I love irony. No sooner had I discussed with a colleague about the time I worked for a couple of McKinsey alums than I received an email promoting a new study undertaken by, you guessed it, McKinsey. Actually the McKinsey Global Institute (MGI). The paper’s authors researched global supply chains very timely in light of the Covid-19 pandemic. The report highlights vulnerabilities in global supply chains and how resilience takes priority, calculating ongoing cost of shocks and prospects for production to shift.
- Industries experience month-long disruptions every 3.7 years on average
- Companies can expect supply chain disruptions to erase 40 percent of a year’s profits over the course of a decade on average—and extreme events take an even bigger toll
- Up to a quarter of global trade flows could move to different countries over the next five years if companies restructure their supplier networks and governments take action. But moving supply chains is not the only way to build resilience.
The idea of chasing low-cost labor across the globe while ignoring supply chain risks and costs always seemed goofy to me. For, I didn’t waste my years as the unofficial chief manufacturing cost analyst for a medium-sized manufacturer. But here is some weighty analysis that emphasizes the risks.
The stakes are high, according to Risk, resilience, and rebalancing in global value chains, a new report from the McKinsey Global Institute (MGI). MGI analyzed 23 industry value chains to assess their exposure to specific types of shocks, including pandemics, conflicts, cyberattacks, trade wars, natural disasters, and climate risks. Industries have different exposure to these shocks based on their geographic footprint, factors of production, and other variables.
Based on the frequency and cost of disruptions, MGI scenarios show companies in most industries can expect shocks to erase 45 percent of one year’s EBITDA on average over the course of a decade. A single extreme event could cause even bigger financial losses. On top of this bottom-line impact comes the additional cost of rebuilding damaged physical assets, losing market share to competitors that are able to sustain operations, and significant societal harm such as loss of life, loss of jobs, shortages of critical goods, and damage to communities.
Geographic concentration can often produce supply chain bottlenecks when a shock hits. MGI finds 180 goods that are exported primarily from just one country, worth $135 billion in trade annually. Another issue is that large multinationals can have thousands of suppliers—but most have little visibility beyond the top tier of those tightly interconnected networks.
Will companies restructure their supply chains as part of a flight to safety? Yes and no, the report finds. There is an economic logic behind the way industry value chains have evolved. Given the scale, complexity, and interconnectedness of value chains, they are harder to move than is commonly realized.
MGI estimates that 15 to 25 percent of global goods exports, worth $2.9 trillion to $4.6 trillion annually, could conceivably move to new countries over the next five years. This is based on both economic factors, such as the cost of relocating production, and non-economic factors, such as governments changing policy to promote domestic production of goods deemed essential or important to national economic security.
“The prospect of a significant geographic rebalancing in global supply chains represents a risk for the companies and countries that might lose out—but a potentially significant opportunity for those that manage to capture a share of this production. This could have important consequences for future growth and employment,” says Susan Lund, a partner at the McKinsey Global Institute. “But supply chains involve thousands of independent firms, reflecting specialization, access to consumer markets around the world, substantial sunk costs, and long-standing relationships. Relocating is not a simple task.”
To attracting more production, countries need to develop strong supplier ecosystems, specialized workforce skills, robust infrastructure, and an attractive business environment.
There is more to resilience than changing where goods are made, however. Operational choices and the structure of a company’s supplier network can heighten or lessen vulnerability to disruptions. Common practices such as sourcing from a single supplier, relying on customized inputs with few substitutes, and carrying substantial debt can magnify the financial impact of a shock if they are not calibrated to account for current levels of risk.
Among the steps companies can take are mapping the sub-tiers of their supply chains in detail and connecting them digitally for better transparency; building the capacity to flex production across multiple sites; holding more inventory; and strengthening their balance sheets.
The COVID pandemic is prompting action at a time when cost structures are changing across countries and revolutionary digital technologies are gaining traction in global manufacturing.
“Supply chain shocks are not a new phenomenon, but only a handful of leading companies have really moved to minimize their risk until now,” says Katy George, senior partner and global leader of McKinsey’s operations practice. “That’s largely because of a perception that resilience has to come at the cost of efficiency. But that’s no longer true. Now companies have new tools at their disposal to become more resilient and more productive.”
