Supply chain-driven innovation

Demand-driven innovation is driving every part of the modern business, including the supply chain. Take a look at the new supply chain, which responds directly to customer needs.

More and more, direct customer input is driving every aspect of innovation, from the overall product concept to the timing of the launch to packaging and delivery. In this emerging world of demand-driven innovation, the supply chain plays a crucial part: It must not only be resilient and cost-effective, it must be able to respond directly to customer needs, even as those needs are continually shifting. And it must be able to reduce...

lead times to the bare minimum.

A supply chain that responds directly to customer needs may look quite different from the supply chains of the past. For one thing, it maintains a close relationship with marketers and product developers at the very beginning of the product life cycle. For another, it addresses the question of what happens to a product after launch -- in other words, the supply chain strategy helps sustain the product's success in the marketplace.

The supply chain executive's role may look different, too. Supply chain managers already collaborate with other corporate functions, of course, but creating a supply chain that successfully supports demand-driven innovation requires an expansion of that collaborative role. The supply chain executive must help facilitate and guide innovation and become a true partner in marketing efforts.

Customer expectations have risen
Today's buyers are finicky and demanding. They expect the right products to be available at convenient times and locations. Companies are under increasing pressure to rapidly read buyers' signals, develop products attuned to their needs, and deliver when customers are ready to buy.

This represents a significant shift for manufacturers. For most of the last century, the needs of companies, not consumers, drove the nature and pace of product innovation. General Motors, Ford, and Chrysler found it convenient to debut new automobile models every year. Producers of household cleansers made an art of pushing their products into grocery stores and drumming up demand through televised ads. Buyers had little say.

There were good reasons for a seller-centered approach, of course: Limited variety meant long manufacturing runs, which meant factories could be kept humming at full capacity. Besides, in the pre-computer age, companies had scant ability to collect and analyze data, so they didn't really know what customers wanted or were willing to pay.

Nowadays, companies know a lot about what customers want. Marketing departments and sales departments are increasingly expert at accumulating real-world customer data. New tools enable them to delve deeply into buying patterns and precisely track changes in buyer perceptions. For instance, Groupe Danone conducted a weeklong Web test to design packaging for a low-fat yogurt product. By analyzing hundreds of user responses to proposed ideas in a matter of days, the company was able to select the right combination of colors, sizes, and wording to grab the momentum of the low-carb craze and generate more than $70 million in annual sales.

Companies have worked hard to use such information to directly tailor product innovations to the nuances of customer desires. Some have gone a step further, allowing customers to go online and configure products they're buying -- from computers, in the case of Dell, to cars, in the case of BMW's Mini Cooper. Customers will increasingly come to expect this kind of direct input into design.

Rethinking the linear flow
With customer desires changing all the time, speed of innovation is crucial. To reduce development time for demand-driven innovation, a number of companies are reexamining product development's traditional linear flow from marketing and R&D through manufacturing to sales. The old way simply takes too long -- a median time to market of 27.5 months for consumer packaged goods and nine to twelve for apparel.

Square D, a division of Schneider Electric, which is based in Palatine, Illinois, provides a good example of a nonlinear development flow in the electrical controls and automation management industry. Demand-driven innovation is an important part of Square D's business, and the company actively engages its customers in developing new products. But instead of simply submitting specs for a desired product and waiting for Square D to produce it, customers collaborate online or on the phone with order engineers, even before specs have been drawn up. Designers can suggest their own ideas or push back on features that might create hurdles in the manufacturing process. The nonlinear back-and-forth makes innovation easier, richer, and faster than it would be otherwise. The faster flow means supply chain managers have to react more quickly in order to support innovations, but it also helps them plan ahead -- they learn at the early stages of product development what the supply chain needs will be.

There's another aspect of the strategy that's crucial for the supply chain: Square D requires that the products be made from standard components. That's how the company maintains control over the development process and keeps costs down. For supply chain managers, it's vastly easier to source standard components than to supply the materials that would be needed to make new products from scratch. The overall result of Square D's nonlinear flow: a 30 percent reduction in order-taking cycle times.

Square D's system depends on integration of the supply chain with other functions of the business. But that's true of all demand-driven innovation, whether linear or not.

