Supply Chain Digital Innovation

Avoid these 5 Common Mistakes

Matthew Liotine, Ph.D.

Vice President, BLR Research

Companies are faced with the problem of how to leverage what they have and how they can drive further benefits through digital innovation. Today’s businesses are facing the forces of change, driving them to make decisions to digitally innovate their business models and operational processes. In today’s environment, companies are shifting from a “run the business” attitude to a “change the business” mentality. Innovation is now critical to any business and should be encompassed not only as a business strategy, but also as a business process. Thinking big goes beyond just making a new product or technical development – it is the creation of new means of bringing value to the firm. While companies struggle with methodologies to innovate their business models, innovating ingrained business processes can be even more challenging. Companies have turned to technology to help innovate their business processes, but it requires using a decision methodology that can assure successful outcomes.

Supply chains are turning towards digital strategies in order to manage the growing complexity that is arising from demand patterns that are becoming increasingly dispersed and diverse. Simply put, a digital supply chain is one that utilizes data and systems to connect operations and business functions internally and externally with trading partners and relevant stakeholders. By intelligently connecting these processes, businesses can achieve greater managerial visibility of their operations and improve decision-making with the end goal of creating growth and profitability.

The Digital Supply Chain

Research suggests that digital supply chains can increase annual earnings by 3.2 percent and revenue growth by 2.3 percent. (Gezgin, et al., 2017). At the very least, digital technologies help reduce supply chain complexity by recording transactions and consolidating data. While Enterprise Resource Planning (ERP) systems have been in use for some time, these systems are primarily systems of record, maintaining databases that contain master and transaction data tables. But digital innovation goes beyond employing technologies solely within systems of record. It involves using digital technology to develop systems of intelligence that can provide insights, solve problems and help make decisions that would not be otherwise achievable by manually distilling information from enterprise systems of record. Systems of intelligence can connect and combine cross-functional data from diverse sources and analyze it to identify or even anticipate operational problems. Such technology can make traditionally inexact tasks such as demand forecasting and capacity planning more precise (Gezgin, et al., 2017).

Much of this thinking is reflective in the current worldwide fourth industrial revolution, also known as the Industry 4.0 movement. This is an initiative to seamlessly integrate supply chains with continuously available smart factories (Harris Williams & Co., 2017) (Price Waterhouse Coopers, 2016). It focuses on the end-to-end digitization of production assets and integrating these with supply chain partners, while analyzing and seamlessly transferring data between them. Supply chain networks which are traditionally vertically and linearly integrated are shifting to more horizontal forms through peer-to-peer connectivity. Furthermore, the friction of information between physical and digital assets is being reduced through integrated technologies and cloud based digital platforms that can facilitate and simplify information exchanges between supply chain entities.

What is Innovation?

By definition, innovation is the introduction of something new, either a new idea, method or device. In the field of supply chain management, it is changing the way supply chains do things. Technology is often viewed as a critical mechanism to innovate, since it is the means in which companies transform labor, capital, materials and information into goods and services. Quite often, innovation is associated with the development of new products or services, or through the adoption of a new technology. But technology is not necessarily the only way to innovate.

Digital innovation involves using information to create capabilities that can improve processes to the degree where they can be transformed. The degree of mix of process improvement and new capability forms an innovation frontier (Figure 1). The mix of technology and process upgrades can drive improvements from the level of being progressive to radical in nature. So, for example, using existing technology to completely transform a process can be just as innovative as introducing a brand-new technology to the firm in order to enhance the same process.

Figure 1 - The Innovation Frontier

Digital innovation within a supply change constitutes using information to make radical improvements in understanding and effecting the key factors that govern the supply of goods: variability, capacity and cycle time. Demand variability can drastically increase cycle time, which is the time required to produce a product. Thus, the ability to use digital technology to sense demand and to communicate variability to production processes could enable them to adjust capacity to achieve acceptable utilization levels in the range of 70 – 80% without increasing cycle time or inventory. Figure 2 illustrates the relationship between variability, utilization and cycle time. The area between the current and desired levels represents the opportunity that digital innovation could deliver to a supply chain process.

Figure 2 - Supply Chain Digital Innovation Opportunity

Avoid These Common Pitfalls

Failure to successfully innovate is quite often due to pitfalls in the overall innovation process. Here are some of the five most common ones:

• Failing to identify ripe areas for innovation within the firm. Companies that seek growth in dynamic or mature markets soon discover that there are many segments that are not growing rapidly.

• Employing a lengthy and costly innovation process versus promptly developing ideas and using rapid prototyping methodologies.

• Limiting ideas to those generated solely within firm, versus seeking ideas and knowledge beyond the boundaries of the company.

• Not recognizing the required modes of improvement that a technology can enable, such as streamlining activities, expanding capabilities and enhancing processes or products.

• Tailing-off of initial innovation of products or processes and reverting back to original levels due to lack of support.

Many of these pitfalls are a result of a variety of factors that are characteristic of large companies. In companies where lines of business managers dictate product or process upgrades, improvements tend to be unleashed on a project basis, versus an ongoing process or program basis. While this is not necessarily an undesirable feature, it opens up the possibility of project thrashing in response to competing business priorities. Companies will err on the side of creating many low risk short-term incremental improvement projects, instead of driving towards the few that might entail higher-risks but have greater rewards.

Embedded legacy processes and ingrained cultures can also add to innovation friction, creating artificial constraints and limited views towards change. Limiting the innovation responsibility to only the firm’s research and development organization, which is inherently expensive, can slacken progress without reducing innovation costs. It can also foster a “not invented here” mentality, which is counter to today’s conventional wisdom that promotes a more open and communal approach towards innovation.

Conclusions

A digital innovation roadmap is key to successful supply chain innovation. It should in no way be cast in stone, but rather be updated regularly as needed. Since customer footprints are constantly evolving, it should be employed on a continuing basis. Firms focusing on ongoing continual improvements view innovation strategy as a process, not a project, and typically enjoy higher returns. Even if outcomes are unusable for strategic or operational reasons, the knowledge obtained can be of great value. Successful digital innovation projects typically feature improvements which are evaluated in a rigorous fashion, with prototyping, proof of concepts and field trials embedded in the rollout to minimize risk. The project scope should cover the services, processes and system requirements for the innovation and should include decision points where changes can be made.

BLR's consulting services and innovation approach can help your firm develop a low risk digital innovation strategy. To learn more, visit BLR at www.blr-research.com.

Bibliography

Gezgin, E., Huang, X., Samal, P. & Silva, I., 2017. Digital transformation: Raising supply-chain performance to new levels, s.l.: McKinsey & Company.

Harris Williams & Co., 2017. Automation Market: HW&Co. Whitepaper, s.l.: Harris Williams & Co.