After reading first break all the rules in the special report on innovation in emerging markets in the April 17th edition of The Economist, I have to wonder if the charms of frugal innovation will be the salvation for supply chain leaders who have hit a brick wall in supply chain optimization.
According to the article, the future lies in “reverse” or “constraint-based” innovation, which is being relabelled as “frugal” innovation. In frugal innovation, product companies take the needs of the poor consumer as a starting point and work backwards. Instead of adding ever more bells and whistles, the products are stripped down to their bare essentials. This goes beyond simply cutting costs to the bone as frugal products need to be tough, easy to use, and have a low environmental impact. In short, frugal does not mean second rate.
Frugal innovation involves rethinking the entire production process and business model. Companies need to compress costs to reach more customers and accept thinner profit margins to increase volume. Under the frugal innovation mindset, three ways of reducing costs are proving quite successful:
- Increase Contracted-Out Work
Bharthi Airtel, a 30B Indian mobile company with some of the lowest fees in the business, contracts out everything but its core business of selling phone calls. Ericsson handles network operations, IBM handles business support, and an independent company manages transmission towers.
- Use Existing Technology in Imaginative New Ways
TCS wants to use mobile phones to connect TVs to the internet through a set-top box because PCs are rare in India while TVs are ubiquitous.
- Apply Mass-Production Techniques in New and Unexpected Areas
Devi Shetty, India’s most celebrated heart-surgeon, is attempting to make the industry more efficient through application of Henry Ford’s management principles to create a combination of economics of scale and specialization that can radically reduce the cost of heart surgery. His flagship Narayana Hrudayalaya Hospital in Bangalore has 1,000 beds (compared to an average of 160 in American Heart Hospitals), a team of 40+ cardiologists who perform about 600 operations a week, and generous backup facilities that allow the surgeons to concentrate on their speciality and not administrivia. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America and has success rates that rival the best American hospitals.
And all three ways are appropriate to your supply chain. For example, an efficient operation focusses on its core strengths and contracts out support operations a partner can do better, faster and cheaper; a forward thinking operation will realize that RFID is sometimes more useful when applied within your four walls to automate tracking of all of your assets (as asset tracking and inventory is one of the most time-wasting administrative practices your people will need to engage in); and will automate repeated RFX and Auction events on a massive scale to reduce the amount of tactical data collection efforts that their buyers will need to engage in (which will allow them to focus on strategic efforts).
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