In this week's episode, Santosh sits down with Katy George, Senior Partner at McKinsey & Company to discuss her recent report on Industry 4.0 and the Lighthouse companies that are leading the way for innovation, automation, and worker adaptation in the new digitally-led environment.
Below is a transcription of the interview: Santosh Sankar 0:40 Hey ladies and gents Welcome Back to the Future supply chain podcast. I'm your host Santosh Sankar. And joining me today is Katy George, senior partner Mckinsey. Welcome Katie. Katy George 0:51 Thank you very much. Santosh Sankar 0:52 Yeah, glad to have you on here. I want to kind of jump right into it and talk about a lot of the work you've done around industry 4.0. You've authored a report around what you dubbed the Global Light house network. But before we get into all the good stuff, I want to know the person and your story. What's the Katy George story? Katy George 1:14 Haha, okay. So I am a partner at McKinsey in our new jersey office, and I lead our global operations practice. But I grew up in Illinois, surrounded by stories of the rust belt and thought had the pain of not being competitive in manufacturing, and the transition that was happening and the implications for our workforce and for people and our communities. And so when I... I'm an economist by training and when I chose my graduate program, I chose one where I could study not only labor economics, but also really understand what makes manufacturing plants tick, and what makes supply chains tick? And how can we organize work to ensure that companies and sectors and communities are healthy and vital? Santosh Sankar 2:11 Very cool. So that's ultimately led you to devote your your career to think about industry + digital coming together. Exactly. And what was that path where you ended up realizing that digital and technology is going to have a really really meaningful impact to what may be the status quo of operations have been as you look at manufacturing lines, distribution centers, trucking, so on so forth? Katy George 2:42 Well, you know, I did a lot of my client work around lean production systems and and then supply chain design and improvement and saw how, how the way that we organize work and the way that we drive problem solving and continuous improvement has a huge impact on the productivity and the flexibility and then ultimately the competitiveness of an operation. But then, you know, as we start started to see digital technologies coming online, we saw that they would be extremely disruptive to existing supply chains and existing factory setups. I'm part of the McKinsey Global Institute. I'm on the advisory council and have collaborated with some of our Mgi research colleagues on a couple of big reports. One was on the future of manufacturing globally, where we looked at how new technologies would really rewrite how industries are shaped where manufacturing is done, what customers can expect, but that manufacturing would stay very vital as a contributor to economies both locally and regionally as well as globally. And then, you know, we started to look at what the impact of new technologies would be specifically and You know, you really can't be in manufacturing without trying to understand what the impacts will be and how to help individual workers. And also companies respond to the changes that are coming. So we've been spending a lot of time both at the research level. So the McKinsey Global Institute level, and with the World Economic Forum, as you mentioned, looking at the most kind of advanced adopters of new technologies, as well as working with individual clients, to think about how do you prepare for the future? What is the performance and the financial impact that you can expect? And how do you really create great value from using these technologies? but also how do you change your operations? And how do you differently prepare your workforce? How do you think about rescaling and upskilling in order to take advantage of what turned out to be a really exciting set of new technologies, it is exciting to be part of the fourth industrial revolution that will reshape our world and create great opportunities for consumers. You know, across every industry with a transition is going to be important and needs to be well done. And that's something we're really dedicated to. Santosh Sankar 5:07 We've alluded to the fourth industrial revolution or what people call industry, four Dotto. But would you be able to give us the download? What is it? Who does it impact? Why does it matter for our audience base that might not be as familiar or maybe have been exposed to misinformation or frankly, need to get up to date? Katy George 5:29 Sure. So we think of industry 4.0, or the fourth industrial revolution or digital supply chain, digital manufacturing, whatever terms you use, it's really the coming together of three big buckets of technologies and technology applications. So first of all, whole new kinds of intelligence driven by analytics, right. So the advent of big data. Manufacturing, by the way, is a sector that has long had the most data of any sector, you know, across industries. More than government more than consumer and retail more than banking. But we haven't used that data well. So now how can we use the fact that we have much better and much less expensive ways of capturing data, integrating data, analyzing data to make better decisions, real time in our manufacturing operations and our supply chains more broadly. So the first kind of set of use cases that we look at are really powered by data