What is operational excellence? And how can a renewed focus on this approach contribute to success in today’s business landscape? This episode of McKinsey Talks Operations explores the concept of operational excellence and its significance in organizations that use this approach of augmenting production and process systems. Our experts share insights on how companies can successfully adopt technology and nurture a sense of purpose among employees. We also delve into the benefits of operational excellence and how it looks in different settings like financial institutions and manufacturing industries.
Join the conversation with McKinsey senior expert Ted Iverson, partners Ferran Pujol and Joris Wijpkema, and host Christian Johnson. The conversation has been lightly edited for clarity.
Joris Wijpkema: Employees are looking for purpose, they’re looking for more than a job, more than a paycheck in their day-to-day work. So the ability for their organizations to tie into the organizations’ purpose is important.
Christian Johnson: That’s Joris Wijpkema talking about one of the foundational principles of operational excellence, the topic of discussion for today’s episode of McKinsey Talks Operations, a podcast where the world’s C-suite leaders and McKinsey experts cut through the noise and uncover how to create a new operational reality.
I’m your host, Christian Johnson. And I’m here today with Ted Iverson, a senior expert in McKinsey’s Seattle office; Ferran Pujol, a partner in the Santiago office; and Joris Wijpkema, a partner in our Chicago office. Thank you for joining us, Ted, Ferran, and Joris.
Ted Iverson: Hi, Christian. Good to see you again.
Ferran Pujol: Hi, Christian.
Joris Wijpkema: Hi, Christian. Happy to be here.
Christian Johnson: We wanted to get started today by first talking about what do we mean by operational excellence? That can obviously mean many different things to many different people. But when we see it in the world, what do we mean by it?
Joris Wijpkema: Yes, Christian, happy to take that one. Maybe first of all, it’s important to say what it’s not. It’s not a particular set of outcomes or performance numbers. If you’re talking about a manufacturing setting, it’s not about what your scrap rate is or what your capacity utilization is. Those type of metrics are often the goal. But what operational excellence looks like is really a consistent way of working. It’s a consistent way of working that delivers on the goals, really activating the entire organization to continuously get better every day at achieving that organization’s purpose. So it’s really a set of culture, behaviors, mindsets, and daily practices that is intimately tied to the organization’s reason for being.
I’ll add on top of that, that what we’ve really seen in the past few years are two elements becoming more and more important as part of that operational excellence framework. Employees are looking for purpose, they’re looking for more than a job, more than a paycheck in their day-to-day work. And so the ability for the organization to tie into that purpose is important. And the second one is more seamless application of technology, in a way that respects the humans in the organization but is also tied to the level of maturity that organizations have in their operational practices.
Christian Johnson: That sounds like a great way to introduce it. What does it look and feel like on the ground?
Ted Iverson: Well, I can help with that one.
Christian Johnson: Thanks, Ted.
Ted Iverson: In those kinds of environments that Joris talked about, we often have frontline individuals who are very personally connected to what’s going on. And all the way through the organization there’s a level of enthusiasm and connection through that purpose. What is the good that we do as an organization, and what is my role in that as a frontline worker? It’s common to hear levels of enthusiasm that make it sound exactly like they are the vice president over their division. A level of enthusiasm and engagement and understanding about their organization at the top level, that they can drop down into, “Here’s what I do to contribute,” and you can really see the value and the worth that they have is one of those key contributors.
Christian Johnson: Let me think right now about how this might translate. Because when I hear things like enthusiasm in the organization, people sounding like they’re the vice president, they’re sounding engaged wherever they are at the organization. That sounds almost like a mission. And what we’re talking about, though, in most cases, is a private-sector business. Or it might be a big government organization. This is not something that’s a charity, right? How do you get that enthusiasm and that sense of purpose for something that is just an ordinary business, at least from the outsider’s point of view?
Ted Iverson: Some clients that we’re working with in South America are actually owned by the country; they are mining operations that have been in existence for a long time. And their level of connection to that purpose involves calculating if we can be this much better, if we can produce this much more copper, how many more tuition scholarships can we provide to university students? How many more schools can we build? And that connection and the feeling inside their organization becomes very heartfelt because they know individuals receive those scholarships. They have family members who have been in hospitals, and their ability to then say, “OK, we need to be this much better,” truly has that personal connection with what they’re doing. And that’s just one example.
Joris Wijpkema: Another great way I think of increasing the sense of purpose for employees in an organization, one that we see very often, is tying it to how the product or service impacts the customer. And what is it enabling that customer to do?
Ferran Pujol: An example of what Joris is explaining is in a pulp and paper company. They translated how many plastic bags they avoid, that aren’t used, by each ton of pulp that the operators produce. So the operator is able to link very specifically, because they produced an additional ton of pulp, to so many thousands of plastic bags not being used.
Christian Johnson: So we have this idea of turning purpose into operations. What are some of the things that companies can do to try to make that relationship clearer? What do they need to do to sustain that ongoing commitment?
