The challenge of innovation – balancing risk and reward

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Innovation is like Mom and apple pie – self evidently a Good Thing. But industrial history is littered with ‘innovations’ that have at best wasted management effort and corporate funds and at worst have jeopardised the whole organisation. A ‘Logistics Europe’ Round Table discussion in July (supported by IBM and SAP) discussed how we can assess supply chain innovation, how we can discriminate between the snake-oil, fads and hype and those developments which really could improve or transform our operations, and how, even when we have identified something genuinely and usefully innovative, we can secure an implementation that actually delivers to the bottom line.

Many (not all) ‘innovations’ these days are IT-based. Nick Allen asked Professor Richard Wilding of Cranfield whether there was any sort of matrix or model to assess the risks of a touted ‘IT solution’. Wilding suggested that we have to look at internal operations, in terms such as uncertainty, vulnerability, even volatility, as well as external impacts. ‘At the end of the day, IT enables you to run processes more effectively (or at all). The question is how to ensure those processes themselves – even if they are paper-based – are robust, resilient, can work across the network, are compatible between different agents’ systems’.

He suggested a fundamental difference between step-change innovation (‘perhaps imposed by a customer, which is really scary’) and incremental innovation; but as Stephen Hunter from Nisa-Today’s commented ‘It’s very difficult to do little bits of innovation in logistics. There are huge voids in process knowledge so “little bits” are actually very big bits in their consequences. When it goes wrong it doesn’t just go a little wrong!’

David Fry from Oxford University Press concurred. ‘An integrated chain is only as good as the worst part of it’.

He advocated applying the manufacturing concepts of Total Quality Management to supply chain investment ‘across the whole process, or the benefit [of innovation]degrades’.

For IBM, Peter Anderson confessed that it was difficult to talk about supply chain innovation to clients, for whom innovation is equivalent to R&D and product development. ‘You can talk sensibly about incremental innovation in engineering processes, but for guys further down the curve [supply chain for example]innovation means massive change, and is therefore the more likely to fail’. In opposition, Rod Johnson of AMR Research pointed out that leaders like Tesco have been developing flawless lean processes for twenty years which certainly counts as successful incremental innovation, while O2, admittedly from a poor base, have had a massively successful programme of innovation around forecast and demand planning. Wilding agreed that Tesco offered examples of successful incremental change but ‘in other areas, like on-line grocery, they are really looking at step changes and having to think very differently.

Incremental innovation vs step change
‘In business, there are different processes with different “clock speeds”. There are processes that lend themselves to incremental innovation and improvement: there are also processes that generate competitive advantage, hence they have to keep a step ahead of the competition and so need step change’.

Much depends on the overall competitive direction of the company, and it’s perception of how supply chain operations fit this direction. Anderson suggested that in some firms the re-emergence of Sales & Operations Planning has created a forum to talk about a much bigger, more strategic cross departmental supply chain agenda, but Fry noted that while supermarkets compete directly through their supply chains, and thus use their supply chain processes to dictate terms, in many industries, such as publishing ‘there’s no-one in charge. Our competition is actually for authors, so supply chain and manufacturing tends to be forgotten. Our supply chain is very fragmented, and we are trying to influence people at three steps remove’.

Wilding pointed out that redeveloping the supply network, quite regardless of any technological innovation, is itself an innovative activity. New processes, networks, structures are successful innovations if they are tied in to competitive and corporate strategy, but equally they fall down if no one is listening to ‘marketing’, or what the customer really wants. Johnson confirmed that where logistics clients used to review every year or two, now quarterly reviews of supply chain operations are common, which creates opportunities for speedy implementation of innovations.

As the Chairman pointed out, though, there has to be some limit to the speed of change. Innovation, change, is difficult. Lionel Schwirtz of SAP agreed – ‘You can’t go from the current to the visionary in one go; people have to move in small steps, and they need to understand what they are doing’.

In fact, the panel generally agreed, there is not much truly innovative supply chain technology out there at present – from integrated systems to RFID, the technology is fairly well-established, even if the profitable implementations are rarer. Anderson suggested that ‘agent  technologies’ being developed (by IBM and others) could, by ‘talking’ across functional silos on a case-by-case basis, fuel a revolution in supply chains, but as Wilding warned ‘IT is always 10 years ahead of where people are. There is a complete gap between the management and skill sets, and what the technology could do’. Johnson agreed that ‘the biggest change is the speed and cost of deploying technology, but the challenge lies in doing cultural change (not just internally). It’s wrong to see innovation in terms of brilliant breakthrough technology’.

For Joan Irving the lesson was clear. ‘Companies confuse innovation with complexity, with bells and whistles. An incremental, step by step approach is best, and we should always be simplifying things, not making them more complex. And innovation has to build on solid processes within the “silos”.’ To which Wilding added ‘IT enables people to look across the silos – but the people don’t do it’.

He expanded: ‘People used to want a technical “how to do supply chain” solution. Now we have a bit of that but the emphasis is more on how to get the people to understand how their supply chain works, and that is built around relational issues’. He suggested that supply chain people tend to come from technical backgrounds and perhaps we need a few more psychologists: ‘the businesses that are really moving forward may have fairly basic systems, but they know how to leverage people’.

