Globalization intensified competition in most industries. This came at a time when firms competing in mature markets were experiencing increased difficulty to grow revenues in their home markets. As a result, firms were forced to focus on cost reduction as a means to increase shareholder value. Firms also felt an increased dependence on suppliers for value creation.

1. Insights
Supply Chain Innovation
- Dr. Martin Lockstrom
Introduction
Globalization intensified competition in most industries. This came at a time when firms competing in mature markets
were experiencing increasing difficulty to grow revenues in their home markets. As a result, firms were forced to focus
on cost reduction as a means to increase shareholder value; Offering low product prices, as a result of being a low-cost
producer, was perceived as one of the most important competitive advantages a decade ago. Meanwhile, companies have
also streamlined their businesses and increased focus on their core competencies, through outsourcing, which in turn has
led to increased dependence on suppliers for value creation.
More importantly though, product complexity, today, makes it virtually impossible for individual firms to possess all the
technical expertise and capabilities needed to develop and produce products and services. In order to avoid excessive
transaction costs, when outsourcing business activities, companies try to get the best from both worlds by creating “a
virtually integrated enterprise” where relatively independent parts of the value chain can work in sync. In this quest, the
involvement of supply chain partners has become critical.
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2. Role of Innovation
Constant development and adaptation is of outmost importance for any enterprise. Absence of these leads to loss of competitiveness, commoditization
of products and services, and ultimately performance decline. Innovation in the key lever to create differentiation. While many companies talk about
their focus on innovation, this process often times stops at incremental improvement, at best leading to avoidance of competitive disadvantage, but
does not render competitive advantage. Innovations may take shape along two dimensions, where the first one is related to magnitude, ranging
from incremental to radical, and the second is impact, ranging from sustainable to disruptive. (Figure 1)
The first category - Incremental and Sustaining
ATION
Innovations – entails minor improvements that don’t
Disruptive Disruptive and
alter the current competitive market forces to any large
Innovations Radical Innovations
extent. For example, enlarged displacement volume
of a gasoline engine. The second category - Radical “Covert Agent of Change” “Instant Game Changer”
Innovations - include innovations of a larger scale that
significantly improve a product or service yet ensuring
the overall product function is in line with customer
expectations. For example, fuel-injection engines. The
INNOVATION
INNO
third category - Disruptive Innovations - completely
Incremental and
changes market conditions and customer expectations. Radical
Sustaining
For example, the introduction of the automobile as a Innovations
replacement for the horse and carriage. It is important to Innovations
“Big Impact”
note that the establishment of a disruptive innovation can “Business as Usual”
be slow and gradual, but for various reasons neglected by
incumbents. The fourth category - Disruptive and Radical Figure 1: Innovation types
Innovations - is a combination of the second and third
categories. These are large-scale disruptive innovations that become established in the market very fast. These are very rare. For example, fully
automated flying cars that don’t require airports or pilots.
Supply Chain Innovation and the Infosys Framework for Innovation
Infosys has crafted a framework for innovation premised on seven megatrends that will shape the competitive landscape of the future. These are:
Digital Consumers Emerging Economies, Sustainable Tomorrow, Smarter Organizations, New Commerce, Pervasive Computing, and Healthcare
Economy. The applicability of these themes in a supply chain innovation context is interesting to explore. (Figure 2)
Digital Consumers Self-Service N=1 Co-Creation
Emerging Economies Growth Momentum Innovation Hubs Smart Sourcing
Sustainable Tomorrow Social Contracts Resource Intensity Green Innovation
Healthcare Economy Affordable Preventive Patient-Centric
New Commerce Mobility Micro Inclusive
Smarter Organizations Simplify Collaborate & Learn Adapt
Pervasive Computing Sensor Networks Intelligent Cloud-Based
Figure 2 - The Infosys innovation framework with subthemes, relevant in a supply chain context, called out
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3. Co-Creation Smart Sourcing, Adapt, Collaborate & Learn
With the changing landscape of customers and technology, In today’s globalized economy, companies can no longer solely rely
innovation, which was traditionally undertaken exclusively inside on their home markets for market share and growth – emerging
the organization’s R&D department, is no longer necessarily limited economies are becoming more important than ever to achieve
to a dedicated unit within the organization. Companies have started strategic business objectives, both for ensuring strategic factor
involving external partners and their customers in the innovation inputs such as goods, services and knowledge, as well as for
process. This has led to the ecosystem approach for innovation where generating revenue. What’s more, the traditional top-down way
all the partners come together to innovate for the organization. of managing businesses is becoming increasingly obsolete, where
We refer to this as innovation co-creation. This paradigm implies more nimble newcomers can level the playing field and beat large-
perceiving the company as an open system, into which innovation sized incumbents through innovative business models. As a result,
can flow in and out. The idea of co-creating innovation means that enterprises must ensure they maintain the right level of flexibility and
two or more parties can develop and deploy novel ideas that would agility to effectively adapt to an ever-changing environment through
not have been possible by the parties in isolation. cooperation with external knowledge partners.
