation is definitely part of it. But the innovation is coming, because companies and the conversation have moved from why we need to engage to, how do we operationalize the commit­ments that society expects leadership to take? In this decade of action, it’s really imperative that every company deals with its impact on climate change, biodiversity loss, and mounting inequality. These actions will anticipate and connect with our customer demands. And regulations are being put in place and capital markets that are using this ESG infor­mation to actually allocate their capital. And the innovation cycle is right at the heart of that.

Christian Johnson: In the same episode, Daphne, you spoke with McKinsey partner Ruth Heuss about the role of operations in answering that call to action.

Daphne Luchtenberg: Ruth, this podcast channel addresses an audience of operations leaders, and we often talk about the importance of making the connection between the board vision and the front line. We’ve talked about how CEOs and leadership teams have been setting bold aspirations and visions. But, really, it’s operations that make these things happen, right? What role do you see for people who have leadership roles in operations today?

Ruth Heuss: The purchasing function will play a huge role, especially for those sectors that buy things and then process it along the way before they resell it, mainly consumer goods and automotive. But, obviously, also in many other industries, manufacturing will play a key role.

For example, in pharmaceuticals and chemicals, there are all kinds of processes that need to be decarbonized. And not to forget one important piece—we will see a huge capital expenditure wave coming over, which is needed for building all those decarbonized supply chains and operations for battery plants. And the cheaper we can actually build this green infrastructure, the cheaper the transition also is and the faster it can get done.

So there’s a huge demand for operations in terms of cost reduction for the transition, but also in speeding up for the transition. If you just think about it, we need to build ten times more capacity in solar and wind every year than we did before. How will that go if the operations folks don’t really speed up their processes in that time?

Daphne Luchtenberg: It does really feel like there’s a positive movement in terms of people development to fill the skills gap, a focus on sustainability, and the power of digital analytics to solve complex problems. However, we can’t ignore the elephant in the room from the past 12 months: the impact inflation has had.

Christian Johnson: Absolutely. Probably the biggest immediate problem facing most businesses around the world today is inflation. We had a great discussion in our episode, “Inflation fighter and value creator: Procurement’s best-kept secret.”

Daphne Luchtenberg: That’s right, Christian. We were lucky enough to have Craig Reed, former vice president and chief procurement officer at Corteva Agriscience, discuss how companies can gain momentum and stabilize to deliver value.

Inflation fighter and value creator: Procurement’s best-kept secret

Craig Reed: In this current environment, you need clear transparency, from beginning to end to be able to perform. With so much volatility, unpredictability, and challenges, it is extremely important to enable the organization to be able to manage the situations that are occurring across this entire continuum.

This resiliency discussion is probably the most significant one now because all companies are taking a fresh look at what does it mean to be resilient. In the past, you were driving for productivity, and you were doing that on a global market that had some level of stability and predictability. Now that’s continuing to change, and you have to rethink what the definition of resiliency means for you and your company from a supply chain standpoint. Reevaluating that is also strategically important right now.

Christian Johnson: Everything we’ve described so far adds up to an end-to-end operational resilience strategy, right? That’s what enables an organization to respond and adapt in this sort of environment.

Daphne Luchtenberg: Resiliency is still key and it’s a great note to end our show on.

Christian Johnson: As difficult as this year was, it was also a great year, full of genuinely inspiring conversations to help leaders navigate through the uncertainty and build resilient operations.

Daphne Luchtenberg: Christian, I’m excited to see what next year brings.

Christian Johnson: Already well in the works. We have some great conversations planned on insulating from inflation, decarbonizing operations, winning with talent, gaining digital speed, enhancing resiliency, the imperative for excellence in capital projects, and much more.

You’ve been listening to McKinsey Talks Operations with me, Christian Johnson.

Daphne Luchtenberg: And me, Daphne Luchtenberg. If you like what you heard, subscribe to our show on Apple Podcasts, Spotify, or wherever you listen.