Supply Chain Innovation, Part 1

Stephen DeAngelis

December 13, 2011

Dustin Mattison, founder of www.dustinmattison.com, indicates that his passion “lies in harnessing the power of the Internet to affect change in businesses ranging from a size of one to hundreds.” His blog normally involves interviews that he has conducted with various business and supply chain experts. Over this past year, he has posted a few blogs about supply chain innovation. One of those posts involved an interview with Peter Balbus, a strategic partner in Nanobiz, LLC. [“How can we make America’s supply chains more dynamic and innovative? Dustin Mattison’s Blog, 25 May 2011] In response to the question “How do you think we can make America’s supply chains more dynamic and innovative?” Balbus told Mattison, “A big part of the answer lies in shifting how we think of supply chains, away from the traditional three bids and buy procurement, to a truly strategic resource that most companies today are dramatically underutilizing.” Some supply chain professionals may take umbrage with Balbus’ traditional view of supply chain professionals and how they behave; but, his view is not his alone. For some reason, supply chain professionals seem more identified with industrial age business processes than those from the information age. This is surprising since supply chain professionals have always been on the cutting edge of technology in fields ranging from transportation to IT. Mattison continues:

“The business world of the 21st century is highly networked, and not just on the Internet or wireless apps on the iphone. Peter means real strategic business networking across the entire value chain, including the supply chain.”

The very use of the term “chain” underscores why some individuals believe that supply chain professionals are stuck in the past. They know they live in a networked world containing “value networks” and “supply networks,” but changing an industry’s lexicon is a difficult thing to do. For that reason, I’m for leaving the term “supply chain” alone but ditching terms like “value chain” that simply don’t reflect the world in which we live. There is little reason to perpetuate an outdated idea. Mattison continues:

“Peter finds it very refreshing when he sees large companies recognize that … outside networks of small companies can be an integral part of their own supply chain. If they stop thinking of the supply chain as just parts and services, but access to innovation that the large company themselves might not be able to do, it dramatically improves and increases the ability of these companies to not only be more innovative but also to create jobs. If we look at the Fortune 500 there has been a net loss of jobs over the last 25 years. Large companies are more concerned with productivity enhancements. Frankly, coming out of this current recession, while their profits are up, they are not hiring. What we need in this country is more re-industrialization.”

For more discussion about the benefits of big businesses versus small businesses, read my post entitled Big Business: Good or Bad? Mattison continues:

“While Peter is not a huge fan of widespread government intervention, he thinks this is one of the clear roles for both State and Federal government investment. Some of the states which have created clusters of innovation and technology have done so because they recognize they can provide certain incentives to young companies to come to their areas.”

For more discussion of this topic, see my post entitled Innovation Hubs and Regional Innovation Clusters. Perhaps the most important thing that Balbus told Mattison is that “you have to build a business case” for creative ideas. “[You begin making a business case with an idea.] Here is the problem it is going to solve, here is the benefit that I think it will yield for our organization, and here is what I think the cost is going to be.” If a business case can’t be made, an innovation won’t result. Specifically on the subject of innovation, Balbus told Mattison:

“Every time he hears that innovation is crowd sourced or that innovation comes from contests and talking with your customers, he wants to cringe because this is not really where innovation comes from. While it can be a source, and depending on the industry some get more value from this than others, but by and large (especially organizations with complex supply chains, most likely industrial) you don’t get a lot of innovation just by asking your customers. You get a tremendous amount of insights just by looking the other way, sitting down with suppliers who very often have ideas which they would love to share. The smaller the company the closer senior management tends to be to the market. It is somewhat counterintuitive, almost like looking in the rear view mirror to [go] forward, but it is not. Henry Ford is famously quoted as saying that if he had asked his customers what they wanted I would have built a faster horse. There is a lot of truth to that.”

In other words, innovation can result from better collaboration. That was also the message delivered by Rick Hughes, Procter & Gamble’s Chief Procurement Officer, at the Procurement Leaders Forum 2011 in Boston earlier this year. [“PL Forum Boston: Opening the channels of innovation,” by Steve Hall, Procurement Blog, 9 November 2011] Hall reports:

“Hughes’ presentation … focused on the value and the innovation that came out of engaging with suppliers in the right way, but while the results impress, the story behind them gave real food for thought. Hughes noted that [P&G’s supplier] scorecard was a source of ideas and savings that wouldn’t have otherwise been available. But when it started it came from a drive from the business toward sustainability and that meant engaging with external business partners in a different way.”

P&G’s experience confirms what Balbus stated earlier about working with suppliers to become more innovative. Sometimes innovations do result from serendipity; but, almost always that serendipitous opportunity only arises because a company was engaged in an innovation process at the time. I believe that P&G’s effort is a case in point. Hall continues:

“For all the sophistication of the procurement organization, P&G didn’t always have the means to have the right kinds of conversations with suppliers. That thought, in retrospect, brought to mind a phrase from Estee Lauder CPO Leonardo DeCandia’s presentation, when he said that often it’s not about changing the person, it’s about changing the way you speak to them. P&G, like Estee Lauder, recognized early that it needed to have the right conversations with suppliers. It needed to equip buyers with the ability to have robust conversations around innovation and sustainability. The presentation quoted one supplier’s thoughts on the scorecard that seem relevant here: ‘It allowed us to understand what P&G wanted and get after doing it’.”

Good conversations (and good analysis) often begins with good questions. Henry Ford might have been told by customers to build a faster horse; but, a probing set of questions would have revealed what they really needed and those answers, in turn, would have led to the cars and trucks he eventually built. The same holds true for conversations with suppliers — good questions result in better answers. Hall continues:

“When you think on that, [suppliers were] saying that they had innovation and ideas to give but communicating that had previously been a challenge. An example that Hughes brought up here, was a chemical supplier that had to create cost and waste by adding water to a product to transport it to the buyer, who had to promptly dry it out to use it. As soon as the right people and the right tools were applied to the relationship, the bridge was there to begin talking about a mutually beneficial solution.”

In Part 2 of this series, I’ll discuss more about who “the right people” might be to engage in the innovation process. Hall continues:

“So, while P&G’s scorecard – which it aims to roll out next year to over 1,000 business partners – has the flexibility and the functionality to encourage suppliers to communicate opportunities for collaboration, it’s the cultural change within the buying organisation and the architecture of procurement that make the tool so effective.”

P&G’s efforts to become more innovative are being driven by its CEO Robert McDonald. According to Michael Chui and Tom Fleming, McDonald wants “to make Procter & Gamble the most technologically enabled business in the world.” [“Inside P&G’s digital revolution,” McKinsey Quarterly, November 2011] They write:

“McDonald … is overseeing the large-scale application of digital technology and advanced analytics across every aspect of P&G’s operations and activities—from the way the consumer goods giant creates molecules in its R&D labs to how it maintains relationships with retailers, manufactures products, builds brands, and interacts with customers. The prize: better innovation, higher productivity, lower costs, and the promise of faster growth.”

In other words, McDonald is trying create a corporate culture that fosters innovation. For more discussion about the importance of company culture, read my post entitled Innovation and Corporate Culture. Hall concludes that “supplier development and buyer development often need to go hand-in-hand.” Although I believe that my company, Enterra Solutions, comes up with creative solutions for making supply chains more responsive and effective, I believe that we wouldn’t be as innovative if we didn’t collaborate closely with our clients. Together we can make any solution better.