Category Archives: Sourcing Innovation

Demand-Side Innovation Requires Supply Innovation

Earlier this year, Optimize Magazine ran the article “Demand-Side Innovation: Where IT Meets Marketing” that noted that How companies market their offerings – online and offline – has as much to do with their success as the products themselves and that unless consumers can find our brands, share them with one another, and make our brands their own, we may wind up with the wrong markets, the wrong buzz, and the wrong mousetrap. Furthermore, they state that technology, not marketing, has created this new reality and that it’s technology executives, in conjunction with their marketing counterparts, who can effectively address the new market requirements.

I disagree. I do not believe that technology and marketing alone can fully address the new reality. But before I discuss why, let’s review the article in more detail.

The article indicates that a variety of forces are contributing to this new reality where a better mousetrap without a better marketing plan is like a tree falling in a forest, and highlights the following six:

  • Social Media is Increasingly Predominant
  • Online Connectivity is Critical to Offline Community
  • Online Transactions are Small, but Their Influence is Big
  • Social Networks are Critical New Channels of Media Distribution
  • Broadband is Making Online Media More Engaging
  • Immense Virtual Environments are Taking Hold

The article also discusses three business activities whose continual transformation has profound implications for businesses today.

  • Product LocationAmazon.com may not be viewed as a community site, but much of its value derives from collaborative filtering (through user reviews and ratings).
  • Product Shaping and BrandingMajor brands are not having much luck tapping the power of social networking – word-of-mouth marketing is still the most effective promotional medium that money can’t buy.
  • Product Development Consumer co-creation and peer-production of products and services is becoming more common.

When you consider these three activities, the common theme is really product (or service) management, not the underlying technology. Good Product Management is at the intersection of all of the business functions, right where supply management lives. Furthermore, in some organizations, a best-of-class supply management organization is likely to have the most experience with collaboration and networking solutions, even if they don’t know it. Current sourcing, procurement, and supply chain management is built on visibility and collaboration. Thus, supply management is very likely to understand these concepts. Furthermore, the best demand-side management is worthless if the organization cannot meet the needs of the marketplace. Involving supply management from day one greatly increases the likelihood that an organization will deliver the right product at the right time in the right manner to maximize success.

Democratizing Innovation vs. Crowdsourcing

Crowdsourcing, as I noted in CrowdSourcing (Purchasing Innovation VI over on e-Sourcing Forum [WayBackMachine]) and Cambrian House: Crowdsourced Software, which can be defined as the process of delegating various tasks for which you do not have the manpower or expertise from internal production to external entities or affiliations of networked persons with the expertise, access to, or raw capabilities that you require, allows you to accelerate product development lifecycles and innovation by taking advantage of the masses.

Democratizing Innovation, the title of a book by Eric von Hippel, is when users develop solutions and manufacturers base their new product ideas on the examination of user-developed solutions as well as their needs. It is the intersection of the emergent-solution and emergent-market model where individuals innovate for themselves (with steadily increasing quality and steadily decreasing cost using steadily improving tools that are becoming cheap and ubiquitous) and manufacturers learn to rely on users for innovation prototyping and the collaborative filtering efforts of user communities as the basis of their marketing research.

The concept of Democratizing Innovation is discussed in an interview between Eric von Hippel and Tom Austin of Gartner (on Gartner’s site), that, unlike most of Gartner’s offerings, is free for anyone who wishes to read it. The interview, which is quite lengthy, discusses various aspects of Democratizing Innovation, and includes references to open source and user-centered innovation (which are fundamental components of crowdsourcing), but the most interesting aspect is the reference to a concept of an “intellectual commons”.

Eric von Hippel states that he believes that many fields are on the way to building an intellectual commons, which is increasingly becoming a viable substitute for intellectual property protected by patents and copyright and that, over time, information protected by intellectual property law as a monopoly will only survive in increasingly isolated corners of the economy since intellectual commons will eventually dominate. Interesting proposition. I hope it happens … which should not be a surprise since I am all for the abolishment of software patents as well as much stricter controls on the patent process. (For example, I would argue that a patent should not be granted unless a panel of experts in the field agreed that the invention contained within was indeed innovative. Considering Genrich Altshuller, the founder of TRIZ, found that, on average, only 20% of patents have somewhat inventive solutions, only 4% of patents contain a new concept and 1% a revolutionary discovery, it should be obvious that at least 75% of patents granted should never have been granted.)

But I digress. We’re talking about crowdsourcing and democratizing innovation – two concepts that look eerily similar – despite the fact that the Gartner interview does not even mention crowdsourcing. After all, both are based on user-centered innovation, and the emergent properties of a social collective which will slowly redefine productivity and innovation in this modern era.

We’ve left the world of Marshall McLuhan where The Medium is the Message and have entered the world of William Gibson where it’s impossible to move, to live, to operate at any level without leaving traces, bits, seemingly meaningless fragments of personal information. But that can be a good thing. We can leave more than traces and meaningful fragments of non-personal information as well. Others can do the same. These fragments can be combined into pieces, pieces into images, and images into collages that can be used as the foundation for new innovations. The future is here. It’s just not widely distributed yet.

Purchasing’s Advice on Selecting a Sourcing Strategy

The second installment in Purchasing’s Strategic Sourcing series offered five more tips to buyers wanting to improve their sourcing programs. The tips they offered were:

  • Know the supplier’s cost
  • Rank the supplier’s importance
  • Seek long term relationships
  • Become a commodity specialist
  • Concentrate on the critical materials

These are all good tips, but it completely misses the main point. A strategy is a (long term) plan of action designed to achieve a particular goal, most often a “winning one”. These are all tactics, or actions taken to achieve a specific effect. They are not strategy.

