What It Really Means: Operational excellence

All supply chain organizations operate with performance expectations and target KPIs. The methods used to set those targets vary and as a result an organization may achieve its targets. But performance against plan alone does not necessarily mean that a supply chain has reached a higher or sustainable standard.

Operational excellence implies more than meeting internally defined goals. It reflects not just the setting of stretch targets—often representing a step‑change above current performance or industry benchmarks—but also the organization’s ability to deliver against those targets over time. Without that distinction, organizations can consistently “hit the numbers” while still falling short of what the business needs to compete effectively.

What separates operational excellence from hitting the numbers?

Operational excellence applies to all the day-to-day aspects of running the supply chain, from manufacturing to planning, transportation, and warehousing. It also relates to performance measured over daily, weekly, monthly, and annual time horizons. What separates it from simply hitting targets is not just the level of performance achieved, but how that performance is delivered and sustained.

In practice, operational excellence is defined by results that are consistent, efficient and predictable.

Consistency is about sustaining performance at or above target over time. If high-level performance is merely a temporary spike and then drifts back, it doesn’t really help the business or show that the organization has reached a new sustainable standard. Operational excellence requires that improvements hold over time and become the expected level of performance, not just an occasional high point.

Efficiency shows up in how results are achieved, using the right level of effort and cost. If hitting your targets requires excessive manual intervention, temporary workarounds, or a disproportionate use of resources, performance might look strong on paper—but it isn’t sustainable. Once productivity or cost pressure increases, those results are hard to maintain.

Predictability is reflected in outcomes that are expected rather than surprising. It depends on strong in-process measures that show whether results are on track, allowing for timely interventions where needed if there are gaps. Without predictability, even strong operations are difficult for the business to rely on or leverage. The key benefits of a strong supply chain operation, such as short-cycle innovation and time-sensitive customer promotions, are tied closely to predictability.     

Operational excellence suggests that the organization is driving exceptional outcomes compared to peers and industry norms. But if its goals are yielding average performance, they are likely based more on the targets the organization knows it can reliably hit than on stretching targets that force a step-change in thinking and execution. For example, if supply chain A consistently delivers 3% savings vs. plan each year, that might reflect solid performance. But if the gross margin is too low, that level of improvement may still be insufficient. And if a competitor (supply chain B) consistently delivers 5% in annual savings, it shows that a higher bar is achievable. In this context, consistently hitting goals does not necessarily indicate a level of excellence that meets the needs of the business.

Why is operational excellence in supply chain so critical?

Supply chains that achieve operational excellence provide their business with a competitive advantage, and since the pandemic, C-suites have increasingly recognized the value supply chains can deliver to the top and bottom lines. While few are best-in-class by definition, all supply chain organizations can aim to be operationally excellent and consistently deliver meaningful business impact. 

Benefits of operational excellence: When supply chain teams consistently set stretch goals and higher performance expectations that enable them to consistently deliver results efficiently and predictably, the business sees clear, tangible outcomes, both hard and soft:

• lower costs (which can in turn yield increased sales revenue and profit)
• reduced cash needs (inventory, capital)
• improved customer service
• faster speed to market
• enhanced quality
• improved employee morale and engagement
• optimized processes, tools, and ways of working

Beyond hard output measures such as cost or speed, setting stretch goals and higher performance expectations can surface opportunities to improve processes, tools and ways of working.

Watchouts: Unfortunately, there can also be some unintended barriers to achieving operational excellence, including:

• Setting goals with no business basis: It’s best to avoid pushing the organization to be excellent without a clear connection to business needs, competitive benchmarks and other key metrics. Otherwise, it will be hard to get organizational buy-in on a sustained basis.
• Muscling the system and becoming a one-time wonder: Delivering strong results in an unsustainable or unrepeatable manner, such as through mandatory overtime across departments on stretch timing, can produce short‑term gains but does not establish a sustainable or repeatable way of working.  Process and work systems need to support improved performance on an ongoing basis and in an efficient manner. Sustained reliance on extraordinary measures, such as mandatory overtime, ultimately creates cost and morale or retention issues.
• Chasing a silver bullet: Buying and implementing a new system and hoping results will improve without addressing foundational work processes, roles, training and qualification rarely leads to lasting improvement.
• Ignoring daily work and results: This perspective may be counterintuitive, but over-focusing on improvement work and letting current results drift can lower your baseline and mute the impact of improvements.

How to develop operational excellence?

For starters, the organization needs to objectively assess current supply chain performance against operations, setting stretch goals for improvement even if leadership and the organization do not yet know how to achieve them. These goals can be based on competitive benchmarks, business needs, or simply step-changed performance vs. the current state. It’s also important to ensure that the organization is educated on the reasoning behind and the importance of these new goals.

When it comes to implementation, Step 1 is ensuring that foundational capabilities are in place (e.g., training and qualification; standardized data, work and roles). Step 2 is automating stable and repeated tasks—areas such as master data checking, demand forecasting, and distribution planning. For Step 3, using the capacity saved by automation to invest in improvement work and change management is critical. And finally, Step 4 involves rigorously measuring and tracking performance vs. goals, using in-process measures that can predict output results to catch any drift early.

As performance improves, the organization should revisit its goals and targets and make adjustments where needed. Above all, remember that operational excellence is never business as usual because the bar is always rising.

About the authors

Andrew Byer is a former P&G Supply Chain Leader. Mike Dobslaw leads Ernst & Young LLP’s Supply Chain Planning practice. To learn more about how Ernst & Young LLP and P&G team to support Supply Chain Transformations please write [email protected]

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