Category Archives: Sourcing Innovation

What makes an innovative company?

This summer, Boston Consulting Group released their “Innovation 2006” study where they determined that innovation remains a top strategic focus for many companies, with 72% of the 1,070 executives in 63 countries and all major industries ranking it a top-three strategic priority. Furthermore, they demonstrated that innovation does translate into superior long-term stock-market performance: the 25 most innovative companies (as defined by the survey respondents) had a median annualized return of 14.3% from 1996 through 2005, a full 300 basis points better than that of the S&P Global 1200 median. Furthermore, innovators increased median profit margins by an annualized 3.4 percentage points per year over the ten year period, vs. 0.4 percentage points for the median Standard & Poor’s Global 1200 company. In addition, they maintained revenue growth on pace – 9% per annum – with the index median.

There were a number of interesting results and insights in this study, which I’ll discuss further in a later post, but the insights I’m going to focus on are the attributes of an innovative company. The survey the report is based on asked respondents to rank the most innovative companies, and the results, in order were:

  1. Apple Computer
  2. Google
  3. 3M
  4. Toyota Motor
  5. Microsoft
  6. General Electric
  7. Procter & Gamble
  8. Nokia
  9. Starbucks Coffee
  10. IBM

In addition, it asked the executives why they thought the company was innovative, and summarized the results for the top five. The following commonalities shine through:

  1. Innovative Culture
  2. Deep Customer Understanding and Focus
  3. Market Focused

One of the statements about Apple quoted in the article was “every single person in the company contributes to Apple’s innovation success every day“. One of the statements about Google that was quoted stated “Google has built reinvention and creativity into the core values of the company.” And one of the statements about 3M was “3M gives its employees time to work on, develop, and test their ideas” and “has a high tolerance for error“.

Quotes about Apple included “Apple is very focused on the user experience and how design impacts that experience.” One of the quotes about Microsoft was “They’re not always first, but they listen to customers or they wouldn’t have the market share they have.”

Quotes about Apple also included “Apple is telling its customers what’s next. It’s not following the classic ‘market-led’ innovation path that inevitably leads to incrementalism and ‘me-too’ innovation … Customers trust Apple and view it as a lighthouse guiding them on what to adopt next. If Apple has it, it must be useful.” Quotes about Microsoft also included “Microsoft has a complete and total ability to capture and retain an immense customer base.”

These quotes demonstrate the prevalence of an innovative culture, deep customer understanding and focus, and (core) market focus of innovative companies, since even their peers pick up on it.

However, what’s even more substantial, in my view, is the commonality all these traits posses – they are all people focused. Innovative companies focus on their employees, their customers, and the people who constitute the market in which they operate. They realize that innovation comes from people, that these people need to be supported, and everyone with an idea should be heard. They encourage creativity and free-thinking, even if it means that company employees will wander down the wrong path now and again. After all, the harsh reality is that experience is one of our greatest teachers, and learning from (small, contained) mistakes is a heck-of-a-lot better than not learning at all.

So what makes an innovative company? The answer should be clear now – innovative people supported by innovative leaders in an innovative culture that promotes creativity, learning, research, and development. That looks for answers within and without. That listens to its customers, its partners, market analysts, and works with them to define tomorrow’s product and tomorrow’s market.

Thus, the first step to becoming innovative is to decide you want to be innovative and develop an open, collaborative, and supportive culture. If this is beyond you, then I’d start questioning your ability to succeed in the marketplace of tomorrow, especially considering that over 90% of survey respondents indicated that they consider organic growth through innovation necessary for success in their industry. (And if this goes against every grain in your being, then maybe you should consider nominating your company for a Weasel Award next year, after all, you just might be weaseling your employees, customers, and shareholders out of an opportunity for future success.)

The Road to Innovation

In a recent issue of APICS Magazine you will find “The Road to Innovation” (registration required) which consists of an interview with Elbert “Burt” Rutan, president of Scaled Composites LLC and a leading innovator in aviation, whose accomplishments include the production of Voyager – the first airplane to fly nonstop around the world without refueling – and SpaceShipOne – the first privately funded craft to reach space and winner of the 2004 Ansari X PRIZE.