Back in the 80s and perhaps before, I started listening to a radio personality/philosopher called Earl Nightingale. His recording of The Strangest Secret became the first gold album for a talking program (rather than music). He was still in his 20s when he discovered the core understanding that drove the rest of his life–you become what you think about.
He had another pet theme that I thought made sense–hydrogen as fuel. It is plentiful. Its combustion by-product is water. What’s not to like (other than a huge infrastructure devoted to another fuel).
Those days are returning. Several articles have popped onto my radar screen in the past week trumpeting the theme of hydrogen as fuel.
I sense business opportunities for some business-savvy engineers.
Check out this article on Axios.
John Dyck is now CEO of CESMII, a US government initiative promoting Smart Manufacturing. I worked with him some at MESA International and in his previous role at Rockwell Automation. He sent me this note the other day, “I wanted to share with you a link to a recording of a Congressional Briefing (virtual) that I participated in (with ASME) on rethinking the manufacturing supply chain. My contributions start at the 10:20 mark and are ~10 minutes. This is part of a significant initiative that we’ve started here, which you see in the final 2 minutes of my presentation.” There are few people in Congress with any kind of science or engineering background. Let alone manufacturing and production. I hope they take the time to watch and learn.
Unlike the initiatives in Germany and China that have the full support from the top of the government, American government might fund initiatives such as CESMII, but as far as the top reaches of Congress and the administration are concerned, the outcomes are more along the lines of wishing and anxiety.
If you are American and involved in this area, listen and see where you might help. If you are outside America, you’ll find it interesting what we’re working on.
I never thought I’d sit at home in front of a screen for most of a day (7 am CDT until 3:45 pm CDT) although part of the time I was on my iPhone driving to an errand still watching. In fact, I answered a survey from my friends at Rockwell marketing with a neutral-to-negative view of these virtual conferences. I was actually hoping for the trip to Boston. My wife and I celebrate one of those landmark anniversaries Friday, and I thought Boston would be a good place to celebrate. <sigh>
However, PTC assembled a great group of speakers. The internal speakers were professional quality presenters. Even the weakest presenter of the day was superior to many I see live. Of course product enhancements were emphasized, but thought leadership about where both PTC and Rockwell Automation were heading (Rockwell is an investor and CEO Blake Moret got the unenviable final speech slot) formed the backdrop.
PTC CEO Jim Heppelmann interwove his vision of the company and industry with a variety of product roadmaps and use case examples. To speak “PTC” one had best learn to spell “SaaS”. He enumerated four skills enhanced by cloud-based, or SaaS, applications. Mobility and resiliency; Flexibility–supply chain and production; Bringing digital technology to front-line workers; and, Remote Monitoring (something I’ve been talking to many people about lately).
Going forward, Heppelmann discussed adding AR to IoT and AI leading to “Spatial Computing” and “Spatial Analytics”. PTC has products and applications going in that direction. Listening to him, I immediately saw possibilities.
You can follow my Twitter thread (@garymintchell) for other thoughts of the day. Aside from PTC executives laying out product and application roadmaps, presentations relevant to the day and well done were from Rana el Kaliouby, CEO of Afectiva and author of Girl Decoded (excellent story told on Tim Ferriss blog) who discussed emotional intelligence for technology; Kimberly Bryant told the story of Black Girls CODE–powerful; Nir Eyal discussed ideas on product development from his book Hooked (but I preferred his book Indistractable); and Stacey Higgenbotham, who is the IoT journalist. I think I saw seven of the eight presentations. I think I need an adult beverage!
Moret talked of the many benefits Rockwell Automation has provided to customers through its partnership with PTC and acquisitions of PTC partners. Many years ago, I saw some demos of Rockwell working with CAD/PLM supplier trying to bring that technology and automation together. Siemens did it by acquiring UGS quite a few years ago. That integration seems to have succeeded, but it was rough going for a while. Meanwhile, aside from the important benefits of ThingWorx from PTC, OnShape, the CAD SaaS application, combined with Vuforia products, ThingWorx, and acquisitions in the simulation area potentially make Rockwell extremely competitive in that market.