Supply chain innovation is a case of innovation co-creation where From a supply chain perspective, the purchase function has
supply chain partners (For example, buyers and suppliers) innovate traditionally operated as a transactional function. The reasons for this
together. It is particularly prevalent in complex, networked industries, were many; in the past, products were often produced locally, had
such as automotive and aerospace which are both characterized by a lower degree of technology content, and companies were much
long product lifecycles and long product development lead times. more vertically integrated than today. Now, the situation is different.
Interestingly, for many leading companies today, the question is In these new circumstances, purchase has been forced to change its
not necessarily how to become more innovative oneself, but rather traditional role from a provider of the right components at the right
how to stimulate and encourage others to innovate, and develop time and right costs to a manager of the supply base, responsible for
the capability to absorb and integrate those innovations into one’s the generation of competitive advantages for the company, not only
own products and services. Seen from this perspective, supply chain through cost reduction, but also through innovation. Although supply
innovation becomes the task of orchestrating innovation rather than chain innovation is not new per se, the trend has accelerated over
merely innovating. time and become increasingly critical for competitiveness. This is also
why deep buyer-supplier relationships, nowadays, are of paramount
importance, as long-term relationship orientation is necessary to
realize any substantial benefits.
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4. Innovation Co-Creation Champions
One of the world’s leading global consumer product goods companies Betting that these connections were the key to future growth, and the
discovered that its existing innovation model was no longer very CEO made it a goal to acquire fifty percent of their innovations outside
effective, especially as technological developments increased the company. The strategy was not to replace existing capabilities of
pressures even further. Meanwhile, R&D productivity had levelled existing researchers and support staff, but to better leverage them.
off at a success rate of about 35 percent and smaller competitors Half of these new products, the CEO said, “would come from own labs,
were increasingly stealing market share. Put simply, the innovation and half would come through them.” In order to meet the challenge,
landscape had changed over time but the company’s existing the company set up a secure IT platform that allowed them and their
innovation model had remained virtually the same since its founding. suppliers to share specifications, blueprints and other information,
which facilitated collaboration. The continuous interaction between
Interestingly, the company discovered that important innovation was
internal and external research staff led to improved relationships,
increasingly executed externally at small and midsize entrepreneurial
increased flow of ideas, and comprehensive understanding. The
companies and it turned out that individuals were eager to license
new innovation model also brought an internal culture change.
and sell their intellectual property. Furthermore, universities and
Furthermore, it did not eliminate R&D jobs within the company; the
government labs had become more interested in forming industry
company actually had to develop new skills to handle the flow of ideas
partnerships, and they were hungry for ways to monetize their
from the outside, as well as actively promote internal idea exchanges.
research. Meanwhile, the Internet had opened up access to talent
markets throughout the world. Other progressive companies like Eli The success didn’t take very long to materialize: 45% of the initiatives
Lilly were also beginning to experiment with the new concept of open in the current product development portfolio incorporated key
innovation, leveraging one another’s (even competitors’) innovation elements from R&D outside the company; productivity increased by
assets—products, intellectual property, and people. nearly 60% since 2000, and the innovation success rate more than
doubled, while the cost of innovation fell as a percentage of sales
The company estimated that for every in-house researcher there were
from 4.8% in 2000 to 3.4% in 2005.
200 external scientists or engineers elsewhere in the world who were
just as good. However, tapping into the creative thinking of inventors
and others on the outside would require massive operational changes.
First, the company needed to move its attitude from resistance to
innovations: “not invented here” to “proudly found elsewhere.” It also
needed to change how R&D was perceived — from only having R&D
staff in-house to having the existing number of R&D staff plus all those
external to the company.
