Operations Practice

A more resilient supply

chain from optimized
operations planning
To combat greater complexity and prepare for rapid demand shifts,
resilient companies can integrate prescriptive analytics into their
supply chain planning.

This article is a collaborative effort by Hossein Aghai-Khozani, Simon Bull, Valerio Dilda, Lapo Mori, and
Sebastian Reiter, representing views from McKinsey’s Metals & Mining and Operations Practices.

© Oatintro/Getty Images

September 2022
 Across industries, companies that rely on day operations, understand true operational
transported materials for their operations have constraints, and use scenario analysis to ask
gained hard-earned knowledge from major critical “what if” questions.
disruptions over the past couple of decades,
most notably the financial crisis of 2008, As companies in manufacturing industries have
the COVID-19 pandemic, and geopolitical discovered, following these design practices
developments. During times of sudden upheaval, can increase supply chain throughput by 10 to
companies must quickly ramp down operations 15 percent in the short term, with no change in
and then ramp up again once demand bounces assets or overall configuration. Organizations
back, adapt their execution, and revisit long-term can also reduce costs by 5 to 10 percent and
plans. The supply chain has a special role to play, CO 2 emissions by 10 to 15 percent over the long
as companies rapidly shift their focus from cost- term while increasing operational flexibility and
effectiveness to maximized throughput—all with resilience toward disruptions. This article details
the same assets and infrastructure. the design best practices that support this effort
and how companies can get started integrating the
A poor response can have cascading effects, necessary capabilities into their business.
such as facility shutdowns or missed delivery
obligations. In recent years, approaches that use
data and analytics to identify answers and make Optimization in sales and
recommendations to specific business problems operations planning
have proved to be particularly relevant in bringing Optimization in operations planning involves
clarity to operations planning and thus improving determining the optimal choices for a set of
supply chain resilience. However, the vast decisions in a given business environment and
majority of companies have yet to implement such business target. This type of optimization generally
approaches in their supply chain, leaving a serious works best with prescriptive models that provide
gap in their planning capabilities. the ideal set of decisions as an output. The
elegance of optimization is its ability to adapt to
A recent McKinsey article1 examined three value not only changing business environments but also
chain approaches that can address this supply shifts in the business target—for example, from
chain gap—simulations of reality, optimization minimum cost to maximum throughput, highest
of plans, and real-time control-tower monitoring yield, zero environmental impact, or a combination
(see sidebar, “How analytics supports different of multiple factors.
planning approaches”). Here, we examine the
second approach in more detail, as it ranks among For these reasons, optimization is the ideal
the most powerful tools businesses can use to approach to readjust a company’s operations
navigate complex and changing environments, as outside factors or strategic priorities change.
especially disruptions. For example, an agricultural company recently
experienced dramatic rises in production costs
Organizations that want to get the most out of combined with limited transport capacity, creating
this powerful approach design their associated significant gaps in its ability to manage existing
optimization tools and processes along five best resource constraints. The company was able to
practices: improve information flows between respond by shifting its operations planning to an
teams, elevate customer centricity, bridge the optimization approach that almost completely
gap between long-term planning and day-to- closed this gap.

1
“Building value-chain resilience with AI,” McKinsey, November 26, 2021.

2 A more resilient supply chain from optimized operations planning

How analytics supports different planning approaches

Supply chain analytics can support Simulations are descriptive analytics tools. resilience by expanding the scope of
planning efforts that broadly fall into three In a simulation, a digital twin is constructed real-time monitoring to anticipate and
types. While optimization has been at the with uncertainty measures and operational respond to upcoming or potential supply
center of this article, two other tools are inputs. Simulation is more appropriate for chain disruption. Real-time monitoring
simulation and monitoring. All three require comparing or modifying existing plans in the is the most useful when seamless
expert knowledge of the system, but face of uncertainty. Whereas optimization communication between various functions
simulation also relies on large historic data is more of a “black box” process, simulation and integrated decision making are critical.
sets (exhibit). produces explainable KPI-driven reports.
A typical simulation use case involves A combined approach is often best.
Optimization models are prescriptive examining an existing material network with For example, consider detailed railway
analytics tools. The main output is an uncertain production quantities, demand, scheduling. The complex rules and
optimal plan for the current environment. and transit times to identify first- and interactions require optimization methods
Optimization is most useful when an second-order bottlenecks. to create valid plans, while simulation
organization must create an ideal plan can then validate the performance and
from scratch that factors in complex rules The third analytics approach is real-time robustness of plans and determine the
and constraints. A typical use case for monitoring. Most companies have a most effective delay-mitigation policies.
optimization is building a monthly plan for control tower serving as an operating Real-time monitoring ensures seamless
operational production as part of the sales nerve center. However, fully digital communication between individual hubs in
and operations planning process. end-to-end control towers can increase case of unexpected disruptions.