Ted Iverson: A lot of organizations have many good initiatives that they’re working on, but they are spending some time cascading that purpose down through their organization to each layer and asking, how does this particular layer of the organization contribute? And getting that feedback from those folks, “But then is it reflected in my KPIs and the measurables that you’re holding me accountable for?” And if we have measurables that are not connected to those elements of purpose, then we need to ask ourselves, “Is there an opportunity to better align these? Are these the right measurements for holding my people accountable for moving in directions that are aligned with the overall organization?” So it begins that process of helping us to be able to look at strategy at each level and prioritize as well as create that alignment.
‘If we have measurables that are not connected to elements of purpose, then we need to ask ourselves, “Is there an opportunity to better align these?”’Ted Iverson
Ferran Pujol: Another good way that we’ve seen is putting operators in touch with sales representatives, or customers, or the recipients of the help that these companies can provide to NGOs [nongovernment organizations]. Having sales representatives visit the plant to explain the feedback the customers give about the product is very powerful in generating a sense of purpose in the operators.
Christian Johnson: In most organizations that you’ve worked with, how well do senior executives understand what is really, number one, the purpose of the organization, and then number two, what that purpose means operationally for the frontline worker, for the people who we need to inspire on a day-to-day basis?
Joris Wijpkema: I think executives often struggle with that. If you ask them, they will be able to articulate what the organization’s purpose is. And I think if you pushed them they would have a high-level idea of what that could mean for the employees. I think where it often falls apart is in the translation of what’s in the executives’ mind into what people on the shop floor do in their day-to-day work.
Christian Johnson: And what are some of the consequences of getting this wrong? What happens to the organization that isn’t getting this quite right, isn’t examining what its purpose is and translating that purpose to the front line?
Ted Iverson: You know, combining with Joris’s comment, there’s an example that illustrates what you asked, Christian. An organization that I was working with a few years ago had multiple steel processing centers in the United States, and their purpose or mission was to constantly increase shareholder value. Not a lot of frontline folks were involved—shareholder value doesn’t really connect to them very specifically. And I questioned the leaders after we’d been to three or four other sites: What is your company’s purpose? What inspires people? And they said, “We’re increasing shareholder value, and that’s a good thing.” And it is; it’s a good thing. But I indicated, “If you’re doing that, I don’t understand why you have so many US-based sites? Why have you not escaped to lower-cost labor environments, less restrictive environments? Why this?” And they said, “Well, our customers are located in these areas, and we have excellent, talented people that are very dedicated and knowledgeable.”
And suddenly, they started describing this respect for customers, respect for people. And as they said it, they realized that “This is really what our purpose is, isn’t it? We are connecting with customers, respecting our talent and our capability, and preserving that. And by doing all of those things, then of course, yes, we are increasing shareholder value.”
Christian Johnson: And what were some of the things that this unblocked? Are there specific things that you remember that they were suddenly able to resolve?
Ted Iverson: Even simple things, like the number of ideas coming from frontline employees, improvements affecting their own work, suggestions on how to improve products. Those kinds of frontline-generated ideas increased dramatically, just as we started to talk differently about what our real purpose was. We essentially put more weight toward the front of the organization for improvement, and they readily accepted it.
Christian Johnson: And this is something that I think we want to highlight because of another factor here. And that is, so many organizations are struggling with technology. And one of the statistics we often hear is a very large majority of organizations and of senior executives are dissatisfied with their investments in technology. Their investments aren’t paying off the way that they had expected them to. And so how does that statistic potentially relate to some of the problems, the disconnects that we’ve described here?
Ferran Pujol: Yes, Christian. What we’ve seen is that companies that follow operational excellence principles to guide technology adoption, as opposed to prioritizing by impact and visibility, achieve more impact. But what’s more important is that this impact is sustained over time. So, for example, a mining company followed the end-to-end value-stream principle by linking the mine and the plant with artificial intelligence, and using artificial intelligence models to optimize the entire value stream.
‘Companies that follow operational excellence principles to guide technology adoption, as opposed to prioritizing by impact and visibility, achieve more impact.’Ferran Pujol
Another company that was deploying artificial intelligence followed the “respect every individual” principle by choosing models that were interpretable, so that the individual operators could understand the causality links between all of the recommendations from the models—and so they felt at the center of the change. A counter example of that is a company that implemented 150 use cases at two different sites, prioritizing by impact and visibility. They had a great impact, but the impact was not sustained over time.
Christian Johnson: OK. And that’s because there was this disconnect between the technology being implemented and the workers’ ability to make improvements on that technology over time. Is that it?
Ferran Pujol: Exactly. So there’s this adoption point of workers not being connected to the technology, not feeling like they’re the central part of this technology adoption, but also that the technology was not really integrated with the processes. And this results in lower adoption, and people stopped using the technology over time.
Christian Johnson: Got it. And can we look at a couple of different ways that operational excellence would work in different types of settings? We’ve described a couple of examples here. We’ve talked about mining, we’ve talked about metals. How does operational excellence look and feel if we are in, say, a financial institution, for example, versus say, in manufacturing?
