Supply Chain Innovation


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Globalization intensified competition in most industries. This came at a time when firms competing in mature markets were experiencing increased difficulty to grow revenues in their home markets. As a result, firms were forced to focus on cost reduction as a means to increase shareholder value. Firms also felt an increased dependence on suppliers for value creation.

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Supply Chain Innovation

  1. 1. Insights Supply Chain Innovation - Dr. Martin Lockstrom Introduction Globalization intensified competition in most industries. This came at a time when firms competing in mature markets were experiencing increasing difficulty to grow revenues in their home markets. As a result, firms were forced to focus on cost reduction as a means to increase shareholder value; Offering low product prices, as a result of being a low-cost producer, was perceived as one of the most important competitive advantages a decade ago. Meanwhile, companies have also streamlined their businesses and increased focus on their core competencies, through outsourcing, which in turn has led to increased dependence on suppliers for value creation. More importantly though, product complexity, today, makes it virtually impossible for individual firms to possess all the technical expertise and capabilities needed to develop and produce products and services. In order to avoid excessive transaction costs, when outsourcing business activities, companies try to get the best from both worlds by creating “a virtually integrated enterprise” where relatively independent parts of the value chain can work in sync. In this quest, the involvement of supply chain partners has become critical.
  2. 2. Role of InnovationConstant development and adaptation is of outmost importance for any enterprise. Absence of these leads to loss of competitiveness, commoditizationof products and services, and ultimately performance decline. Innovation in the key lever to create differentiation. While many companies talk abouttheir focus on innovation, this process often times stops at incremental improvement, at best leading to avoidance of competitive disadvantage, butdoes not render competitive advantage. Innovations may take shape along two dimensions, where the first one is related to magnitude, rangingfrom incremental to radical, and the second is impact, ranging from sustainable to disruptive. (Figure 1)The first category - Incremental and Sustaining ATIONInnovations – entails minor improvements that don’t Disruptive Disruptive andalter the current competitive market forces to any large Innovations Radical Innovationsextent. For example, enlarged displacement volumeof a gasoline engine. The second category - Radical “Covert Agent of Change” “Instant Game Changer”Innovations - include innovations of a larger scale thatsignificantly improve a product or service yet ensuringthe overall product function is in line with customerexpectations. For example, fuel-injection engines. The INNOVATION INNOthird category - Disruptive Innovations - completely Incremental andchanges market conditions and customer expectations. Radical SustainingFor example, the introduction of the automobile as a Innovationsreplacement for the horse and carriage. It is important to Innovations “Big Impact”note that the establishment of a disruptive innovation can “Business as Usual”be slow and gradual, but for various reasons neglected byincumbents. The fourth category - Disruptive and Radical Figure 1: Innovation typesInnovations - is a combination of the second and thirdcategories. These are large-scale disruptive innovations that become established in the market very fast. These are very rare. For example, fullyautomated flying cars that don’t require airports or pilots.Supply Chain Innovation and the Infosys Framework for InnovationInfosys has crafted a framework for innovation premised on seven megatrends that will shape the competitive landscape of the future. These are:Digital Consumers Emerging Economies, Sustainable Tomorrow, Smarter Organizations, New Commerce, Pervasive Computing, and HealthcareEconomy. The applicability of these themes in a supply chain innovation context is interesting to explore. (Figure 2) Digital Consumers Self-Service N=1 Co-Creation Emerging Economies Growth Momentum Innovation Hubs Smart Sourcing Sustainable Tomorrow Social Contracts Resource Intensity Green Innovation Healthcare Economy Affordable Preventive Patient-Centric New Commerce Mobility Micro Inclusive Smarter Organizations Simplify Collaborate & Learn Adapt Pervasive Computing Sensor Networks Intelligent Cloud-Based Figure 2 - The Infosys innovation framework with subthemes, relevant in a supply chain context, called out2 | Infosys
  3. 3. Co-Creation Smart Sourcing, Adapt, Collaborate & LearnWith the changing landscape of customers and technology, In today’s globalized economy, companies can no longer solely relyinnovation, which was traditionally undertaken exclusively inside on their home markets for market share and growth – emergingthe organization’s R&D department, is no longer necessarily limited economies are becoming more important than ever to achieveto a dedicated unit within the organization. Companies have started strategic business objectives, both for ensuring strategic factorinvolving external partners and their customers in the innovation inputs such as goods, services and knowledge, as well as forprocess. This has led to the ecosystem approach for innovation where generating revenue. What’s more, the traditional top-down wayall the partners come together to innovate for the organization. of managing