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5. Mastering the Supply Chain Innovation Challenge
A company can achieve superior market performance by gaining access of strategic resources, such as raw materials, human resources, knowledge,
and so forth. However, there is a paradigm that claims that it is not necessarily resources per se that are important, but rather the ability to
reconfigure old resources into new ones in line with the innovation orchestration approach outlined earlier. The reason why the latter is more
important is due to the fact that benefits from having strategic assets diminish as they become more commonplace among competitors. With
this in mind, the only way for companies to stay competitive is through being continuously innovative and by “constantly disrupting” themselves.
According to this logic, the important thing is not about having better resources, but making better use of them.
In order to succeed with supply chain innovation, there are a number of critical aspects that need to be addressed:
1. Functional empowerment. From a supply chain perspective, 5. Cross-functional collaboration. Often, innovation takes place
this means that the companies must enable and empower at departmental level such as at the product development
their purchasing functions to take on the responsibility for unit. The problem with this is that a lot of knowledge remains
systematically scanning the supply base for innovations and untapped, and innovation outcomes seldom connect with
establish long-term collaborative relationships with key suppliers. corporate performance metrics. For instance, purchasing might
have identified an innovation among one of its suppliers, but
2. Updating incentives. If the performance of the purchasing
the product development department might not be interested
function is only measured along the traditional criteria cost,
as they may have their own innovation agenda. The best
quality and delivery, supply chain innovation will not become
way to circumvent this problem is to set up cross-functional
reality. In order to succeed, a set of innovation-specific set of
innovation teams which incorporate representatives from
KPIs have to be implemented both for evaluating suppliers
relevant departments that jointly develop and implement
and the purchasing function itself. Like the old adage, “what
strategies and policies.
gets measured gets done”.
6. Top management support. Innovation is not a one-time shot.
3. Process orientation. Most companies have no problem coming
In order for innovation to flourish, it has to be institutionalized
up with great ideas. Where most companies fall short is how
and absorbed into the corporate DNA and take place on a
to successfully commercialize them. The root cause to this
continuous basis. To overcome this challenge, top managers
dilemma is often a lack of clearly defined innovation processes
must be involved and foster an entrepreneurial corporate
that specifies tasks, task owners and timelines.
culture that foster and nurture innovation. Employees at all
4. Innovation strategy. The majority of companies have strategies levels must be encouraged to think out of the box and be
for marketing, sourcing and product development, but many allowed to fail at least once.
don’t have a strategy for innovation, even less so for co-creation.
The purpose here is to set measurable innovation targets,
developing roadmaps, and allocating adequate resources.
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6. Conclusion
The competitive landscape is changing at a faster pace
than ever. The survival of any firm in the long run depends
on its ability to constantly adapt and renew itself. The only
way this can be done is through innovation. Innovation
doesn’t necessarily mean coming up with new ideas,
but more importantly how ideas, new and old, are
commercialized. Technological advances have opened up
opportunities for companies to innovate in ways that were
not possible a decade ago by tapping into their supply
chain partners. The trends are clear and the opportunities
are there – companies that fail to embrace the new reality
will ultimately fall behind and see themselves become
overtaken by more nimble competitors.
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7. About the Author
Dr. Martin Lockstrom
Principal Consultant, Building Tomorrow’s Enterprise, Infosys Labs
Martin is a specialist in Supply Chain and Operations Strategy,
Outsourcing/Offshoring and International Management. During a
six-year stint in China, he established the research and education
activities at the SCM, Sustainability and Automotive academic
centers at China Europe International Business School, Shanghai.
He established the first endowed chair for Purchasing and SCM in China at Tongji
University, Shanghai, and was also responsible for setting up Supply Chain Management
Institute China, an international network of SCM research and education hubs.
Martin co-founded Procuris Solutions, an IT company specializing in SCM-related solutions,
offering consulting services to companies like Accenture, Ariba, BMW, Clariant, Dell, Dow,
Ernst & Young and Intel, among others.
He has a Ph.D. in Supply Chain Management from European Business School, Germany, a
bachelor’s and master’s degree in Industrial Engineering and Management, from Chalmers
University of Technology, Sweden. He speaks Swedish, English, German and Chinese,
has published over 50 articles and papers and presented at more than 60 conferences.
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8. About Infosys
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© 2012 Infosys Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges
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