Ted Iverson: So in a financial institution, of course, most of the time you have pretty good visibility into who the customer is and how you’re serving them. The key becomes that movement from activity toward outcomes, and understanding how those outcomes are affecting our customers and what the impact of that is. Examples could include a life insurance company that I was on site with, that had started to realize that everybody who was collecting on one of those policies has probably just experienced one of the most impactful events of their life with the death of a loved one.
And, as they started to envision individuals in their queue, if there are 70 claims to process, these are 70 people that have just been through that significant life challenge. And they ask, “How do I change our process? How do I make things better, so that we don’t take three weeks, don’t take two weeks, but actually process claims on the same day as when all of that information is provided?” And you still see that same level of heartfelt engagement, if not even more, because people realize that instead of being a drag on this individual’s life and creating another obstacle, you are actually freeing them from many obstacles by helping with that financial resource as quickly and effortlessly as possible.
Christian Johnson: That’s fantastic. So, I think one thing we also want to get across, regardless of the type of organization is, how do you get started here? What’s normally the biggest issue that companies need to start with? And then what’s the sequence to really get going and understand your operational excellence journey?
Joris Wijpkema: Christian, I think one of the most important things for people to get started is to really get a good understanding of what is good, or what great really looks like. And there are so many opportunities nowadays, to get to know that better, and to really feel it and internalize it. There are assessments available that you can do. But there’s also “go and sees.” There are opportunities to see other companies and really walk the shop floor and experience what it’s like for companies that have gone through that journey and have achieved quite high levels of operational excellence. And to see how that difference looks, to engage with the employees, talk to them. Until you’ve kind of seen, felt, tasted, and touched it, it doesn’t quite have the same meaning as reading about it, or even us talking about it today.
‘There are opportunities to see other companies and . . . experience what it’s like for companies that have gone through that journey and have achieved quite high levels of operational excellence.’Joris Wijpkema
Christian Johnson: What sorts of innovations are we seeing from companies that have been really good at operational excellence?
Ted Iverson: At one of our favorite places for go-and-see visits, the leadership asked itself the question, “How do we reduce the distance that our products travel when our products have to go through a plating operation?” Well, plating is typically done in a separate environment because of the harsh chemicals and the hazardous waste that’s involved in those processes. This company found ways to be able to change their plating process, so that they could actually do it in the assembly area in a very customized, right-sized application of equipment that is safer than it ever was before and now avoids all of that additional travel and effort to get things back and forth.
So you see, one example is plating in an area that plating would have never existed. And still, in the metals industry I have companies that tell me, “You can’t do that.” And I can show them, it’s happening right here, and these people are happy to talk to you about it.
Christian Johnson: Ferran, Joris, any great stories that you’ve seen?
Ferran Pujol: One example from the pulp and paper company is how they were able to use technology through the lens of operational excellence and linked processes that were disconnected before, linking forestry with the harvesting and the power plants. So they were able to do that by using technology by following the principles. The results were that the operators were able to make decisions from forestry to the plant. So they were much more empowered, and the level of decisions that they were making were much broader, which means more impact than in the past.
Christian Johnson: So we’ve talked a lot about what operational excellence is in terms of purpose, in terms of technology. But another question is, why now? What’s happening that requires this refocus on the approach to management here?
Joris Wijpkema: So unfortunately, we think that a lot of companies have actually lost their way a little bit in their focus on operational excellence in the past five to seven years, and this has been driven by two things. One is the excitement around technology, but it has also been a little bit around the shiny object, and not necessarily really integrated operational excellence. We’ve seen people divert traditional continuous improvements, resources, and people focused on operational excellence to more technology deployment with very mixed results, as we were talking about.
And the other piece is the pandemic and the struggle that people have had in just keeping operations going, dealing with crises, logistics, constraints like supply constraints, like labor constraints, and that has put a lot of pressure on organizations—and has often taken away focus on good foundational operational excellence practices.
Very understandable, but at the same time, we believe this will be core and important to an organization’s health and performance for many decades to come. So we, as an institution, are very committed to really bringing this back on the map. So I think you’re going to see us talk a lot, publish a lot, and do a lot more research in this area and bring people together around this topic to make sure it gets the renewed attention it deserves.
Ferran Pujol: Complementing Joris here. We see that with traditional operational excellence, we now have available really powerful tools. We have technology that we can combine with operational excellence. We also see that society has changed priorities and that we can have these priorities in a company’s purpose and have them connect well with the operators. So we believe this topic is really important now. It can be as important as lean was at its time or as the beginning of the technology deployment. So that’s why we’re starting conversations with CEOs to have reflections about this topic, and why we are discussing it with the experts internally and externally. It’s a topic that we’re passionate about and that we want to help disseminate in the business community.
Christian Johnson: Excellent. And I’d like to thank our guests again for joining us today.
Ted Iverson: Thanks so much, Christian.
Ferran Pujol: Thank you, Christian. It’s been a pleasure.
Joris Wijpkema: Thank you very much, Christian.
Christian Johnson: Thank you so much. You’ve been listening to McKinsey Talks Operations with me, Christian Johnson. And if you like what you’ve heard, subscribe to our show on Apple Podcasts, Spotify, or wherever you listen. We’ll be back with a brand-new episode in a couple of weeks.