businesses is becoming increasingly obsolete, whereWe refer to this as innovation co-creation. This paradigm implies more nimble newcomers can level the playing field and beat large-perceiving the company as an open system, into which innovation sized incumbents through innovative business models. As a result,can flow in and out. The idea of co-creating innovation means that enterprises must ensure they maintain the right level of flexibility andtwo or more parties can develop and deploy novel ideas that would agility to effectively adapt to an ever-changing environment throughnot have been possible by the parties in isolation. cooperation with external knowledge partners.Supply chain innovation is a case of innovation co-creation where From a supply chain perspective, the purchase function hassupply chain partners (For example, buyers and suppliers) innovate traditionally operated as a transactional function. The reasons for thistogether. It is particularly prevalent in complex, networked industries, were many; in the past, products were often produced locally, hadsuch as automotive and aerospace which are both characterized by a lower degree of technology content, and companies were muchlong product lifecycles and long product development lead times. more vertically integrated than today. Now, the situation is different.Interestingly, for many leading companies today, the question is In these new circumstances, purchase has been forced to change itsnot necessarily how to become more innovative oneself, but rather traditional role from a provider of the right components at the righthow to stimulate and encourage others to innovate, and develop time and right costs to a manager of the supply base, responsible forthe capability to absorb and integrate those innovations into one’s the generation of competitive advantages for the company, not onlyown products and services. Seen from this perspective, supply chain through cost reduction, but also through innovation. Although supplyinnovation becomes the task of orchestrating innovation rather than chain innovation is not new per se, the trend has accelerated overmerely innovating. time and become increasingly critical for competitiveness. This is also why deep buyer-supplier relationships, nowadays, are of paramount importance, as long-term relationship orientation is necessary to realize any substantial benefits. Infosys | 3
  4. 4. Innovation Co-Creation ChampionsOne of the world’s leading global consumer product goods companies Betting that these connections were the key to future growth, and thediscovered that its existing innovation model was no longer very CEO made it a goal to acquire fifty percent of their innovations outsideeffective, especially as technological developments increased the company. The strategy was not to replace existing capabilities ofpressures even further. Meanwhile, R&D productivity had levelled existing researchers and support staff, but to better leverage at a success rate of about 35 percent and smaller competitors Half of these new products, the CEO said, “would come from own labs,were increasingly stealing market share. Put simply, the innovation and half would come through them.” In order to meet the challenge,landscape had changed over time but the company’s existing the company set up a secure IT platform that allowed them and theirinnovation model had remained virtually the same since its founding. suppliers to share specifications, blueprints and other information, which facilitated collaboration. The continuous interaction betweenInterestingly, the company discovered that important innovation was internal and external research staff led to improved relationships,increasingly executed externally at small and midsize entrepreneurial increased flow of ideas, and comprehensive understanding. Thecompanies and it turned out that individuals were eager to license new innovation model also brought an internal culture change.and sell their intellectual property. Furthermore, universities and Furthermore, it did not eliminate R&D jobs within the company; thegovernment labs had become more interested in forming industry company actually had to develop new skills to handle the flow of ideaspartnerships, and they were hungry for ways to monetize their from the outside, as well as actively promote internal idea exchanges.research. Meanwhile, the Internet had opened up access to talentmarkets throughout the world. Other progressive companies like Eli The success didn’t take very long to materialize: 45% of the initiativesLilly were also beginning to experiment with the new concept of open in the current product development portfolio incorporated keyinnovation, leveraging one another’s (even competitors’) innovation elements from R&D outside the company; productivity increased byassets—products, intellectual property, and people. nearly 60% since 2000, and the innovation success rate more than doubled, while the cost of innovation fell as a percentage of salesThe company estimated that for every in-house researcher there were from 4.8% in 2000 to 3.4% in 2005.200 external scientists or engineers elsewhere in the world who werejust as good. However, tapping into the creative thinking of inventorsand others on the outside would require massive operational changes.First, the company needed to move its attitude from resistance toinnovations: “not invented here” to “proudly found elsewhere.” It alsoneeded to change how R&D was perceived — from only having R&Dstaff in-house to having the existing number of R&D staff plus all thoseexternal to the company.4 | Infosys