A strategy results from the detailed analysis of your business, goals, product lines, and supply chain and the options available to you. What are you making, and what do you need to source to make the product? Can you source global, or do you have to source local? What are the processes that need to be respected? For each of the different options, what are the associated costs? Is the product complex, high value, or a combination thereof, or is it simple, low value, or simple and low value?

Based on the answers to these questions, you determine the geographic, negotiation, and category specific elements of your sourcing strategy. The circuit boards are complex and high value, so I have to source from a select group of manufacturers that meet these very demanding criteria. I need to replenish my product stores rapidly for my local restaurant chain, so I need to source from regional suppliers. I need to design a new control system, so I need to focus on suppliers that will work with me to reduce development and production time and cost.

Only when the strategy has been figured out do you start identifying potential suppliers, analyzing their cost structures compared to your should cost models, or ranking their importance with respect to your organizational goals. Furthermore, only once you have an overall supply chain strategy that allows you to separate out the “critical materials” can you concentrate on those materials and become a commodity specialist. So, even though these are all good tips, even combined, they do not constitute a strategy.

If you want a short article that gives you an idea on where to look for an appropriate strategy, I’d recommend J.P. Massin’s post “The Strategic Sourcing Matrix quadrants’ characteristics” over on Strategic Sourcing Europe [WayBackMachine] instead.

The Top Three I: The Big Bad Blogger Throw-down!

It’s been a while since the last cross-blog series, and a long while since the last big cross-blog series – last summer’s Sourcing Innovation series that ran for thirteen posts, crossed seven blogs, and engaged eleven different authors – but the wait is over! Today I’m pleased to announce that a new cross-blog mega series is starting – “The Top Three”.

In this series, which will run for the next two weeks, your favorite sourcing, procurement, and supply chain bloggers and guest bloggers, including a few of the Enterprise Irregulars [WayBackMachine] are going to discuss the three issues in the sourcing / procurement / supply chain space that they perceive to be the most critical as well as a discussion of why the issue is important, what a company can do about it, and what could happen if it’s not addressed.

Current indications are that this is going to shape up to be a great series! So far, I’ve received confirmations from over twenty authors that they are going to participate, including a few on the periphery of the space, and I’m hoping more will jump in as the throw-down escalates! As a side-note, I’ve invited almost sixty different bloggers, guest bloggers, and prominent individuals to participate, including every blogger I ever indexed on the master blog list.

By the end of the series, don’t be surprised if we finally have a good definition of what Supply Management 2.0 really is!

Ahoya, Akoya

When I was being blown away in the windy city, I had a chance to sit down with Brett Holland, Co-Founder and SVP of Akoya (acquired by i-Cubed). It was an illuminating conversation, and one that highlighted why companies like Akoya and Apriori are taking spend management to a whole new level, especially in manufacturing (even though they are both attacking problems at different ends of the spectrum using two different approaches). Not wanting to spoil Brett’s upcoming posts over on Spend Matters, I decided to hold off on a post of my own.

In his “Getting Ahead of the Product Cost Management Curve”* post on Spend Matters [WayBackMachine], Brett points out that procurement and sourcing play a very critical role in understanding the product cost implications associated with the sourcing and purchasing of engineered components and that procurement and supply management can and should lead conversations regarding product costs since today’s spend management 2.0 solutions allow procurement and sourcing professionals to arm themselves with much more information about what drives costs and where there are opportunities to save money in direct materials and contract manufactured component categories. Furthermore, most of the current approaches in the market are highly complementary to each other and manufacturing companies should be working with all types of product cost management techniques to maximize their position in an increasingly competitive environment. And this last point is key. One solution is great – a small basket of complementary solutions that attack cost from all the angles is either better.

In his “Taking Control of Cost Management for Engineered Direct Materials”* post on Spend Matters, Brett points out that in the past, there have not been very good ways to systematically find cost inefficiencies and take action on them within engineered direct materials. Companies have developed cross functional teams, conducted six sigma projects, brought in consultants and domain experts, but none of them have had the direct access to the critical data and the analytical tools to dissect it so they could have a clear picture on the factors that drive cost inefficiencies in the direct materials across the organization.

However, today, analytical solutions are available for product cost management that can take the data that is within your control – financial, purchasing, supplier, and manufacturing – analyze it, and present you with a highly accurate list of parts that have potential cost savings. Additionally, these analytical solutions provide reasons why these savings opportunities exist and potential actions to take to capture them. The analytical solutions can then be complimented by activity-based cost models, risk management solutions, supplier relationship management solutions, and e-Procurement packages that help execute on the actions.

Furthermore, Today’s product cost management analytics work by drawing out the elemental factors within the part and its manufacturing requirements that drive the cost. They then analyze this data to determine commonality and comparability, and can predict target costs. They augment (and sometimes correct) this predicted cost with data that determines the factors that may contribute to cost inefficiencies (you can think of it as the evidence that makes the case). From this combination of approaches, these analytical solutions can accurately assess which parts are good renegotiation candidates, which parts are good resourcing candidates, which suppliers are best at each part, and other actionable findings.

This last point is key – and why you should use a basket of complementary solutions, starting with Akoya and Apriori. Akoya helps you figure out where you are likely overspending and why, and Apriori helps you figure out by how much and what you do about it, with its process-based mechanistic cost models. In other words, given the forest, Akoya helps you find the trees that need to be cut down and Apriori is the saw you use to tackle the trees.

For another perspective on Akoya, refer back to Jason’s “Spend Management Goes Upstream: Part 3 – The Akoya Philosophy” post.

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.