Burt Rutan makes some very good points about the nature of innovation in the article. In addition to traveling the road less traveled, you need to take risks and you need to be aggressive. You’re more likely to get your money’s worth when you take a few risks.

However, achieving innovation isn’t easy. It requires the right mindset, the right processes and hard work in addition to risk-taking and aggressiveness. This week we’re going to discuss some characteristics of innovative companies and some metrics you can use to measure your innovative achievements.

The Efficio Survey (on the Changing Face of Procurement)

As mentioned in “The Changing Role of Procurement in Europe” on Spend Matters, Efficio recently released a study that looked at the changing face of procurement in Europe. Like Jason, I’m not going to spoil the report for you, but merely point out six key imperatives for procurement presented by Efficio.

  • Become a manager of relationships
    Procurement must possess highly developed relationship skills to effectively manage both internal and external stakeholders as well as suppliers.
  • Grow into the role of managing networks, not “vendors”
    As businesses continue to focus on core strength and outsource specialist activities, they have to manage increasingly complex supply chains.
  • Focus on value, not only on cost
    Procurement’s new role of managing whole networks of business partners will increasingly require it to extract value from those relationships as well as cost.
  • Broaden the skills base
    Procurement clearly needs a much broader set of skills than the core functional skills of tender execution and supplier negotiations.
  • Become part of the business
    Procurement must continue to integrate with the organisations in which it operates and be seen as a multi-talented business problem solver.
  • Don’t stand still
    Procurement needs to constantly focus on overcoming the challenges that lie ahead, and on proving its worth through excellent internal customer service and tangible results.

These recommendations are a great start, but I’d like to toss out five more of my own:

  • Smart Sourcing, not Low Cost Country Sourcing
    Remember, it’s not unit cost, but landed cost, that has the larger impact on your overall cost, and when the number of “touch” (or transition) points from a Low Cost Country is typically four times the number of “touch” (or transition points) from a local supplier, you can see how your transportation costs can really add up. A good post on Low Cost Country Sourcing is JB’s post “Global Sourcing: Does Innovation Matter?”.* (This post was in response to my challenge post, Is Low Cost Country Sourcing to China Really Innovative?.
  • Visibility, not Reduction
    All though a lean, rationalized supply chain is important, effective supply chain control is requires more than just a good design, it requires visibility, a topic I visit regularly. See my post Global Supply, Visibility, and Performance, for example.
  • Data, Data, Data
    Bad data and / or bad classification can cost you a lot, especially in global trade. For more information, see my post on Managing Global Trade Data.
  • Compliance, Compliance, Compliance
    Some estimates state that up to 70% of negotiated savings are never realized! Make sure all contracts are tracked and monitored from the date of inking to the date when the last product is delivered. Buyers have to buy against them, payments have to be on schedule, agreed upon rates need to be adhered to, and, most importantly, rebates and post-order discounts need to be recouped.
  • Don’t forget Legal!
    Major procurements often come with a lot of risks. Make sure you engage legal counsel from day one to make sure you mitigate all of your legal risks before they happen. (See my post on Key Concepts for Major Procurements.)

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

Lean Sourcing

Recently, Jason Busch essentially reprinted an article from the first edition of Azul Partners’ newsletter Sparks on “The Top Ten Myths of Analyst Relation”# over on Spend Matters. Although a very good article, I would have reprinted excerpts from regular contributor Lisa Reisman’s Aptium Global executive whitepaper on “Lean Sourcing: Creating Sustainable Purchasing Savings” since all reports indicate we are headed for a global economic slowdown, with U.S. growth expected to nearly halve in 2007 (from 3.3% to 1.8%), taking global growth with it (from 5.2% to 4.4%). *

Most of us realize that economic slowdowns result from reduced consumer spending and result in smaller coffers and lower profit margins as you trim prices in your attempt to maintain your market share. But what we may not realize is that from a sourcing perspective, this could actually drive our prices up, and not down as one might expect. Although historically downtowns may have been a great opportunity to extract concessions from your supply base desperate to maintain their volume when there is less market share to go around, the recent focus on strategic sourcing and, more importantly, e-Auctions in a transparent marketplace has not only trimmed all the fat there is to trim from many suppliers, but reduced the margins of some suppliers to the point where they can only maintain profitability under (very) high volumes. Therefore, if demand for their products drops significantly, they will have to raise prices to stay in business (unless the underlying commodities they require take a sharp downtown, which I would not hesitate to state is not likely in many markets with China and India still high on a global binge buying craze on pretty much everything they can get their hands on).