  5. 5. Mastering the Supply Chain Innovation ChallengeA company can achieve superior market performance by gaining access of strategic resources, such as raw materials, human resources, knowledge,and so forth. However, there is a paradigm that claims that it is not necessarily resources per se that are important, but rather the ability toreconfigure old resources into new ones in line with the innovation orchestration approach outlined earlier. The reason why the latter is moreimportant is due to the fact that benefits from having strategic assets diminish as they become more commonplace among competitors. Withthis in mind, the only way for companies to stay competitive is through being continuously innovative and by “constantly disrupting” themselves.According to this logic, the important thing is not about having better resources, but making better use of them.In order to succeed with supply chain innovation, there are a number of critical aspects that need to be addressed: 1. Functional empowerment. From a supply chain perspective, 5. Cross-functional collaboration. Often, innovation takes place this means that the companies must enable and empower at departmental level such as at the product development their purchasing functions to take on the responsibility for unit. The problem with this is that a lot of knowledge remains systematically scanning the supply base for innovations and untapped, and innovation outcomes seldom connect with establish long-term collaborative relationships with key suppliers. corporate performance metrics. For instance, purchasing might have identified an innovation among one of its suppliers, but 2. Updating incentives. If the performance of the purchasing the product development department might not be interested function is only measured along the traditional criteria cost, as they may have their own innovation agenda. The best quality and delivery, supply chain innovation will not become way to circumvent this problem is to set up cross-functional reality. In order to succeed, a set of innovation-specific set of innovation teams which incorporate representatives from KPIs have to be implemented both for evaluating suppliers relevant departments that jointly develop and implement and the purchasing function itself. Like the old adage, “what strategies and policies. gets measured gets done”. 6. Top management support. Innovation is not a one-time shot. 3. Process orientation. Most companies have no problem coming In order for innovation to flourish, it has to be institutionalized up with great ideas. Where most companies fall short is how and absorbed into the corporate DNA and take place on a to successfully commercialize them. The root cause to this continuous basis. To overcome this challenge, top managers dilemma is often a lack of clearly defined innovation processes must be involved and foster an entrepreneurial corporate that specifies tasks, task owners and timelines. culture that foster and nurture innovation. Employees at all 4. Innovation strategy. The majority of companies have strategies levels must be encouraged to think out of the box and be for marketing, sourcing and product development, but many allowed to fail at least once. don’t have a strategy for innovation, even less so for co-creation. The purpose here is to set measurable innovation targets, developing roadmaps, and allocating adequate resources. Infosys | 5
  6. 6. Conclusion The competitive landscape is changing at a faster pace than ever. The survival of any firm in the long run depends on its ability to constantly adapt and renew itself. The only way this can be done is through innovation. Innovation doesn’t necessarily mean coming up with new ideas, but more importantly how ideas, new and old, are commercialized. Technological advances have opened up opportunities for companies to innovate in ways that were not possible a decade ago by tapping into their supply chain partners. The trends are clear and the opportunities are there – companies that fail to embrace the new reality will ultimately fall behind and see themselves become overtaken by more nimble competitors.6 | Infosys
  7. 7. About the Author Dr. Martin Lockstrom Principal Consultant, Building Tomorrow’s Enterprise, Infosys Labs Martin is a specialist in Supply Chain and Operations Strategy, Outsourcing/Offshoring and International Management. During a six-year stint in China, he established the research and education activities at the SCM, Sustainability and Automotive academic centers at China Europe International Business School, Shanghai.He established the first endowed chair for Purchasing and SCM in China at TongjiUniversity, Shanghai, and was also responsible for setting up Supply Chain ManagementInstitute China, an international network of SCM research and education hubs.Martin co-founded Procuris Solutions, an IT company specializing in SCM-related solutions,offering consulting services to companies like Accenture, Ariba, BMW, Clariant, Dell, Dow,Ernst & Young and Intel, among others.He has a Ph.D. in Supply Chain Management from European Business School, Germany, abachelor’s and master’s degree in Industrial Engineering and Management, from ChalmersUniversity of Technology, Sweden. He speaks Swedish, English, German and Chinese,has published over 50 articles and papers and presented at more than 60 conferences. Infosys | 7
  8. 8. About InfosysMany of the worlds most successful organizations rely on Infosys todeliver measurable business value. Infosys provides business consulting,technology, engineering and outsourcing services to help clients in over30 countries build tomorrows enterprise.For more information, contact© 2012 Infosys Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledgesthe proprietary rights of the trademarks and product names of other companies mentioned in this document.