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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.

Insi

ghts

Supply Chain Innovation

- Dr. Martin Lockstrom

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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 A�ordable Preventive Patient-Centric

New Commerce Mobility Micro Inclusive

Smarter Organizations Simplify Collaborate & Learn Adapt

Pervasive Computing Sensor Networks Intelligent Cloud-Based

Role of InnovationConstant development and adaptation is of outmost importance for any enterprise. Absence of these leads to loss of competitiveness, commoditization of products and services, and ultimately performance decline. Innovation in the key lever to create differentiation. While many companies talk about their focus on innovation, this process often times stops at incremental improvement, at best leading to avoidance of competitive disadvantage, but does not render competitive advantage. Innovations may take shape along two dimensions, where the first one is related to magnitude, ranging from incremental to radical, and the second is impact, ranging from sustainable to disruptive. (Figure 1)

The first category - Incremental and Sustaining Innovations – entails minor improvements that don’t alter the current competitive market forces to any large extent. For example, enlarged displacement volume of a gasoline engine. The second category - Radical Innovations - include innovations of a larger scale that significantly improve a product or service yet ensuring the overall product function is in line with customer expectations. For example, fuel-injection engines. The third category - Disruptive Innovations - completely changes market conditions and customer expectations. For example, the introduction of the automobile as a replacement for the horse and carriage. It is important to note that the establishment of a disruptive innovation can be slow and gradual, but for various reasons neglected by incumbents. The fourth category - Disruptive and Radical Innovations - is a combination of the second and third categories. These are large-scale disruptive innovations that become established in the market very fast. These are very rare. For example, fully automated 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 Healthcare Economy. The applicability of these themes in a supply chain innovation context is interesting to explore. (Figure 2)

Figure 2 - The Infosys innovation framework with subthemes, relevant in a supply chain context, called out

INNOVATION

INN

O

ATI

ONDisruptive

Innovations“Covert Agent of Change”

Disruptive and Radical Innovations“Instant Game Changer”

Incremental and Sustaining

Innovations“Business as Usual”

RadicalInnovations

“Big Impact”

Figure 1: Innovation types

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Co-Creation

With the changing landscape of customers and technology, innovation, which was traditionally undertaken exclusively inside the organization’s R&D department, is no longer necessarily limited to a dedicated unit within the organization. Companies have started involving external partners and their customers in the innovation process. This has led to the ecosystem approach for innovation where all the partners come together to innovate for the organization. We refer to this as innovation co-creation. This paradigm implies perceiving the company as an open system, into which innovation can flow in and out. The idea of co-creating innovation means that two or more parties can develop and deploy novel ideas that would not have been possible by the parties in isolation.

Supply chain innovation is a case of innovation co-creation where supply chain partners (For example, buyers and suppliers) innovate together. It is particularly prevalent in complex, networked industries, such as automotive and aerospace which are both characterized by long product lifecycles and long product development lead times. Interestingly, for many leading companies today, the question is not necessarily how to become more innovative oneself, but rather how to stimulate and encourage others to innovate, and develop the capability to absorb and integrate those innovations into one’s own products and services. Seen from this perspective, supply chain innovation becomes the task of orchestrating innovation rather than merely innovating.

Smart Sourcing, Adapt, Collaborate & LearnIn today’s globalized economy, companies can no longer solely rely on their home markets for market share and growth – emerging economies are becoming more important than ever to achieve strategic business objectives, both for ensuring strategic factor inputs such as goods, services and knowledge, as well as for generating revenue. What’s more, the traditional top-down way of managing businesses is becoming increasingly obsolete, where more nimble newcomers can level the playing field and beat large-sized incumbents through innovative business models. As a result, enterprises must ensure they maintain the right level of flexibility and agility to effectively adapt to an ever-changing environment through cooperation with external knowledge partners.

From a supply chain perspective, the purchase function has traditionally operated as a transactional function. The reasons for this were many; in the past, products were often produced locally, had a lower degree of technology content, and companies were much more vertically integrated than today. Now, the situation is different. In these new circumstances, purchase has been forced to change its traditional role from a provider of the right components at the right time and right costs to a manager of the supply base, responsible for the generation of competitive advantages for the company, not only through cost reduction, but also through innovation. Although supply chain innovation is not new per se, the trend has accelerated over 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.