Therefore, as I have indicated before, e-Auctions and a myopic price focus is not going to cut it anymore, and you are going to have to start adopting a full-fledged sourcing cycle based on a TVM (Total Value Management) approach which includes sophisticated spend analysis, decision optimization, and compliance management and incorporates best-practice six-sigma processes, financing, trade management, inventory management, and lean sourcing.

Unlike stand-alone e-Auctions which caught on because of their quick-hit results (even though such results were not sustainable in the long term since three hits to the profit margin was usually the most your supply base could take and stay in business), Lean Sourcing is a long-term strategy that provides continued value to your organization over time. For many companies, it’s the next evolution of strategic sourcing where you take your TVM focus and augment it with best practice lean principles. And like any good process, it’s a journey – not a destination.

Lean Sourcing provides a number of benefits to organizations, but, as highlighted in the whitepaper, there are four key benefits that place it apart from most sourcing strategies:

  1. Greater buy-in from key functional areas
    operations and purchasing which care about both price and performance
  2. Greater likelihood of implementing identified sourcing savings
  3. Improved quality and reduced waste
  4. On-going additional cost reduction opportunities via collaboration with supply partners

Furthermore, it’s not a hard journey either. The following advice (from the whitepaper) is more than sufficient to get you on your way:

  • Create a Lean Sourcing processes that can be mapped and easily communicated to all team members
    open communication facilitates fairness and buy-in
  • Develop project milestones, deadlines, and target dates
    in reality, only one thing can drive results better than accountability
  • Create a team member incentive structure and compensation plan tied to process outcomes
    nothing drives results from motivated (star) performers better than an incentive plan that not only rewards them for results, but rewards them more for better results
  • Take a global perspective, albeit one that carefully analyzes supply risk
    smart-sourcing requires you consider all the options and take the best one (sometimes that will be China, but sometimes it will be the factory down the street)

* Source: Lost in America, Canadian Business Oct 23-Nov 5, 2006.
# All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

 

(Cost Reduction) It Only Starts With Cost Cutting

Looks like someone’s been secretly reading my blog. But seriously, you know I’m not going to be able to resist a review of any article entitled “Sourcing Innovation (It Only Starts With Cost Cutting)” (Managing Automation Magazine, registration required), after all, that’s pretty much what this blog is about.

According to the article, sourcing and procurement needs to shift away from a single-minded focus on cost cutting to a more holistic approach that considers quality, risk, and product innovation as well as cost. New emphasis needs to be placed on process optimization and collaboration both internally and with suppliers. … Well, yeah!

More interesting is that it also notes that many manufacturers are turning to options-based contracts and indexed-based pricing to counter rising costs and price volatility, especially for energy. This is more interesting – since I find options-based contracts to be uncommon, even though Jason Busch has preached their virtues in this blog as well as his own Spend Matters in “Sourcing Innovation: Securitizing Direct Materials”*. (As for indexed pricing, hopefully you are doing that already!)

It also discusses how HP uses Procurement Risk Management (PRM) (also known as Supply Risk Management) engineering to manage uncertainty in the procurement process by way of a set of mathematical and statistical solutions that analyze hundreds of potential scenarios and determine the likelihood of potential outcomes. Knowing the most likely outcome(s) allows you to predict volumes with confidence and make commitments to a supplier about volume levels and prices.

And, of course, it discusses decision optimization, although it simply lumps it in under the “spend management” heading. (Ouch!) For example, Oracle Sourcing from Oracle Corp. (Redwood Shores, CA) generates recommendations after analyzing various combinations and permutations to balance cost, quality, risk, and product innovation as well as “what if” scenarios. Decision optimization in a nutshell … too bad the author doesn’t look below the 100 million threshold when picking representative companies … since there are much more innovative decision optimization companies out there than Oracle. (And if you don’t remember, start with my optimization series over on the e-Sourcing Forum [WayBackMachine]: Parts I, II, III, and IV).

It’s a good article, but I would have liked more. But then again, it took thirteen installments of The Future of Sourcing to even scratch the surface of Sourcing Innovation.

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