and analytics, all around better insight and intelligence and better decision making. The second set is really around digital connectivity, right, so you can now just as with our iPhones, we can track our packages from Amazon, we should be able to similarly track products as they move around the world through our supply chains, we should be able to immediately see what's happening with customer demand in different places. And within a manufacturing site, for example, we should be able to really understand the performance of the different machines and stations and people and how that all comes together as a system to drive performance. And so the connectivity that is now possible from Digital is kind of the second set of use cases and technologies that we look at. And then the third is around automation and flexible automation. So we're seeing new capabilities in robotics that are completely different from automation of years ago, much more flexible, and much more interactive with human workforce. And so we're seeing that open up all new possibilities. I think we're at a stage now where because of the combination of these technologies, we for the first time, can achieve flexibility and low cost at the same time, instead of seeing them as a trade off. And that just opens up all sorts of new opportunities and industry across all industries. So it's those three different kind of technology areas that we define as industry 4.0. Santosh Sankar 7:55 As I was going through the report, there was a term that really stuck out and It was end to end value chains, and the word value rather than supply chain. And I'd be curious, would you be able to expand on this concept for the audience because, you know, your your purview is all the way from the manufacturing floor right when raw materials are being worked on reconstituted to units of value through to when something gets to a job site, or my front porch. That's a huge expanse. But I'd be curious, you know, how do you think about this term value chain, Katy George 8:36 What you find is a huge expanse, but let me make it even larger. We're talking about how you how you think about working with your suppliers for raw materials and components, and bringing them all the way through either your factories or your contract manufacturers, and then into whatever distribution system. You have all the to your customers front door. So we're really thinking about that entire chain. And in fact, even before that, we're thinking about the interface between all of those operational components and design, product design and product development. Because with a digital thread, you can now connect the dots all the way from designing a product, thinking about the specifications, characterizing those all the way through to tracing that product through your supply chain, measuring the performance not only as it's delivered to your front door, but actually as you use it, right, whether it's something where we do after sales service, and then have inputs around the reliability of the product, the performance of the products, or whether there's some IoT, internet of things kind of components into the product so that we can track it and get feedback that can actually help us improve the end and value chain. So that entire end to end system is what we call the value chain. And the technologies I described allow us to connect the dots across that much faster with a lot more information sharing, and a lot more fluidity, not only within one company's systems and the parts of their supply chain, right, their distribution center can now connect with their retail store. And all of that can be connected to their manufacturing plants and all that connected right to their raw material buyers. But it also can be seamless in terms of connecting the dots outside of one firm boundaries into their suppliers and their customer base. Santosh Sankar 10:30 Yep. So a lot of what you touch on, you know, hits on this concept of operational visibility. And then transparency as you share it with stakeholders is is there a framework that a company and incumbent might be able to adopt as they're looking to drive this end to end improvement? Katy George 10:50 Yeah, sure. Let me let me share a couple thoughts on this. First, what's interesting is we're not really talking about any totally new paradigm around how to understand where there is value to be created in a system and then executing against that. So, in some sense, there's not a new framework, in that any company that wants to participate in this digital or industry 4.0 journey should first start with how do they want to create business value? Where do they think there's opportunities from operational improvement? And then how do they orchestrate and pull together the different technologies and use cases that they need in order to deliver against that. So for example, some of the companies that we've been studying with the World Economic Forum and celebrating in terms of their impact, have really been setting new benchmarks for performance in ways that really matter to their business. So for some of them, it's around flexibility identifying that they want to be able to create really go beyond kind of their mixed model production systems to something even more flexible. more customized in order to reduce inventory, or increase speed through their supply chain meet customer needs in a different way. For others, it's about getting to a note another level of productivity and therefore cost competitiveness. For others, it's about quality, reducing the number of deviations that