Companies can quickly reduce costs and increase efficiency in the immediate term by making three no-regret moves:
Companies can realize improvements in the short and medium terms by taking a three-step approach:
Companies must also prepare sites for the postpandemic world by initiating transformative changes to their operations, including digital implementations that enable proactive identification of risks and rapid mitigation.
JUNE 24, 2020
Most chief operating officers (COOs) of manufacturing companies have experience managing through crises, but they have never faced anything like the COVID-19 pandemic. Companies are now operating in a new reality, characterized by increased uncertainty and volatility, enhanced health standards, and, in some industries, a reversal of globalization trends. A defining feature of this new reality is that COOs must respond not only to a sharp decline in demand (as they did during the Great Recession, for example) but also to unprecedented supply-side disruptions.
Until a vaccine or highly effective treatment is widely available—12 to 24 months from now, according to the World Health Organization—COOs must lead their company’s efforts to win the fight by maintaining stable and cost-efficient operations as the pandemic persists. At the same time, they must initiate long-term actions that will position their company to win the future by gaining competitive advantage in the postpandemic world.
To navigate the challenges in the new reality, COOs should set five priorities now.
Ensure Business Continuity and Manage Liquidity
When countries lifted their COVID-19 lockdowns, COOs faced the challenge of safely restarting onsite operations. Many companies, with support from a rapid response team, have successfully managed the restart of operations and the return to work for thousands of employees. They must now turn their attention to the 12- to 24-month fight phase. During this marathon, business continuity and competitive position will constantly be at risk and require active management.
To win the fight, COOs must shift the rapid response team’s focus to tasks that are essential for stabilizing operations and ensuring business continuity. These tasks include adapting and optimizing production processes while complying with social-distancing rules, establishing a virus-monitoring system, and ensuring adequate supplies in the short term.
During the fight phase, it is also vital to rigorously manage liquidity. The effort should be led by a cash management office that is explicitly responsible for managing short-term liquidity, creating liquidity plans, launching cash preservation measures, and monitoring and forecasting cash and liquidity development. To further free up liquidity, COOs should optimize net working capital, especially inventory.
Rapidly Reduce Costs
For some companies, such as those in the pharmaceutical industry, revenues have been stable or even increased during the crisis. But most companies’ financials are under heavy strain. In a recent BCG survey of business leaders, almost half said that they expect their company’s profits to decline by more than 20%, and about 90% are planning company-wide cost-reduction programs.
To maintain competitiveness during the fight, COOs must act quickly. They should identify cost reduction measures and implement them across all operations, always with a strong bias toward quick wins. The measures should address all value pools in direct and indirect functions—there should not be any sacred cows that are exempt. In many industries, COOs need to reduce the operating costs of manufacturing plants by rightsizing the staff to meet the current needs. At a minimum, they should seek to maintain precrisis productivity levels despite the possibility of lower utilization. In many cases, an additional productivity increase of up to 15% can typically be gained quickly.
Implementing cost reduction measures is essential for securing a company’s survival—not only for the next few weeks but also for many months to come.
Build Supply Chain Resilience
The first weeks of the COVID-19 crisis revealed a weak spot for many companies: a global supply chain that operated efficiently in a steady-state environment but that was highly vulnerable to external shocks. In fact, supply disruptions caused some companies to stop or slow down production even before the virus outbreak reached their facilities.
To maintain business continuity during the fight phase, COOs need to increase the resilience of their supply chain. Digital tools, such as a supply chain control tower or a digital twin solution, can significantly improve transparency and stability. To unleash the full potential of digital tools, however, humans and digital tools must work together seamlessly in order to implement what we call the bionic supply chain.
Considering that increased volatility and uncertainty are expected to persist even as the immediate crisis subsides, building a resilient supply chain is a long-term imperative. Increasing its resilience will not conflict with efforts to reduce costs if done correctly.
Design Future Operations
In recent years, most manufacturing companies have gained significant experience with digital-operations use cases. But many companies have focused on narrow implementations of discrete use cases. To capture the full value of these digitization efforts, COOs must take a holistic approach that encompasses not only implementing technologies but also improving plant processes and structure. A focus on value also requires discontinuing efforts that do not deliver the expected results and scaling up those that do throughout the entire production network, not only in specific facilities. In other words, companies must build the factory of the future at scale.
In order to scale up and drive continuous improvement, a COO needs to rethink the organizational design and put in place the right systems and resources. Successful COOs recognize the future importance of continuing to invest in operations now, even as cost reduction takes center stage during the crisis. Indeed, investments in digital operations can enable cost reductions of up to 30%—a crucial contribution to winning the fight and gaining a competitive advantage in the future.
Address Environmental Sustainability
Because many manufacturing companies are still struggling with the immediate impact of the crisis, emissions reduction is not always a top priority. However, we expect this to change quickly. In many countries, companies may need to take climate protection measures in order to receive financial support from the government. Public pressure for this linkage will likely rise, as production processes account for approximately 30% of global carbon emissions.
Moreover, because the decarbonization of manufacturing is among the most powerful levers that can be used to address climate change, a company’s environmental approach is increasingly influencing its market capitalization and social value. This was the case before the pandemic, and it will remain true during the crisis and beyond.
As a result, COOs need to strongly focus on continuously improving their company’s carbon footprint, especially with respect to its production processes. By implementing a concept that we call the green factory of the future, COOs can apply levers to avoid, reuse and store, and offset carbon emissions along the entire value chain.
COOs must pursue these five priorities to support their company’s efforts to win the fight during the next 12 to 24 months and transform to win the future. The effort to maintain strong operations in the new reality will require agile decision making from COOs across the immediate-, medium-, and long-term time horizons. In short, COOs must take decisive actions today to ensure robust operations in the future.