Web <2022>
<Supply-chain>
Exhibit
Exhibit <2> of <2>

InIn
supply
supplychain
chainanalytics,
analytics,optimization,
optimization,simulation,
simulation,and
andmonitoring
monitoringcan
canwork
work
together but have important differences.
together but have important differences.
Analytics that can support supply chain planning efforts broadly fall into three types

1 Optimization 2 Simulation 3 Monitoring

Analytics type Prescriptive Descriptive Descriptive

Addressed Optimal execution plan for Identification and analysis of Real-time visibility of
business the current business root causes and bottlenecks for operations and financials
problem environment in alignment long-term resource allocation for decision support
with strategic direction

End delivery Productionized tool that can One-off analysis providing Continuously running
build and refine operational insights on bottlenecks data stream and
plans visualization

Is executed on a regular Productionized plan assessor

basis that can analyze plans and
calculate precise KPIs

Technical Current live snapshot of Extensive historical data to Continuous data stream
requirement plant/process build relationships, of live operational and
distributions financial data
Insights and operational
information obtained Expert-provided insight into
through expert interview the decision environment

A more resilient supply chain from optimized operations planning 3

 In essence, organizations can embrace optimization and thus more quickly react to urgent customer
to support better, faster planning and thus increase requests resulting from demand fluctuations caused
value capture and resilience. Five best practices can by rapidly changing spot prices.
sustainably improve supply chain decision making
across the full coordination process (exhibit). To do 2. Bridge the gap between long-term planning
so, the design of the corresponding optimization and day-to-day operations
tools and processes must address all decision Short-term plans are typically shaped by current
layers—from strategic orientation to operational constraints, while long-term plans depend
execution. The best practices for optimization on outside factors that are likely to change.
design explicitly address distinct layers and can thus Effective operations planning addresses the
enhance transparency and planning effectiveness. in-between period, in which value can be lost
in the gap between tactical vision and concrete
1. Elevate customer centricity by enabling a pull implementation. Optimization tools and processes
principle for demand-driven operations can translate mid- and long-term plans into detailed
Customer-centric thinking is a foundational element operational schedules, automatically accounting
for any type of operations planning. Tools and for dynamic conditions and complex operational
processes must be able to quickly translate demand constraints while allowing users to refine and
into sequence and volume of production units and explore possibilities. The gap is bridged in the
share this information with individual production other direction by feeding information on actual
sites. Optimization tools and processes can make operations and deviations from control-tower
these decisions rapidly and objectively, enabling monitoring back to optimization or simulation
both automated plan adjustments based on tools to continually minimize any loss in value. The
changing customer demand and faster responses agricultural company mentioned above was able
by contact center agents to customer requests. to ensure its day-to-day operations remained in
Satisfying those requests can have a significant line with the long-term strategic goals and tactical
impact on operations. A commodity metals company monthly plans despite significant changes in the
was able to accelerate its decision-making process overall business environment.

Web <2022>
<Supply-chain>
Exhibit
Exhibit <1> of <2>

Adopting
Adopting five
five best
best practices can help
practices can help improve
improve supply
supply chain
chain visibility
visibility and
and
coordination at all levels.
coordination at all levels.
Tool and process design must address all decision layers
Strategic orientation Operational execution

Supply chain
coordination

5 4 3 2 1
Best practices Customer Connecting long- Frictionless Understanding Scenario analysis
for optimization centricity term planning end-to-end true operational and critical “what
design with day-to-day information flows constraints if” questions
operations