The supply chain manager's role
For supply chain managers to facilitate and guide demand-driven innovation and truly become a partner in marketing, communication is paramount. You must be able to see clearly into the processes of salespeople, marketers, and designers -- even downstream partners and product servicers -- and collaborate with them constantly.

Salespeople and marketers. The detailed data that these professionals are so good at generating can be a treasure trove, allowing managers to adjust supply chains to quickly accommodate customer preferences. For example, information from sales and marketing indicating that customers are beginning to prefer a certain version of a product -- in a particular shape or size, say -- helps the supply chain manager move rapidly to find out what the cost implications of that trend will be and to find sources for the needed materials.

And information should flow both ways. The supply chain manager is best positioned to know whether a particular shape or size for a product has implications beyond cost. For Danone, marketers' finding that consumers prefer a particular size yogurt might influence package design, which could affect shipment sizes and hence the way product is transported to market. It becomes the supply chain manager's job to inform marketers, early in the game, about the logistical challenges that certain product configurations pose -- and to suggest possible alternatives. In order for this to work, the various departments must make the latest information available to one another and hash out solutions collaboratively.

Designers. Product-development experts can provide the supply chain manager with a window on what's in the pipeline so that a sourcing strategy can be sketched out in the early stages. Innovation can be expensive, and customers don't like to pay for it, even when it comes about as the result of their own direct input. So it's often up to the supply chain manager to find raw materials and other needed resources at prices that will allow the innovative product to be profitable.

Just as they do for marketers, supply chain managers can provide sourcing information to designers about products in the development pipeline. The supply chain manager might point out the relative costs of different materials, for example, or quality problems that might be raised by a design that calls for highly complex parts. In so doing, supply chain executives play a critical role in helping to shape new products into their most viable forms.

Downstream partners and product servicers. After demand-driven innovations reach the marketplace, partner companies that interface directly with users can be sources of important nuggets of information, as can engineers who go out into the field to service products. Are customers using the products in unforeseen ways? What are customers saying about the products? That sort of information allows the supply chain manager to anticipate changes in product design and think ahead about altering sourcing strategies to support the revamped products.

Cutting lead times
Demand-driven innovation doesn't mean much if, before the new product is launched, customers have already changed their minds or competitors have beaten you to market. Relentless reduction of lead times is thus one of the most important benefits a supply chain can bring to the discipline of demand-driven innovation.

One athletic-shoe manufacturer is pioneering a lead-time reduction method that may point the way for other businesses. Many apparel companies are striving to develop demand-driven innovation to differentiate themselves from competitors. But traditional supply chains for shoes and clothing don't allow companies to react quickly enough to mercurial fashion trends. By looking at detailed sales forecasts, which are normally developed for product launches, the athletic-shoe maker creates a sourcing plan that takes into account lead times and other factors for all supply components, from leather to dyes, so that final decisions on quantities for each shoe style can be postponed much longer than was formerly possible.

The logic is nothing new to manufacturers in industries like personal computers or printers, but it is a big change for the apparel sector.

This kind of approach will continue to become widespread in the world of demand-driven innovation. Customer data will be more precise, and supply chain executives will be expected to more precisely fill the requirements of marketing and product design.

How to communicate well
If the supply chain is to successfully support demand-driven innovation, supply chain managers should be part of highly collaborative product development teams that include the other corporate functions.

A common practice is for managers from R&D, marketing, and supply chain to meet weekly as a team while the product is in the pipeline. Each expert should give an assessment of the project and the team should be advised about such events as new inputs from customers -- from focus groups, surveys, or Internet sales, for instance -- that might change the direction of the development process.

Of course, effective communication with other functions in the business can be severely hampered by outdated attitudes. Are there people in your department who continue to think of marketing departments as being made up of creative specialists who need to be brought down to earth by the operations staff? If so, be proactive in making sure that the entire supply chain organization understands the valuable contributions that marketers make to the demand-driven innovation process. This is an essential step in making the whole thing work.

Reprinted with permission from "Remake Your Supply Chain to Support Innovation," Supply Chain Strategy, Vol. 1, No. 9, November 2005.

See the current issue of Supply Chain Strategy.

Kevin O'Marah is a vice president of research for AMR Research in Boston. He can be reached at SupplyChain@hbsp.harvard.edu.


To read more articles like this one, visit HBS Working Knowledge, an online source for business analysis, information and research.

© 2005 President and Fellows of Harvard College

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