I think we are seeing PTC and Rockwell Automation breaking out in a new way that is exciting.
[Note: I am an independent writer and thinker, not an analyst who it paid by the companies.]
I have published a podcast, Number 206–OEMs How To Innovate To Win More Business. I’ve found in many discussions with special machine builders, custom manufacturers, and even systems integrators that they may have given up too easily in pursuit of a contract. I have a couple of stories.
The podcast is sponsored by Ignition from Inductive Automation.
In brief: Arthur D. Little acquires Cutter Consortium and Presans to expand open consulting capabilities
Arthur D. Little (ADL) today announced the acquisitions of Cutter Consortium, a business technology research company based in the US, and Presans, a leading player in industrial open innovation based in France. By combining its own expertise with an existing community of independent experts, ADL expands its consulting ecosystem to establish a next-generation value proposition powered by open consulting and open problem solving.
Now, at first, I suffered from a bit of cognitive dissonance. It’s difficult to imagine these large consulting firms who make a living from charging high prices for custom coding. Then I remembered what a friend with experience at this level told me–open source is good for the community, but the large companies benefit, too. You see, they get in return thousands of hours of free software development by the community. I guess you could say it’s a “win-win-win” situation.
Acquired companies described
Cutter Consortium helps organizations navigate digital disruption of business models and leverage emerging technologies for competitive advantage and mission success. Through its research, consulting, training, and executive education – all delivered by globally recognized thought leaders – Cutter delivers innovative solutions to its thousands of clients worldwide. Cutter’s experts have done the ground-breaking work in areas ranging from digital architectures to digital tech, enterprise agility to data analytics, and digital leadership to sustainable innovation. At the heart of its business is a membership service that gives clients valuable access to its experts and their insight.
Presans is a leading data-driven platform dedicated to industrial open innovation and open problem solving. Thanks to cutting-edge technology based on big data and artificial intelligence, as well as a team of fellows (former research and innovation executives) with in-depth knowledge in innovation, Presans leverages a network of over 6 million experts worldwide. Presans provides a variety of high-end open innovation services, contributing to the acceleration of decision-making and removal of scientific and technological roadblocks. Presans has worked for 50+ international industrial groups and delivered more than 100 innovation projects in Europe, the US and the Middle East.
“Arthur D. Little applies an ‘open consulting’ and ‘open problem solving’ approach and brings the best global experts to every assignment to complement its internal strengths,” comments Ignacio García Alves, Chairman and CEO of Arthur D. Little. “We believe the future is open consulting. With the double acquisition of Cutter and Presans, we are able to expand our open consulting ecosystem and open problem solving capabilities, offering access to experts, premium insight and a differentiated experience for our clients, in a seamless way.”
“The Cutter team felt an instant synergy with our colleagues at ADL. We share a focus on innovation, which, in ADL’s case, goes back to its roots, and an emphasis on providing custom, leading-edge solutions. Moreover, ADL’s more than 40 offices in 30 countries has given Cutter an enhanced ability to assist its clients worldwide,” says Karen Coburn, CEO of Cutter Consortium.
“Since its inception at the École Polytechnique’s start-up incubator, Presans has always engaged with the best experts in the world, mainly to help its customers solve complex technical problems,” says Albert Meige, Founder of Presans. “Presans now addresses more and more problems at the crossroads of strategy consulting and scientific & technical expertise. The time had therefore come for Presans to strengthen itself by joining forces with Arthur D Little.”
Together with Cutter and Presans, ADL reinforces its position on digital and information technologies, as well as industrial innovation, particularly in breakthrough innovation and convergence problem solving. In addition, through the acquisition of the technological platform of Presans, ADL is accelerating its investments in artificial intelligence and machine learning to develop state-of-the-art offerings for its clients.
Cutter Consortium and Presans will continue to operate under their current brands with the same management teams, while benefiting from ADL’s capabilities, investment, and global exposure.