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Innovation Co-Creation ChampionsOne of the world’s leading global consumer product goods companies discovered that its existing innovation model was no longer very effective, especially as technological developments increased pressures even further. Meanwhile, R&D productivity had levelled off at a success rate of about 35 percent and smaller competitors were increasingly stealing market share. Put simply, the innovation landscape had changed over time but the company’s existing innovation model had remained virtually the same since its founding.

Interestingly, the company discovered that important innovation was increasingly executed externally at small and midsize entrepreneurial companies and it turned out that individuals were eager to license and sell their intellectual property. Furthermore, universities and government labs had become more interested in forming industry partnerships, and they were hungry for ways to monetize their research. Meanwhile, the Internet had opened up access to talent markets throughout the world. Other progressive companies like Eli Lilly were also beginning to experiment with the new concept of open innovation, leveraging one another’s (even competitors’) innovation assets—products, intellectual property, and people.

The company estimated that for every in-house researcher there were 200 external scientists or engineers elsewhere in the world who were just as good. However, tapping into the creative thinking of inventors and others on the outside would require massive operational changes. First, the company needed to move its attitude from resistance to innovations: “not invented here” to “proudly found elsewhere.” It also needed to change how R&D was perceived — from only having R&D staff in-house to having the existing number of R&D staff plus all those external to the company.

Betting that these connections were the key to future growth, and the CEO made it a goal to acquire fifty percent of their innovations outside the company. The strategy was not to replace existing capabilities of existing researchers and support staff, but to better leverage them. Half of these new products, the CEO said, “would come from own labs, and half would come through them.” In order to meet the challenge, the company set up a secure IT platform that allowed them and their suppliers to share specifications, blueprints and other information, which facilitated collaboration. The continuous interaction between internal and external research staff led to improved relationships, increased flow of ideas, and comprehensive understanding. The new innovation model also brought an internal culture change. Furthermore, it did not eliminate R&D jobs within the company; the company actually had to develop new skills to handle the flow of ideas from the outside, as well as actively promote internal idea exchanges.

The success didn’t take very long to materialize: 45% of the initiatives in the current product development portfolio incorporated key elements from R&D outside the company; productivity increased by nearly 60% since 2000, and the innovation success rate more than doubled, while the cost of innovation fell as a percentage of sales from 4.8% in 2000 to 3.4% in 2005.

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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 to reconfigure old resources into new ones in line with the innovation orchestration approach outlined earlier. The reason why the latter is more important is due to the fact that benefits from having strategic assets diminish as they become more commonplace among competitors. With this 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:

5. Cross-functional collaboration. Often, innovation takes place at departmental level such as at the product development unit. The problem with this is that a lot of knowledge remains untapped, and innovation outcomes seldom connect with corporate performance metrics. For instance, purchasing might have identified an innovation among one of its suppliers, but the product development department might not be interested as they may have their own innovation agenda. The best way to circumvent this problem is to set up cross-functional innovation teams which incorporate representatives from relevant departments that jointly develop and implement strategies and policies.

6. Top management support. Innovation is not a one-time shot. In order for innovation to flourish, it has to be institutionalized and absorbed into the corporate DNA and take place on a continuous basis. To overcome this challenge, top managers must be involved and foster an entrepreneurial corporate culture that foster and nurture innovation. Employees at all levels must be encouraged to think out of the box and be allowed to fail at least once.

1. Functional empowerment. From a supply chain perspective, this means that the companies must enable and empower their purchasing functions to take on the responsibility for systematically scanning the supply base for innovations and establish long-term collaborative relationships with key suppliers.

2. Updating incentives. If the performance of the purchasing function is only measured along the traditional criteria cost, quality and delivery, supply chain innovation will not become reality. In order to succeed, a set of innovation-specific set of KPIs have to be implemented both for evaluating suppliers and the purchasing function itself. Like the old adage, “what gets measured gets done”.

3. Process orientation. Most companies have no problem coming up with great ideas. Where most companies fall short is how to successfully commercialize them. The root cause to this dilemma is often a lack of clearly defined innovation processes that specifies tasks, task owners and timelines.

4. Innovation strategy. The majority of companies have strategies for marketing, sourcing and product development, but many 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.

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ConclusionThe 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.

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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 Tongji University, Shanghai, and was also responsible for setting up Supply Chain Management Institute 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, a bachelor’s and master’s degree in Industrial Engineering and Management, from Chalmers University of Technology, Sweden. He speaks Swedish, English, German and Chinese, has published over 50 articles and papers and presented at more than 60 conferences.

© 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 acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.

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