4 A more resilient supply chain from optimized operations planning

3. Improve information flows between operations one automotive company facing a shortage of
and marketing and sales semiconductor chips, a control-tower tool in
Organizations need to enable a consistent flow combination with optimization-based processes
of information among stakeholders. Integrated generated more than $100 million in margin
supply chain planning tools already bring together improvement.
information from multiple systems and business
functions, creating transparency and empowering 5. Use scenario analysis to ask critical
decision makers while enabling analytics tools. what-if questions
Optimization tools and processes can be added to Planners must have an operational process that
improve decision making. A tangible example of can run, understand, and evaluate scenarios for
this interplay can be a sudden change in production planning and scheduling. This process produces
capacity due to an unforeseen dumper breakdown. what-if questions that can inform discussions with
Integrated planning tools ensure all relevant sales, customers, and third parties and support
stakeholders are aware of this change, but only better decision making. Optimization tools allow
optimization tools will actively steer and synchronize decision makers to focus on the “what if?” and
the decisions of the entire organization toward receive immediate and risk-free feedback on the
the ideal target in this new environment. Actions consequences, thus streamlining and lowering the
could include modified marketing and pricing of the barriers to asking insightful questions. Recently,
respective products or the realignment of the supply a pharmaceutical company was able to improve
chain. Comprehensive control-tower dashboards overall throughput and on-time delivery by using
are then used by teams from various functions to optimization tools that enabled asking what-if
support real-time decision making. questions regarding rush orders, staffing shortfalls,
and capital expenditure investments.
For instance, a mining company was able to quickly
and regularly make updates to its product portfolio
based on recommendations from the marketing Get started with an appropriate
and sales team. This coordinated rapid response business opportunity
enabled the company to keep its portfolio closely Many companies have yet to make significant
aligned with market demand at all times. investments in optimization for their operations
planning. Often, organizations have not even
4. Understand true operational constraints by undertaken the analysis to select the business
dissecting the infeasible plans opportunity. In addition, discussions around optimal
The exercise of identifying and avoiding infeasible business targets that cover the most relevant trade-
plans often leads planners to review and adjust their offs are often ignored, as they reside between
operations. This infeasibility can come in the form of functions and are thus considered “off limits.”
forced stoppages when operators are tasked with Picking the wrong operations element or business
following an impossible plan or situations in which target for optimization diverts finite resources from
plans are unable to meet all known operational what truly matters and represents the biggest risk
constraints. Control-tower dashboards can aid in of failure.
understanding these constraints and providing
feedback. Optimization tools can then progressively The key is to identify a process that satisfies
integrate all these constraints into actual operations three criteria: first, the overall decision space
planning, thus providing consistently feasible must be so large that an individual planner can’t
solutions. In this way, the impact of optimization explore and understand all the possibilities at
tools results in higher adoption, as they reduce the once; second, the quality of outcomes must be
overall frustration level across the organization objectively measured and assessed according to
associated with these infeasible solutions. For a well-defined and accepted target; and third, the

A more resilient supply chain from optimized operations planning 5

 potential for improvement must be measurable Similarly, companies should avoid focusing on
and ideally quantifiable—for example, costs, building new data-centric infrastructure as an
throughput, CO2 emissions, profit, or a combination initial enabler for operations planning—either
of multiple factors. The mining company focused to capture and ingest data more frequently
on profit by adjusting the supply chain in line with or to host new, complex analytics solutions.
the optimal product portfolio, and the agriculture Instead, operations planning solutions can run
company emphasized the marginal costs of infrequently, use small-scale data, and typically be
incremental production. The metals company implemented alongside and connected to existing
selected a combination of throughput and yield tools and systems. In this way, these solutions
while maintaining high customer satisfaction. The are complementary to common end-to-end
automotive company minimized lost revenue planning cloud solutions and maximize the value
coming from supply chain disruptions. And the organizations can extract from existing resources.
pharmaceutical maximized on-time, in-full delivery.
In a recent case study, the large mining player
Companies must ensure their optimization program developed an optimization-based process to
identifies business opportunities and associated improve the supply chain of its trains, vessels,
targets that are not properly covered by the existing and mine operations over short- and medium-
manual processes. However, any optimization- term horizons. The process was aligned with the
based approach must retain an adequate level company’s strategic target regarding customer
of human judgment and expertise to account for specifications and overall production goals.
unexpected situations and outliers. Optimization Embedding the optimization process into overall
should aim to augment and empower human decision making allowed the company to improve
decision makers but not replace them. operations significantly. This move alone captured
many millions of dollars in cost savings.

Common pitfalls in data gathering

and infrastructure
Companies should avoid directing time and In a world characterized by increasing volatility
resources to elements that aren’t necessary for and major disruptions, the maturity of operations
high-functioning operations planning. For example, planning has the potential to increase the
contrary to conventional wisdom, large longitudinal performance spread between first movers and
data sets are not required. Optimization for supply laggards. So far, bigger corporations have taken
chain planning can typically be built by drawing on the lead in implementing approaches to optimize
knowledge gained through expert interviews as their operations planning, given the resources
well as snapshots using a small amount of the latest and capabilities required. Whether optimization
business data. Both elements are present today, as is within the reach of all companies is still an
organizations need access to this information to open question.
Find more content like this on the monitor supply chain performance in the first place.
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Hossein Aghai-Khozani is a consultant in McKinsey’s Munich office, where Sebastian Reiter is a partner; Simon Bull is a
consultant in the Copenhagen office; Valerio Dilda is a senior partner in the Paris office; and Lapo Mori is a partner in the
Denver office.

The authors wish to thank Eddie Elizondo, Shailesh Lekhwani, and Tarusha Moonsamy for their contributions to this article.

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6 A more resilient supply chain from optimized operations planning