are occurring, and therefore assuring safer and better quality products for their customers. Santosh Sankar 12:23 Are there specific vendors that you see that might be ahead of the pack in enabling this future for their customers? Katy George 12:35 What we see actually is that there are a lot of vendors who offer a lot of different things right in terms of, you know, basic cloud architecture support, data, architecting, data cleansing, data, visualization, and all sorts of, you know, specific software applications through different things. What we're seeing is that companies are really who are furthest ahead are really using a combination of some of the big established players in it and IOT, but also experimenting with a lot of startups and bringing multiple suppliers together technology suppliers together into their ecosystem, to experiment and to improve performance. So one of the things that really characterizes the plants that are in this lighthouse community, is there an open architecture approach, and the kind of mindset around piloting and experimenting with fast failure, rapid iterations, using a minimum viable products kind of approach and framework to try things, get them out on the floor into their supply chain quickly, and evolve from there. So we're not saying, you know, this is not about find one vendor, call them and have them, you know, rewire your supply chain. This really is about being very clear about what business value you're trying to create, and then assembling different technologies in a very iterative and experimental way. to equip your, whether it's a manufacturing plant, or it's part of your supply chain with new capabilities that allow you to meet that business value, the business back kind of approach is another one of the characteristics of the lighthouse sites that's quite different from some of the companies that are struggling to implement these new technologies, some of the companies that are struggling and we, in our report, we talked about them being in pilot purgatory, are picking technologies that they think would be valuable and they're right, they will be valuable, but implementing single technologies, and trying to see the return on investment from those single technologies and some kind of pilot before they scale. And what they miss is that those single technologies typically do not transform the operations of their system, enough to make a big difference in performance. It's only when you bring things together and I will give you a framework for this. We see that the lighthouse sites are bringing technologies together to really transformed three different parts of their operations, the technical system, right, the kind of the flow of their actual physical product, the flow of information, etc. so that the technical system changes their performance management, all of these sites have put in some kind of digital performance management kind of approach so that they have much faster visibility to what's going on their supply chain can make much faster decisions, can use algorithms to make decisions that otherwise would have been made by people you know, in a much more you know, in what slower way and then third people systems, so changes such that we're really giving worker superpowers in terms of expanding the the types of tasks that they can do because they're now using augmented reality or some other kind of ways of kind of expanding on what what people are able to do. Yeah. So the what we're saying is that when you To attack both the technical system and the performance management and expand the capabilities of your workforce, that's when the whole system starts humming. And you start seeing a really significant return on the investment you've made. You start seeing kind of the foundation being laid for continuous Improvement and Innovation, which is quite democratized. And therefore, innovation comes from every part of your operation, because everybody's working in this new way. You see the culture change. And you see that these companies are really beating previous benchmarks in terms of their performance. Santosh Sankar 16:32 Are there good examples, you might point to where there are incumbents that have done this really effectively blending digital industrial, running experiments, being open to bringing vendors together to actually, you know, realize a lot of this. Katy George 16:51 Yeah, we've, in our report that we issued jointly with the World Economic Forum in January of this year. We actually give 40 some of these examples because what we've done is we've scanned industry and received thousands of applications, companies who have individual sites or end to end value chains, where they have been implementing these new technologies. And we have an industry committee that assesses these applications, we do site visits, etc, and identify the companies in the site that we think are really furthest ahead. And so there are lots of very specific examples in that report. Let me just give a couple to you: biopharmaceuticals is one that has a site that was absolutely at the top end of global pharmaceutical performance. We have Mckinsey does a lot of benchmarking in the pharmaceutical industry. So we have a very good understanding of kind of where plants are in terms of their productivity, quality and flexibility performance. And this one was right at the top. They implemented new technologies in analytics and digital and have really surpassed kind of the performance. And so you can see a, you know, great site already now using new techniques to get to another, a whole new