Operations Practice
Building a digital bridge
across the supply chain with
nerve centers
Many companies operate some type of supply-chain control tower, but
upgrading to a digital, end-to-end nerve center can manage risk even
more effectively, while boosting output and productivity.
This article was a collaborative effort by Jaafar Beydoun, Elise Cruel, Scott McArthur, Ali Sankur, and
Ketan Shah, reflecting views of McKinsey’s Supply Chain Practice.
© Getty Images
January 2021
It’s an all-too-realistic scenario: headed into the — Improving decision-making by applying
final week of the quarter, a consumer packaged advanced analytics (including machine-
goods (CPG) company’s final supply plan appears learning techniques) to analyze second-,
to be optimized and on target to meet quarterly third-, and even fourth-order implications of
goals. Yet by the following Wednesday, the chief potential responses to disruption
supply-chain officer hears from the head of
sales that customers are not receiving product — Reimagining the operating model,
for an upcoming promotion. Customer service recognizing that technology alone won’t
is overwhelmed with calls, and a large retailer deliver sustained improvement in supply-
threatens to terminate its contract. chain performance
Upon digging deeper, the planning team discovers Under this approach, news of delays at a port
that the logistics manager had asked manufacturing of entry would trigger multiple responses in
to stop producing the item two weeks previously, tandem: the nerve center could link the delay to
citing constraints in storage and transportation an in-transit container of raw materials destined
even though adequate manufacturing capacity for the same port, then estimate the extent of
was available. The production team therefore any resulting production slowdown, adjust the
reallocated capacity to other products—but never production schedule, and notify the logistics
communicated the decision and rationale back to manager about the changes—all within a manner
the planning and sales teams. of minutes.
For many companies, the current state of their However, because no standard playbook has
supply chain means situations like this one, while yet emerged for transitioning to a supply-chain
completely avoidable, remain all too common. nerve center, companies face several important
That’s despite the fact that many organizations tasks—such as identifying the most promising
now operate a version of the supply-chain control use cases to interconnect first, and determining
tower. While today’s control towers can significantly the thresholds for reacting to shocks. An
improve supply-chain performance, especially accelerated planning cadence is also likely to be
for the short term, they have limitations in their needed, as are new governance practices and
functional scope, ability to sense upcoming shocks, role definitions across the supply chain to align
and capacity to compute globally optimal responses. the organization.
More recently, some companies with leading-edge Yet the potential rewards could make the
supply chains have started to experiment in creating investment well worth making. Companies that
“supply-chain nerve centers”—digital, end-to-end have started on the path to supply-chain nerve
control towers that span functional silos. The centers have already saved millions in inventory
differences center on four areas: and logistics costs. We estimate that for a $10
billion company with a well-performing supply
— Extending the ends in end-to-end planning by chain, a nerve center could raise earnings by up
interconnecting historically isolated functions, to two percent, boost sales by $150 million, and
such as supply-response planning and logistics reduce costs by $50 million (Exhibit 1).
execution, as well as upstream and downstream
channel partners
A mosaic—or just fractured?
— Sensing upcoming shocks earlier and deeper Over the past few decades, many organizations
across the supply chain by applying digital successfully optimized separate functions within
technologies and the Internet of Things (IoT) the supply chain, adopting technologies such as
2 Building a digital bridge across the supply chain with nerve centers
Exhibit 1
Supply-chain
Supply-chainnerve
nervecenters could
centers generate
could substantial
generate untapped
substantial value. value.
untapped
For a $10B enterprise with a well-performing supply chain, a supply-chain nerve center could unlock1:
Earnings: Sales: Cash release: Cost reduction:
1–2 percentage points $150–200 million $300–500 million $50–100 million
1
Not always additive; some overlap possible; impact depends on starting point of supply chain
advanced planning systems (APS) and warehouse Its promise stems from a new ability to sense
management systems (WMS), supplemented high-impact threats and opportunities across
by bespoke solutions and the still-ubiquitous the extended supply chain earlier, so they can
spreadsheet-based tools. But while these systems be addressed quickly and collaboratively. The
offered value for their respective functional areas, result? Optimized plans with cross-functional
they left organizations with a “mosaic” solutions alignment already built-in (Exhibit 2).
landscape, often loosely linked together with
minimal cross-functional collaboration. These new capabilities can support a more
efficient integrative business-planning (IBP)
The lack of real-time, bidirectional links enabling process, as all actors move in concert with
each function to detect changes across the another, rather than acting individually on
enterprise and value chain can lead to suboptimal outdated data—and then firefighting to
performance for the whole company. There are realign. Because all projections use a single,
simply too many simultaneously moving parts in a interconnected planning engine, planners have
given supply chain, and failure to connect different a more complete view of how every decision
functions horizontally and more seamlessly leaves affects all areas of the supply chain. This
untapped opportunity. transparency allows them to be more confident
that recommended plans are feasible for
This challenge becomes even more pronounced in everyone and optimal for the enterprise, leading
a crisis. A mid-2020 survey of more than 60 senior to fewer iterations (and emergencies).
