COOs found themselves reckoning with many of 2022’s challenges, from supply chain disruptions to labor issues, as companies worked to further bounce back from the COVID-19 pandemic. Assuring material supply and capacity was top of mind as companies scrambled to find local suppliers to meet production needs. But a recent PwC survey found that nearly half (45%) of industrial products (IP) leaders expect supply chain disruptions to ease in 2023, and 83% of all sector leaders are focusing their business strategy on growth.
The race to recovery in 2022 is now an effort to raise margin targets back to pre-inflation levels. As executives pivot their focus from recovery to looking forward, they must develop strategies to proactively mitigate risks and prepare for the next yet unknown disruption. Bringing lessons learned into 2023, COOs ultimately must prioritize two things – resilience and margin expansion.
Building resiliency in strenuous times
Building and maintaining resilience while simultaneously improving margin expansion is not without its challenges. As recession concerns loom, executives are bracing for the impacts of rising inflation and its repercussions. Production costs are a primary concern, with nearly three in four IP sector leaders (73%) citing rising production costs (e.g., wages, materials, energy, inventory) as posing a “moderate or serious” risk to their business. As a result, most leaders (77%) say they’re increasing prices for products and services and over half (57%) report their businesses are streamlining their product portfolios, presumably to protect shrinking margins.
While rising interest rates and inflation persist, workforce challenges also continue. PwC’s latest Cautious to Confident Pulse Survey found that 39% of executives were very concerned about wage growth not keeping up with inflation. As executives size up the risk of a potential recession, COOs are taking a concerted, yet strategic, approach to balancing costs with talent management while maintaining profitability. The same survey found that 45% of COOs have made workforce changes to improve analytics capabilities, which will help build operational resiliency that can withstand challenging business environments in the future.
Unlocking the value of digitization
A significant contributor to building – and achieving – resilience is to define and capture the value of digitization. Digital investments will remain a steadfast priority for COOs wishing to expand margins in 2023. Having a clear list of priorities and a robust plan to support agile design, delivery and adoption are all critical to ensuring these investments produce the desired results. It is also critical to define what value is trying to be captured and have a robust and consistent measurement capability to hold the organization accountable. It is not uncommon to learn and adapt this measurement structure, but it should be clear to what and why.
To accelerate the transformation and ROI, COOs are concentrating on hiring to build strength, and they are most concerned with quality over quantity. Nearly half (48%of COOs say their companies have hired new employees with digital skills to improve the technical talent of their workforces. These technical hires will serve to steady operations in preparation for a potential recession and to further withstand disruption. Highly skilled talent can help reduce a company’s reliance on a broader workforce. A select few can automate tasks that normally would have been done by many. Robotic process automation and simple automation are relatively uncomplicated to get up and running and can free up more time for employees to focus on value-add activities.
Driving value from partnerships
While understanding the value equation of digitization is key to meeting realization targets, improving supplier relations is equally important for industry leaders to build resilience – and recover margin – in 2023. The supply chain turmoil of recent years has COOs increasingly focused on their supplier relationships, with 57% saying improving current supplier relationships is very important to transforming their business operations, higher than any other measure we asked about.
Vertical integration is less necessary as companies engage more in partnerships rather than acquisitions. Rarely now do you see significant vertical integration within a company's value chain as most industries have moved to a more collaborative ecosystem. This year, COOs must think creatively about partnership models and their respective timelines, the types of partners that might be viable in new and different ways to navigate a still dynamic supply chain environment more efficiently.
To enhance supplier relations and continue driving value, COOs should reassess how companies are defining their needs and how they are segmenting suppliers accordingly. For example, consider where you can get better leverage from a transactional supplier or redefine what is meant by a ‘strategic supplier’ and what that may mean for near-, medium- and long-term value creation. Building additional supplier management skills within procurement departments will be key to ensure the extension of capabilities beyond contract negotiations and compliance checks. It is crucial to be clear about the services your company requires and how your suppliers will fulfill those needs to minimize risk exposure to potential shortcomings in the future.
Looking ahead to an uncharted future
Although it is not what it was at the start of 2022, the supply chain environment is still uncertain. The dynamic is going to continue to evolve in 2023 as executives move away from a recovering or reactionary mindset and into a stabilization process. A company’s degree of resilience allows them to mortgage margin expansion as opposed to solely seeking margin recovery, but the investments it takes to get there are significant. Therefore, the triaging mindset of the last two years must transition to one focused on robust plans of both long-term and near-term initiatives that build this resiliency. Evolved definitions of risk, agile application of digitization and more aggressive leverage of partners will help COOs stabilize in the near-term while being better equipped for growth in the long term.