Confusing the issue
All this lead David Fry to question whether we aren’t in danger of confusing ‘innovation’ with ‘dealing with change’; envisaging new ways of doing things, or just adapting to a mutating world. China, for example, is still changing – wage rates are going up, shortages developing – that will make a big difference (a lot of publishing production has moved to China although as Fry admitted, it isn’t always obvious why). Similarly, increasing traffic congestion in the UK could prompt a move back to smaller, more dispersed distribution centres – these would be changes, but not necessarily ‘innovative’ ones.

As Wilding opined ‘Innovation in one industry is not necessarily innovative in another – someone else has probably been doing this for years. There are “nuggets” of completely new approaches, but mostly we are talking about interdisciplinary work. You could look at the Dell model and try to apply it to, say, a brewery – it might be transformational, but how much of it would really be “new”?’

Lionel Schwirtz suggested that the real driver is speed rather than technology, and specifically speed as defined by customer expectations. ‘We are used to ordering a computer and receiving it next day: now we want to be able to do the same with a car: so the carmaker has to change. We are used to dealing domestically with Tesco and now we expect the same service, On Time In Full and so on, from all our business suppliers. Everyone has to move, in these maturing industries’.

Which brings us back to risk, said the Chairman. How do you identify that killer application? Is it staring you in the face? Or have you been sold it? Or has the instruction come down from on high (whether your own head office or the client’s)? And if you’ve identified the application, how do you assess and justify the inevitable risk?

Well, that ended, for the moment, any consensus! For Anderson, the question should be framed the other way around – if we don’t do this, what are the risks? Schwirtz favoured a more mitigational or defensive strategy – how do you lower overall supply chain risk? Joan Irving said ‘From our perspective, risk is our competitive position. We start from the customer’s point of view of risk (which is an obvious position for a distributor, perhaps less obvious for a manufacturer). We have to look at the external risk, to us, of not doing something. Historically, that’s been driven by the top’s view of the competitive challenge, but implemented at the operational level’.

But that raises a problem, which Wilding laid out. ‘The big issue about supply chain risk lies in getting it onto the Board agenda. You are asking them to spend money against a possible risk, and they don’t buy in to that’.

Getting Board buy-in
He gave a topical example: Cranfield hosts a Supply Chain Risk Forum, brainstorming and modelling precisely these issues. One participating firm was trying to assess the risk to its supply chain from a possible Avian Flu pandemic. A practical solution was investment in systems that would allow supply chain controllers to manage from their own homes – technically feasible, but vast amounts of money. No way for the Board. But, continued Wilding, the same solution framed in terms of an existing Board strategy (in this case, encouraging diversity through retaining ‘ladies with children’) already had Board buy-in. ‘What are the issues on the Boardroom agenda?’ Wilding asked, ‘because supply chain risk isn’t one of them’.

Partly, this is because the risk of change or innovation is seen as greater than the risk of not changing. Stephen Hunter noted that ‘most distribution networks work fairly well. An act of innovation introduces risk’. The inevitable contrast between Tesco – ‘doing simple things well’ and Sainsbury – ‘trying to create a brand new world’ scarcely needed raising, but Hunter went on to suggest something counter to the popular mood.

Usually, the management gurus ask us to ‘break down the functional silos’. May it not be more practical, asked Hunter, to use the technology positively to create silos, (at least from the point of view of the individual employee) so that tasks are simple and completely understood. Wilding suggested an analogy with the Japanese approach to lean technology, where the smallest change has to be formally approved, but where everyone understands that what they do can impact on other parts of the system.

However, as Joan Irving pointed out ‘Manufacturing has Quality systems: supply chain, by and large, hasn’t’. Although Fry of OUP revealed that his firm is in the early days of introducing manufacturing-derived quality engineering to its supply chain functions.

True innovation is probably something a company does for itself – as opposed to relying on an outsourcing partner. Business modelling (as a technique to determine where companies are best placed to do things for themselves, or where they should outsource) was raised by IBM’s Anderson, who suggested that since, for example, supply chain planning is a purely rule-based process, it might as well be outsourced, but Hunter queried whether it was possible to factor ‘company culture’ into the model.

Wilding suggested that there are competitive processes – the ones that gain you competitive advantage and where, therefore, innovation can reap rewards; Qualifying processes (the ones you have to have just like all your competitors, to win the business), and underpinning processes. The latter are candidates for simplification and outsourcing, while today’s competitive process will in time slip down the list, presumably replaced by some new innovation.

Which all sounds quite convincing, providing you can analyse and separate your different processes. But this itself requires resource and commitment; even, in corporate terms, innovative thinking. Johnson emphasised that ‘the big challenge is the lack of organisational importance faced by the supply chain in most companies’. That, said Chairman Nick Allen, brings us back to the ceo. ‘The ceo is the only person who can align the company to the market and the customer’ and thereby create the environment in which supply chain innovation will thrive or fail.

The panellists:

Nick Allen (Chair) Editor, Logistics Europe

Peter Anderson, Supply Chain Transformation Leader, IBM

David Fry, Group Supply Chain Director, Oxford University Press

Stephen Hunter, Managing Director, Logistics, Nisa-Today’s (an independent buying group for retailers and wholesalers)

Joan Irving, Procurement Director, Premier Farnell, (global distributor of electronic and industrial components)

Rod Johnson, General Manager, European Research, AMR Research

Lionel Schwirtz, Industry Principal, Consumer Products & Life Sciences, SAP

Professor Richard Wilding, Chair of Supply Chain Risk Management, Cranfield School of Management


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