supply-chain executives found 85 percent struggled
with “inefficient digital technologies,” while nearly But while the end-state vision is relatively clear,
half experienced delays in planning decisions it is less obvious where to start and how to get
because of the widespread shift to remote work. there. A big-bang approach, bringing in all data
at once, is usually too daunting and runs the
inherent risk of never-ending implementations
The next evolution of supply-chain because of its massive complexity. At the other
planning extreme, narrow pilots may be easier to start,
By seamlessly connecting various “organs,” or but yield limited impact and rarely scale to more
functional units, with the supply chain, a supply- complex scenarios.
chain nerve center becomes the “enterprise brain.”
Building a digital bridge across the supply chain with nerve centers 3
Web <year>
<article slug>
Exhibit 2 of <y>
Exhibit <x>
Supply-chain nerve centers could simplify internal structures.
Supply-chain nerve centers could simplify internal structures.
Before After
Finance
Finance Commercial Others
Customers Commercial
...
Planning Suppliers Procurement
Order
management
Supply Chain
Nerve Center
Scheduling Procurement Logistics
Logistics Manu-
facturing
...
Scheduling Others
Manufacturing Suppliers Customers
Order
An alternative identifies a few high-impact, cross- Overcoming the challenges of
functional use cases that, when interconnected, change
unlock value and create a foundation for further While technological advances provide increased
scaling as the changes build momentum. The ability to sense and react to shocks, the number
exact combination of connections will naturally of issues identified and the desire to respond
vary according to the organization’s needs and quicker and more often can also increase
capabilities. One medical-device manufacturer, for exponentially. Where can an organization draw
example, started by creating links across planning, the line? After the implementation of a new
manufacturing, and logistics, so that unwwarranted planning and scheduling system, planners at
expedite requests were quickly flagged and one pharma manufacturer started receiving
stopped before they happened—saving millions of more than 200 exception messages every day.
dollars in shipping and related costs. At a food and This onslaught can simply overwhelm even the
beverage company, connecting the supply chain most sophisticated planning organizations and
allowed for better production-capacity decisions, prevent broader adoption of new tools across the
both for third-party manufacturers as well as organization.
third-party logistics partners. It also allowed the
company to operate at lower inventory levels.
4 Building a digital bridge across the supply chain with nerve centers
An alternative identifies a few high-impact,
cross-functional use cases that, when
interconnected, unlock value.
Accordingly, interconnecting previously siloed — Determine which decisions can be put on
functions to operate as one opens up a new set of autopilot, and which are to be handled by the
design choices to be addressed in order to realize planning and execution systems. Algorithms
the full potential of supply-chain nerve centers can be used to automate pre-building inventory
(Exhibit 3). when there is excess capacity and sufficient
warehouse space prior to a constrained week.
— Create a method and acceptable thresholds to Other decisions still require human intervention
separate real issues from noise. While a lack of or judgement, such as those involving complex
information is unhealthy, so too is a never-ending and ambiguous tradeoffs and high levels
series of supply-chain “emergencies” in which of creativity. Typically, organizations are
every small incident creates bullwhip effect, comfortable automating high-frequency, low-
as over- or underproduction ripples through impact decisions, but prefer to keep their hands
each link in the chain. Drawing a line is difficult on the steering wheel for the high-impact, low-
but essential, as organization determines the frequency issues that can dramatically alter
appropriate thresholds for action based on their annual operating plans.
its unique business environment. One CPG
company, for example, set a minimum threshold — Set a decision-making frequency that aligns
of $100,000 in revenue at risk for reacting to a with the company’s overall vision for this
volatile supply-demand situation, as planners new way of working. New technologies
realized most fluctuations would correct and information flows are making the well-
themselves in the subsequent cycles without an established monthly cadence for planning
intervention. calendars a thing of the past. Increasingly,
Exhibit 3
Designing a supply-chain
Designing a supply-chain nerve
nerve center center
involves involves
five design five design choices.
choices.
1 Calibrate thresholds to distinguish real issues from noise
2 Choose which tasks belong to machines, and which to humans
3 Determine the decision-making cadence
4 Define new roles and decision-making rights
5 Design an enabling technology stack
Building a digital bridge across the supply chain with nerve centers 5
exceptions and decisions are at executives’ — Identify a technology stack to enable new
and planners’ fingertips in near-real-time, capabilities. Supply-chain technology
24/7. While making decisions every minute players and users are already interconnecting
isn’t practical, neither is making them only advanced planning software with vehicle
once a month. Companies are reimagining and tracking, plant scheduling, transportation
experimenting with abandoning their quarterly execution, and commercial-planning
planning, monthly sales and operations solutions, thereby creating smarter planning
planning (S&OP), and weekly control tower- solutions and even digital twins. The
cycles altogether, in favor of a continuous best-of-breed approach appears likely to
cycle across all three planning horizons with continue at most companies, and may include
decisions triggered and resolved continuously bespoke solutions for certain functions and
and escalated weekly. applications. However, ecosystems of more
tightly interconnected solutions may emerge
— Revisit roles and decision-making protocols to provide advantages for more seamless
as boundaries among functions start to blur. integration.