level. You see, one example I really liked was Bosch in China. They are also just a very good operator, right as a company, they have a very strong production system and culture and a lot of rigor in the way that they operate. one specific example of how digital was taking them to the next level, which I thought was really interesting was that they connected as we were talking about the end and supply chain in the value chain, they connected their systems to some of their suppliers, so that they could actually manage the supply relationship better in terms of giving the suppliers better demand information tracking when the supply the components would be available and planning them into their own production etc. One of the things they found with one of their suppliers is that they saw that the plant was actually doing all their builds at night, and so it was a very odd kind of shaped kind of supply schedule. And they realized they were doing it because they were polluting and didn't want people to see the smokestacks, etc. And so that was something where it's an example we're using digital really helped them, solve a, you know, identify a real supplier gap in performance and resolve it. There are other examples. So those are two examples of doing what you did before. But now better. There are several examples where you see companies creating whole new business models. And particularly, you see that around some form of mass customization. So there's one of the automotive manufacturers, SAI Maxis now has taken customization to a whole new level where people can customize the camping vehicles and cars that they want at a different level than we're able to do. You know, currently with typical automotive and so that's an example where they're creating new customer value. Really a whole new business model from from these technologies. And the third kind of example I'd give that I think is really fascinating is there are a couple of companies Schneider Electric is one that have really been quite thoughtful about opening up their new digital platforms not only to their own internal networks, but also to customers and suppliers, and sometimes companies outside of kind of their direct value chain, but that are part of the ecosystem. And so Schneider Electric's one that's doing it, another one is Higher, to say, appliance manufacturer in China, and Higher actually, they make washing machines. And they have actually created an internet of clothing, such that they are creating use cases actually in clothing, and that are useful for apparel manufacturers and for retailers. And so they've got both the manufacturers and the retailers on their system. Now, neither of those are either our suppliers or customers of the washing machine company, right. They are just others in the same industry ecosystem. And the clever idea is that when the if a clothing has an IoT kind of element to it, once it hits the higher washing machine, it can tell the washing machine what cycles to use. Very cool, but it's awesome. So it's a cooler example. But just imagine the data that's being collected and shared across that ecosystem. And you know that one example is, you know, of course, a nice customer feature. But my guess is that over time, what will be far more powerful is the way that the industry can work together with this greater insight from sharing this data, and making these connections around how to shape product development, how to shape supply management, and all sorts of things over time. So we're really seeing, as I said, kind of, I'll think about it as three categories that have going from one benchmark to a whole new level in terms of cost and time and flexibility. We're seeing new business models emerge. I think we're just at the tip of the iceberg of that. And we're seeing whole new ecosystems emerge as well. Santosh Sankar 22:05 Just to clarify for our audience, when we're saying lighthouse networks, these are really best of breed in being able to create a culture and execute on experimenting and embedding viable technologies to improve their business and their operations. Is that a good way to summarize it? Katy George 22:27 Yeah, exactly. It's a collaboration that we started with the World Economic Forum three years ago, where the whole steering committee of organizations that are also part of the World Economic Forum community, we set up this notion of let's actually find the individual sites, the manufacturing plants that are lighthouses for the rest of the world to show how this can be done. And that's where the lighthouse name came from. And so we started by identifying 26 lighthouses, manufacturing plants that had really adopted these technologies. At some scale, and really shown real results in terms of business impact, and that's not easy, by the way. And, you know, we looked there, you know, hundreds of thousands of manufacturing sites in the world, and we only found 26 that really had had been able to scale these technologies, for the kind of to really demonstrate the promise of these, I'm sure, obviously, there are other good sites around the world, but it just shows that it is hard to do this. And then this year, as you already noted, we expanded from looking at individual manufacturing plants, you know, factories, to looking at end to end supply chains or value chains where companies were implementing these technologies across a kind of a broader product value chain, which sometimes is anchored in a specific manufacturing site, and sometimes it's not. Santosh Sankar 23:49 With these best of breed organizations. How have