Category Archives: Manufacturing

Some Great Ideas to Revitalize the Innovation Engine, Part II

In yesterday’s post, we discussed some of the suggestions from Henry Nothhaft’s recent book, Great Again, on “How to Revitalize our Innovation Engine”. These suggestions included the liberation of entrepreneurs and start-ups from start-up killing taxes and regulations, the restoration of the VC engine to an earlier design where it worked well, and ending the indifference to domestic manufacturing. These are all great suggestions, but probably the most important suggestion Henry makes is to:

  • Fix the Busted Patent System
    It’s an IP economy and (legitimate) patents are critical for a successful innovation economy, especially since investors (and VCs) want to see IP and protection for that IP before (continued) investing. However, the patent office has a backlog of 1.2B that is growing daily, primarily because, what should be one of the few self-funding agencies is being treated as a petty-cash drawer by the politicians, who have cut 150M in funding this year alone. The patent office needs to be fully funded, needs field offices where patents are filed, needs to modernize, and needs to be able to price with the market (including fast-tracking pricing options).

About the only thing I’d add to Henry’s suggestion list is to:

  • Abolish sotware and business process patents
    The EU has it right. Software should not be patentable and business processes have existed since the day after the invention of money. All these types of patents do is clog up the patent system, enable the patent pirates, and stifle innovation as funds that should be spent on innovation get spent on overpriced lawyers instead.

So what does this mean to your Supply Management operation?

It means that if you want to enable long-term success, you should:

  • help your company establish an innovation fund
    to fund innovative new start-ups that are working on technologies that could revolutionize your manufacturing or supply chain
  • source (some product) domestically
    as not only will this help insure supply if the overseas option(s) suddenly become(s) unavailable (due to political unrest, a shipping disruption, etc.), but it will give you ready access to another source of innovation that will complement your own and support the local economy (which needs to be strong to increase local sales)
  • NOT buy from companies that support patent piracy
    if a company is flooding the patent office with software and process patents, don’t buy from them. Period. They’re the reason we have patent pirates, and if they all go out of business, or change their ways to stay in business, things might get better.

Some Great Ideas to Revitalize the Innovation Engine, Part I

A recent article over on Chief Executive that reviewed Henry Nothhaft’s recent book Great Again summarized some great advice on “How to Revitalize our Innovation Engine”. Tackling the link between innovation and prosperity that is diffused throughout society, Henry is worried that there are numerous forces that are severing this link. These forces include:

  • the divorce of innovation from production
    that has allowed other countries to advance, and become leaders in, technologies that were first developed (and patented) in the US, such as solar power (AT&T Bell Labs, 1957)
  • the lack of jobs in today’s web-based (social media) firms
    While Facebook has 500 M users and a market cap of up to 100B, it employs a mere 1,400 people while Sony (27 employs 170,000, Disney (75 employs 144,000, and Boeing (55 employs 157,000 people. Even Google had only 11,000 people at a comparable stage.
  • a lack of sustainable business(es) models
    since companies that are here today and gone tomorrow don’t have long to innovate

The first three suggestions he offers are the following.

  • Liberate Entrepreneurs from Start-up Killing Tax and Regulations
    Not only did a 2008 World Bank study find that a 10 percent increase in the effective tax rate reduces the investment-to-GDP ratio by 2.2 percent and foreign direct investment by 2.3 percent, indicating that lowering the effective tax rates for start-ups would likely have very positive results, but start-ups are expensive and taxes on necessary hardware and headcount are stifling. If a manufacturing start-up needs 10M of equipment, and the taxes on that equipment are 10%, that’s an extra 1M out of its pocket. While nothing to an established multi-million manufacturer, an extra 1M can sometimes break a start-up.
  • Fix the VC Engine
    In the 1990s, when most VC firms were staffed with executives with operational experience, firms were trying to build companies for the long-term. Today, most VC firms are led by financial types who want to “flip” companies for a quick return like PE firms do. They don’t want to invest unless you already have a product, beta customers, and the headcount to get the job done. At that point, a company could almost self-fund growth with customer partnerships and debt. It’s getting to that point that companies need money.
  • End the indifference to domestic manufacturing
    Most countries understand that manufacturing strengthens an economy and sustains a middle class like no other form of commercial activity. As Henry notes, decades of outsourcing have left the U.S. without the means to invent the next generation of high-tech products. Plus, R&D depends upon close contact with manufacturing for success. A design must be able to be manufactured efficiently and cost-effectively to be a success. R&D cannot be completely disconnected from manufacturing.

And they are all great. Tomorrow we will discuss his fourth suggestion and what your Supply Management operation should do to help revitalize the innovation engine.