One major element of this task is assigning
a leader for the supply-chain nerve center,
with authority to make final decisions Act now for a stronger future
involving difficult trade-offs. A designated By integrating these choices into a supply-chain
lead—whether from planning, manufacturing, nerve center, organizations can attain new levels
finance, or from an entirely new role—not of supply-chain performance—in no small part
only simplifies and accelerates decision because much of the incremental impact from
making, but also can smooth over tensions digital supply chains lies at cross-functional
between competing interests. Some of the interfaces. Moreover, companies that get this
traditional roles may also start to converge. new structure right can also unlock the full
As the transformation progresses, a high- creative potential of their workforce, whereas
powered, centralized task force can bridge the those that lag behind risk performance setbacks
functions seamlessly: for example, planning with every shock.
and scheduling may be consolidated and
performed by a few central network planners. Take the example of a manufacturer caught with
This type of structure looks increasingly immature planning capabilities in early 2020.
feasible as remote work accelerates, reducing Having misread the signs of a demand shift,
physical barriers to the centralization and leaders committed to an overly conservative
virtualization of network-wide planning. supply plan. Lack of scenario planning and
While making decisions every minute
isn’t practical, neither is making them
only once a month.
6 Building a digital bridge across the supply chain with nerve centers
supplier collaboration led vendors to reallocate network, ensuring supply matched the increased
critical parts to the company’s competitors. Once it demand without paying heavy expedited-freight
became apparent that demand was exploding rather costs. As the production schedule evolved in
than shrinking, it was too late to course-correct, response to critical constraints, planners were
leaving the company facing massive backlogs and able to view the changes immediately and
revenue shortfalls. collaborate with plant schedulers so that the
optimum mix of product was being produced.
On the other hand, consider a large consumer
company struggling with balancing supply and Gone were the days of firefighting and out-of-date
demand while accounting for various types of signals, replaced by real-time data and proactive,
production, supplier, and co-manufacturing collaborative problem solving across functions.
constraints. Although baseline performance was The short-term impact: forecast accuracy
sufficient, leaders believed that the company’s increased by more than five percent, inventory
processes were too slow, its data quality was too fell by more than one-quarter, and service levels
poor, and that its people weren’t leveraging data actually rose. Over the longer term, a more
and digital capabilities to their full potential. Not important effect emerged: a more cohesive,
satisfied with merely being “sufficient,” the team alert planning organization that could use next-
set about mindfully integrating the demand, supply, generation solutions to their fullest effect, while
production, distribution, and customer-service empowering frontline employees to make critical
organizations into a new supply-chain nerve center. decisions (Exhibit 4).
Once implemented, the center ensured that the These are the kinds of events that a holistic
supply team received alerts when the system planning approach can help address. By moving
sensed that demand exceeded the forecast by an beyond basic, sequential IBP processes and
agreed-upon threshold. The team could then adjust activating real-time data from across the
the supply plan and reallocate inventory within the
Exhibit 4
SixSix
keykey
lessons froma asupply-chain
lessons from supply-chain
nervenerve
center center
1 Start with a manageable but end-to-end value stream that touches many functions at once
2 Get comfortable with “law of 80% right”—dual focus on quality and velocity of solution
3 Embed capability building and change management into the process itself—not as an afterthought
4 Use disruptive technology to reimagine the process, not to digitize the status quo
5 Let the process accelerate the data quality, instead of bad data delaying the process
6 Lead by value, not by islands of capability in the business, digital organization, or supply chain
Building a digital bridge across the supply chain with nerve centers 7
organization—enabled by new technology organizations use a “test, fail, learn, refine”
solutions—planners can respond to issues approach. Sometimes, simply taking the first
sooner, make better decisions, and break down steps towards a more cross-functional decision
organizational siloes that were long thought making process is what matters. These first steps
unbreakable. don’t necessarily guarantee immediate success;
the clearest recent lesson for business is that
nothing is certain. Failure to act, however, may
lead to a perpetual game of catch-up as others
A road-tested detailed blueprint to build such a reap the benefits.
capability has yet to emerge. Until then, pioneer
Jaafar Beydoun is a consultant in McKinsey’s Detroit office, Elise Cruel is a consultant in the Dallas
office, Scott McArthur is a consultant in the Southern California office, Ali Sankur is a director of practice
management in the Chicago office, where Ketan Shah is a partner.
Copyright © 2020 McKinsey & Company. All rights reserved.
8 Building a digital bridge across the supply chain with nerve centers