they approached, you know, work force rescaling upskilling being able to help their people do more or do better with technology on their side, because sometimes that can create some friction. Katy George 24:11 Absolutely. Well, and, you know, actually this has been, for me personally, this has been the most rewarding part of this work. Because, you know, there have been lots and lots of articles about how automation is going to put us all out of work. And particularly, frankly, you know, a very vulnerable part of our, of our workforce, people with lower educational attainment and so you know, to think about all the disruption that this will create, etc. What's been great is to see the amount of effort and investment and time that all of these lighthouse companies have put into rescaling and upskilling. I think Foxconn said it best. They're one of the lighthouse sites and they said we are trying to make all of our production workers into technician We're trying to make all of our technicians into engineers. And we're trying to make all of our engineers into scientists. And you see just real commitment and effective commitment from these companies around doing the academies on analytics and how to use data for their entire workforces. academies on digital. You see examples of kind of reverse coaching, where p&g has a fantastic example in Central Europe where they had an older workforce. And they brought in a kind of younger cohort into the site. And they set up reverse coaching such that the younger cohort was teaching the older workers how to use digital tools, right, you know, just like my 20 year old teaches me all the time. And then, you know, they older workforce was teaching them how to manufacturer, you know, big products. And it was a fantastic kind of experiment that that really scaled have a new way of working across the site and got people comfortable. And so what you see in these sites is certainly the composition of the workforce in terms of how many people do they need in each role is changing some. A lot of these companies have been very good at redeploying workforce from frontline roles, as I said, into technician roles and other places. But what you see is a very worker centric approach to new technology. We see, engagement scores and satisfaction scores universally going up, something we looked at explicitly this year and saw because the workforce is getting skilled in the new capabilities, they are then in many of these cases, really engaging with it colleagues and digital colleagues who've been brought into these sites, and working with them to design new apps and roll them out that solve pain points and make their lives easier. You really see the automation is taking away some of the dullest, most dangerous parts of jobs and instead people being able to find focus on higher value added kind of tasks around problem solving and preventative maintenance and things like that. So it's actually been a very positive story overall for the workforce of the sites that we have studied. Santosh Sankar 27:14 How should companies that are aspiring to be in the company of lighthouse sight or a light or part of the lighthouse network, rather, what should they be thinking about? Because there, this is a moving target for one. But you also mentioned you have to think about your workforce, the technical competency, and then aligning both of them. And that could be a lot for an organization to handle especially if they've been around for several decades, and have gotten comfortable in a rhythm. Katy George 27:48 Yeah, no, absolutely. It is daunting, and it's why we're saying that companies big and small, are struggling with it. You know, big companies almost universally have some kind of program in this space. But they're not always seeing the returns that they expect to see or the speed in terms of scale up that they would expect. And smaller companies are struggling sometimes figure out how to create the resources and get the expertise they need to make the change. So what we're seeing that works, and this is, I think the most exciting part of the lighthouse research is that companies are starting defense small, and by small, I mean, they're picking individual parts of a plant or plants or parts or single product value chains. And then really focusing on transforming those kind of ecosystems by bringing together as I said, changes to the workforce. So engaging the workforce training, new technologies, both with big companies and small startups in an experimental kind of mode, and really being able to then demonstrate the value by really transforming the way that ecosystem works and then replicating that across others, it's actually not dissimilar to what we saw as best practices in lean manufacturing and lean supply chain deployment, where you need to have surround, you know, we should think about this as changing your operating system as a whole your way of working, not just implementing one technology. And when you take that more holistic approach, you can really get some fantastic results, and then figure out how to scale those. Santosh Sankar 29:27 What about the organizations that you've already dubbed as part of the lighthouse network? What do they need to think about? So they continue to maintain their edge, their leadership in and around these competencies? Katy George 29:43 Well, they are, I say almost universally busy expanding their success stories, right, from individual sites. So you know, as I said, one of the things that again, really marked the difference between the approach that these companies