Supply Chain Innovation

July 16, 2007
Differentiating on processes is more sustainable than differentiating on products.

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.

Third, insights that emerge are discussed cross-functionally and cross-organizationally to arrive at a common understanding of what they mean for various products, processes, and organizations in the supply chain. This dialogue is essential to clarify what might be relatively imprecise data. Managers here are not trying to exactly predict the future, but instead gain a slight edge over competitors by digging a little deeper into possible early-warning signs to change.

Fourth, out of cross-functional and cross-organizational discussions, we see organizational learning occur. As Peter Senge and many others have touted the importance of organizational learning, some supply chain managers are concerned with supply chain learning In this sense, supply chain partners manage learning processes together, sharing and interpreting information that enables them to adjust and modify behaviors and attitudes that not only relate to their internal processes, but also how the organizations interact with each other. In part, supply chain learning is behavioral, manageable and teachable. It must eventually though become cultural, where managers across organizations dealing with supply chain issues are constantly on the look out for innovation opportunities. When this happens, innovations emerge. Some reduce costs for one or more organizations in a supply chain. Others result in significant competitive advantage that positively impact many organizations in a supply chain.

This is merely a summary of some key aspects for one way of approaching supply chain innovation. Our research is bearing out that many firms follow a formal process similar to what is described here, but many more have a long way to go. In particular, many firms are not as rigorous as they could be in capturing customer insights through formal qualitative and quantitative methods. As such, they are likely missing many potential opportunities.

Daniel J. Flint, Ph.D., is the Proffitt's, Inc. Professor of Marketing and director of the marketing Ph.D. program at the University of Tennessee, Knoxville. He has an engineering degree from Annapolis, an MSA from Central Michigan University, and a Ph.D. in marketing and logistics from the University of Tennessee. Flint's expertise is in customer value management, specifically helping firms gain deeper insights to their customers' changing value perceptions, and logistics innovation.

For over 50 years, University of Tennessee (UT) faculty have played a major role in the supply chain/logistics arena - conducting innovative research, publishing leading-edge findings, writing industry-standard textbooks, and creating benchmarks for successful corporate supply chain management. Programming is top-ranked in Supply Chain Management Review, U.S. News & World Report, and Journal of Business Logistics. Certification is available.

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