The speed of innovation has increased significantly over the last 15 years and has become a key factor for competitive advantage. The success of technology and innovation leaders like Alphabet, Apple, Amazon, and Microsoft illustrate this development. Their products and services, such as the iPhone or video streaming services like Amazon Prime Video, have changed the way we live, work and interact with each other tremendously. However, current technological developments not only have an impact on end-customer markets. More and more use cases are also emerging for companies which can be subsumed under the keywords digital business models, Industry 4.0, IoT, cloud technologies, robotics, and AI.
The core of innovation is to enable people to do tasks better than they previously could or make them do things that they couldn’t do before.
Considerable opportunities are associated with innovation. However, there are always those who lose out when changes occur, as the examples of Kodak or Nokia show. As Scott D. Anthony concisely summarizes: “Companies often see the disruptive forces affecting their industry. They frequently divert sufficient resources to participate in emerging markets. Their failure is usually an inability to truly embrace the new business models the disruptive change opens up.”
The speed of innovation is the second of eight root causes we have analyzed as a key factor in supply chain performance. To close the performance gap, many decisions must be made in supply chains and need to be executed. The last article of our 10 part series elucidated the root cause of product portfolio complexity and how to manage it effectively. This article highlights the impact of innovations on supply chain processes.
These three innovation types affect your supply chain performance
Supply chains have to deal with three types of innovation that can influence their supply chain performance tremendously. Let’s have a closer look at those types whose effects can range from incremental to disruptive changes: business model innovation, product & service innovation, and process innovation.
Business Model Innovation
The business model of a company describes how value is generated. According to Osterwalder’s business model canvas, elements of a business model are value proposition, partners, activities, resources, customer segments and relationships, channels, cost structure, and revenue streams.
Changes to the business model can be minor or far-reaching. Nevertheless, for both, the effects can be incremental or disruptive. Either you change your role, or you change what you offer. Think about how Amazon took the role of a “connector” in the consumer market by connecting the demand and supply sides. Inventory control and distribution are in the hands of Amazon, allowing them to fulfill orders for customers quickly and at a low cost globally. Think about RollsRoyce’s power-by-the-hour concept for aircraft engines.
For one thing, they generated an entirely new revenue stream. For another and more importantly, they changed the way of traditional MRO services. The benefits for power-by-the-hour customers are also obvious: enhanced robustness of the supply chain through better predictability of maintenance, minimized operational disruptions, reduced waste, increased efficiency as well as a transparent total cost of ownership. Lastly, think about how software nowadays replaces physical functions or items. By doing so, the complete supply chain and logistics are replaced (e.g., no need for a physical store, distribution channel, truck, and warehouse).
Generally speaking, the influence of disruptive business model innovation on a company’s sales and cost structure is greater than product or process innovation. We will elaborate more on this topic in the next chapter, “new ways of competition.”
Product & Service Innovation
As for product & service innovation, this is probably the most commonly known area of innovation. It is about developing something new that was not available in the market so far or improving products or services that already existed (e.g., adding new functionality or improving performance).
However, research shows that up to 40% of new products are estimated to fail commercially. When considering successful product innovation at a fast pace, we would like to highlight two points that you might want to consider:
- Effective ideation through concepts amplifying the voice of the customer early in the Lead user integration has proven to be effective for generating breakthrough ideas.
- Integrating agile concepts into your stage-gate process, according to Robert G. Cooper, to accelerate the time-to-market through dedicated teams in sprints and constant customer feedback.
One of the most prominent product innovation examples with disruptive power was the introduction of the iPhone, which has a life cycle of approximately 18 months. Short life cycles show that a high speed of innovation can result in a quick loss of value of the products being held on stock. However, the most obvious impacts on the supply chain are high inventory levels and the risk of stock obsolescence. Thus, as the old products are being cannibalized by the new ones, the risk of high working capital and high costs exists (i.e., stock keeping costs and write-offs). Furthermore, wrongly allocated resources can prevent your innovative products from hitting the market (as the pipeline is filled with older versions of the products). Another difficulty when dealing with short product lifecycles is the maintenance of predecessor/successor relationships of products. To generate an automated forecast for a newly introduced product, it is important to link this product to one or multiple predecessor products and inherit the historic sales and market demand patterns from these predecessors.
Process innovation is usually not obvious for end customers. It means the development or improvement of business processes to reduce cost or increase revenues. From our experience, in most cases, process innovation leads to the first rather than the latter. It covers changes in the use of equipment or technology and can take place in all direct or indirect functions across the business. For example, cost reductions can be achieved by avoiding waste, i.e., any activity that is not generating value for the end customer. Avoiding waste is a significant pillar in the Toyota Production System and many related lean systems.
The most cited example of process innovation is the invention of the moving assembly line of Henry Ford, which simplified assembly, helped to standardize work, and shortened production lead time tremendously.
When thinking about process innovation today, you should ask yourself whether a specific customer requirement is the basis of your processes or if it causes a noticeable interruption. Furthermore, you should question the technologies used in supporting your business: are you relying on outdated technology, or do you use state-of-the-art technologies applied with (- very important! -) a meaningful purpose?
Regarding the supply chain, there are countless ways for process improvements that can be realized using AI, machine learning, cloud technologies, etc. Sensorification & real-time monitoring of the supply chain enables the application of management principles initially developed for local systems to globally distributed supply chains such as Lean and Continuous Improvement. By creating a digital twin that reflects the state of a supply chain in real-time, Gemba (go and see) can be performed virtually. Through sensorification & real-time monitoring of the supply chain, you can, e.g., directly detect damage. The root cause is made transparent and enables a significantly shorter reaction time. Furthermore, creating a digital twin and a shared understanding enable higher levels of trust and closer collaboration between all involved partners.
You always need to challenge your status quo
…to enable innovation at the speed of the market – unlike Kodak, where complacency took over. The prerequisite here is to create a culture of innovation reflected in your employees’ mindset and your ability to create small independent teams that can move as fast as the market’s pace. A critical success factor in this respect is to pursue innovation by allowing trial and error. This requires the “deconstruction” of outdated structures built for reducing risk rather than for speed. In other words: Innovation requires an environment that allows for the exploration of new opportunities. Such an environment asks for speed and tolerance towards risk.
No matter what innovation strategy a company pursues, it should be ensured that it is properly formulated and stringently followed. That means you need to operationalize your strategy by breaking it down into concrete targets. This is the basis to shape an organization that can cope with today’s high pace of innovation. By doing so, you need to do your utmost that your organizational structure and processes support the achievement of those targets. This requires the definition and realization of targeted measures. The current state of the art is to keep goal setting and tracking of outcomes with software-based tools. This helps automate respectively create more efficient daily routines and frees up capacity for innovation.
As you can easily see, the speed of innovation is an influencing variable to be reflected in supply chain strategy and processes. Successful transfer of business model innovation, product & service innovation, as well as process innovation on a business level can be strongly supported using AI, machine learning, cloud technologies, and so on. The following article of our series will pick up the challenge of new types of competition.