Advantages of Home Country Sourcing

In some industries, the US is now a low-cost country due to high transit costs, rising low-cost country labor costs, and high productivity when compared to certain low-cost and emerging economies. As a result, it is not only making sense to pull manufacturing back from China to Mexico for many North American operations, but to also pull manufacturing back to the US. Why is this? In a nutshell:

  • Lower Freight Costs
    With oil rices back to $100 a barrel and rising again, the cost of ocean freight is climbing again, transportation and logistics providers are slapping fuel surcharges on your invoices again, and air is out of the question for anything but high-value, high-density, short life-span goods (like laptops and smartphones).
  • High Speed-to-Market Times
    Insetad of waiting an averge of 3 weeks for the container ship to come in, you’re generally at most 3 days, by road, to get your product from your DC to your most remote store or customer location.
  • Lower Inventory Times
    No need to have product in intermediate warehouses waiting for enough product to fill a TEU or to carry a month (or more) worth of safety stock in the event that an ocean shipment is lost or a supplier misses a ship date.
  • Time Zone Advantages
    Follow-the-sun might be good for service operations, but it’s not good for managers who have to quote production in multiple time zones, work twelve hours a day, and never get enough sleep.
  • Lower Labor Costs per Unit
    A modern factory with a significant amount of automation and highly skilled workers can produce more units per worker hour than an off-shore factory that is only patially automated and run by poorly educated low-skilled workers. So even though the workes might be making 15 – 25 an hour compared to the 3 – 5 an hour, US, that you’d be paying a foreign worker, if they can crank out 5 – 10 times as many units per worker hour, it’s actually cheaper to produce at home. And in many US small towns hit hard by the recessions in recent years, labour really isn’t that expensive to begin with — and loyalty is higher than bustling India industrial centers where your workers leave as soon as a job across the street where they can get 5% more opens up.
  • No Culture Clashes
    If an organization has a low CQ (cultural quotient), working with offshore teams can be a challenge and overall efficiency can be low, and if the organization is not selling its products and services abroad, it’s sometimes not worth the effort to manuacture offshore.
  • Low-Cost Factory Repair
    If the product is complex or requires specialized machinery to repair, that is typically only available on a factory floor, and the factory is half a world away, chances are that a faulty product is just going to end up in the trash and increase overall costs. But if the product can be cheaply shipped back to the factory, chances are it will get repaired or refurbished, and losses will be minimized.

Benefits of Coopetition

As this recent HBR post on how to “make your competition work for you”, even if you are afraid that your allies will steal your business, in today’s economy, a creative collaboration with your biggest competitor may be the best opportunity for revenue and survival.

They key to survival is coopetition — finding a way to partner with your competitor in such a way that both parties can substantially benefit from their shared resources without stealing customers or damaging credibility. While easier said than done, there are advantages.

  • Best of Both Creates New Markets
    If your strengths differ from your competitor’s strengths in a complementary way, a strategic combination of your solutions can win in a new segment of the market which neither of you could enter.
  • Economies of Scale
    If companies work togehter on business segments where they can minimize costs but not jeopardize unique attributes, they can share costs and economies of scale.
  • Opportunities for Upsell
    If a customer would benefit by having another product that you sell, or that your competitor sells, there will be an opportunity to upsell the customer at a later time.
  • Integration for Critical Mass
    If your competitor has a product your customer base also wants, it can help you get critical mass a lot faster.
  • Cross-Endorsement
    If your competitor isn’t directly competing with your market, then you can refer business to each other without losing customers.
  • Potential Investor
    Once credibility and value has been established, a strategic partnership can extend to a financial relationship. They could have the finances you need to launch more NPD. Or a merger could allow for economies of scale that will free up even more money for NPD and marketing.

And once both companies are working in sync, there will be the following benefit:

  • Supply Chain Streamlining
    You can partner on procurement, logistics, and NPD. And, if you’re lucky, you can conquer your space like Apple conquered theirs through a best-in-class supply chain.

Is There Enough CI in your NPD?

Considering that the final cost of a new product is often more-or-less determined in the first 10% of the design cycle, you need the best New Product Design (NPD) process you can get. One way to get this is through the application of a Continuous Improvement (CI) Initiative to your NPD process. Through the application of value-stream mapping, you can identify activities in the process that don’t add value to the customer’s perspective. Anything that adds more resources or slows the process down without adding value needs to be scrapped.

The best NPD process is one that includes supply chain and strategic suppliers who can come up with alternative designs that use low-cost raw materials and cost-efficient manufacturing processes. And, if the organization is lucky, a lean transformation will occur and the effort will prevent design creep from adding features and functions the organization’s customers are not willing to pay for. So take advantage of the “unexplored opportunity”. It will be worth it.