What does it mean to be innovative, and why should we care? To many, the term "innovation" connotes a dramatically new technology that may even mean a dramatically new technological product that improves our living condition, making us more productive or efficient. Technically though, innovations span a range from incremental to radical and can apply to products, services, and processes -- in addition to technology -- and can emerge within virtually any discipline, including those seen as the realm of art and creativity. When it comes to supply chain innovation, we generally mean improvements in the way that supply chains operate, and more specifically, in the way that products, information, work, and funds flow (and are temporarily stored) throughout supply chains.

So why should we care about supply chain innovations? In a search for competitive differential advantage, many managers of world-class organizations around the globe have come to realize that differentiating on processes is more sustainable than differentiating on products, even if product differentiation still exists. Product differentiation is more fleeting than process differentiation because products are easier to see and reverse engineer.

Supply chain management processes, those that span multiple organizations and focus significantly on the flow of goods, information, and funds can be quite complex, requiring intra- and inter-organizational coordination and collaboration. But resources applied here often create significant cost savings or improved customer service through product availability measures. Both cost savings and improved service levels can be leveraged in the marketplace. For example, Caterpillar (CAT), a global industrial equipment manufacturer and supplier, has been successfully differentiating in part on service parts availability, holding to turnaround standards internationally that exceed most competitors. This serves as a differentiator because service part turn around time affects customers' equipment downtime, a very important metric for developers, contractors, and mines. This gives CAT a competitive advantage in the marketplace.

Developing dramatically improved processes such as parts availability without simply adding more inventory to the system requires a bit of innovation. And this kind of supply chain innovation can be seen internationally across industries. FedEx created an entirely new market simply through the creation of a radically new logistics service for which customers were willing to pay. Similarly, Wal-Mart, Ikea, the Walt Disney Co., UPS and many other similar firms are often highlighted for their own version of supply chain management mastery and innovation.

What is interesting is not simply the innovations themselves, whether supply chain or product in nature, but the processes that lead to such innovations. Despite extensive research into new product development processes, the place where product and technology innovations take form for the marketplace, new service development and in particular supply chain process development research is relatively new. Some research we have been conducting however is showing that supply chain innovations can emerge from a customer-focused process aimed at uncovering clues to changes in the marketplace that might be addressed by supply chain management innovations and valued by customers. The process looks something like this.

A Process For Innovation

First, organizations looking to develop supply chain innovations lay the ground work for managers to see changes in the marketplace and business environment. When looking for customer-valued opportunities, these managers obtain the resources and training to capture and analyze customer and market data. They in essence set the stage for innovation opportunities to be seen.

Second, managers adopt relatively formal procedures for capturing customer insights that include customer group meetings and one-on-one interviews (where what customers say and imply is formally captured and later analyzed), customer surveys and secondary buying and market data analyses. Analysis of this data is conducted using accepted qualitative interpretive and quantitative statistical methods, looking for clues and patterns to changes that might generate opportunities for supply chain process improvements.

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