had taken and others was this notion that they had created lighthouses they didn't call that at the beginning. That's what we dubbed it. But we, you know, we basically looked for what are some companies that are showing great results on industry 4.0. And as we looked across those, we saw Oh, well, they've all actually either strategically picked or because of some very forward thinking plant manager or supply chain leader, they have actually transformed a piece of their operations first in a lighthouse that then is kind of the beacon to others. And so what they're doing is now starting to replicate across and there are different stages of this but I we haven't seen anybody who is yet really been transformed their whole global network right of plants in a consistent way. And that's something that I'm actually the what's been nice and kind of side effect of this work is that the companies that have been identified as lighthouse companies have now created a very strong network among themselves and they're sharing best practice and regularly and so we have meetings of the community of both You know, companies that are in the community that have been designated lighthouses and others who are on the journey. And so one of the things they are all doing is working to scale across their global networks, and then figure out you know, what is the what are the standards they need to put in place? How do they think about IT infrastructure, etc, to support and then the other thing they're doing is expanding across the end to end value chain. So some have started with an end to end mindset and and have used digital connectivity across, you know, their supply chain organization, their distribution center, you know, their plants, others are putting that in place with the manufacturing sites is kind of the first threat. We're, you know, kind of cog in the, you know, in the system. Santosh Sankar 31:45 In the last couple weeks, we've all acknowledged that there's been a rapid deterioration in the macro economic climate. Many might expect that that softness is going to continue, but it's sounds like, you know, having these type of efforts where you're capturing the benefits of technology, embedding them in your business, that's a long term commitment. How might companies weigh those commitments, that investment into emerging innovative technologies in the short run? Because we can sometimes lose sight of the 10 year 20 year goal in an effort to preserve cash in the next 18 months, or maybe even just emotionally speaking, retrench? Because it feels better. Katy George 32:38 Yeah, it's a really great question. And I think the good news is that we don't see it as a trade off, but that's 10 years versus kind of next year performance. A lot of the technologies that we're talking about are off the shelf and not terribly expensive. This is not about rewiring in your entire IT infrastructure. This is often actually much simpler much scrappier than that. And the kinds of technologies we're talking about the kinds of performance improvements that we're talking about are things that can really benefit companies who do have are facing the kind of volatility uncertainty and performance challenges that we're seeing, you know, right now. So leaning forward, but again, in a very smart, targeted way around the business, performance goals that are most important because that, again, is where people get this wrong if they have a 10 year road map to put in every technology they've ever thought of, they will never get performance benefit from it. But if you have a roadmap that's much shorter term that says, look, by next year, or by next month, actually, we want to have better visibility of our supply chain so that we can be more nimble about allocating inventory. As we see demand shift dramatically. In wake of the corona virus. You If that's the kind of very explicit performance goal, which really focuses, what technologies are you going to put in place? Who's going to be involved? What rescaling do you need to do? Get the performance benefit of that, right, and then start building on that as business conditions change as your business objectives change, in order to build on that, that digital foundation to expand what you can do. But the technologies we're talking about are all about transparency, and therefore being able to make smarter decisions about what you make, in what quantities where you make it, how you can shift the way your networks operating internally versus externally, across different parts of the globe, how to position inventory, how much inventory to position, how to allocate it, how to understand what customer demand is fast, and respond to it, all of those things that companies desperately need to do, or the things that these types analogies actually can facilitate. Santosh Sankar 35:03 I appreciate that color. I'm sure it's something we're gonna run into over the next 4,6,8 weeks especially with that, Katie, it was a great conversation really excited to have gotten you on our podcast, and I look forward to seeing future updates to the lighthouse report. Katy George 35:22 Thanks. Wonderful. Well, thank you very much for having me. Transcribed by Otter
About The Future of Supply Chain
During each episode of The Future of Supply Chain, we sit down with a different entrepreneur, investor, or industry veteran to discuss their story, views on the industry, and how we can collectively build the future of supply chain together. Listen to more episodes at https://www.dynamo.vc/podcasts.
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