Supply Chain Frontiers issue #45
As numerous leading companies have shown, an innovative supply chain can be a powerful competitive differentiator. But what exactly is supply chain innovation, and how can companies harness its undisputed benefits? Surprisingly, relatively little research has been done to answer these questions – until now. The MIT Center for Transportation & Logistics (MIT CTL) has launched a project to define the nature of supply chain innovation and help companies develop and apply it.
Innovation in a broad business context has received much attention. Here is just one of many definitions of the concept: “change that creates a new dimension of performance,” (Drucker Institute, 2002). Innovation has various characteristics, such as the speed at which it foments change, and still provokes debate; for instance, some suggest that only radical and industry-disrupting changes should be considered as innovations.
Supply chain innovation is emerging as a critical component of competitiveness. One research study maintains that this type of innovation is more sustainable than its equivalent in products, because it is a more potent method for cutting costs and is more durable.
However, what constitutes an innovative supply chain is still far from clear. Where and when do the necessary changes take place? Radio frequency identification, or RFID, is often regarded as a supply chain innovation, but did it emerge in the 1940s with the invention of the base technology, or at one of many RFID milestones over the subsequent 50 years? Does the adoption of existing techniques such as cross-docking turn a run-of-the-mill supply chain into an innovator?
“We believe that a supply chain innovation involves the adoption of new processes and technologies that result in meaningful and positive change; it’s not just the adoption of common processes and technologies that result in business improvement,” says Jim Rice, Deputy Director, MIT CTL, who is head of the research project.
There are many examples of such groundbreakers. Equipment manufacturer Caterpillar, for instance, differentiated its business on service parts availability, promising access to global parts that far exceeded its competitors. By creating a unique, integrated network that enabled the company to deliver spare parts anywhere on earth within 48 hours, it created a competitive advantage linked to the reduction of customers’ equipment downtime.
Despite the presence of these role models, however, there is still a need for definitive research on the core drivers of supply chain innovation and its wider application. The MIT CTL project aims to shed light on how companies can systematically pursue supply chain innovation, its key success factors and components, and how companies can implement it successfully. As a first step, the researchers have created a conceptual framework that can be used to compare different innovations and identify what factors drive and impede them. Listed below are the framework’s six elements:
- Context. The company’s competitive situation; the external environment such as country characteristics, the industry, and the products involved.
- Drivers. The market domain – features such as globalization and increasing uncertainty, as well as the business and external domains – the range of products and external influences, government regulation, and stakeholder pressures, for example.
- Innovation. The characteristics that describe the innovation, such as the processes involved and what national or international boundaries limit its development.
- Performance. This comprises two components: performance of the firm that includes labor productivity and sales growth, and the supply chain performance based on such metrics as cost and service level.
- Enabling Factors. The elements that simplify and accelerate innovation, including employee skills, the extent to which a company supports its workers, company size, and the available technology.
- Resources. This primarily comprises three areas: skills, technology, and organization.
This framework is dynamic since a firm’s performance and the environment in which it competes undergo continuous change. Innovation may be one of the change agents.The team has also created a preliminary list of supply chain innovations that provides a handy reference to what has been achieved by practitioners. The list underlines the complexity of innovation – and the research challenge. For example, the project has to define the difference between radical and incremental innovation, and determine the best way to measure these characteristics. Also, is it appropriate to consider the barcode, say, as an innovation, or as a single, relatively modest improvement in an enabling technology?
“Analyzing supply chain innovation is important for both practitioners and researchers, but we have yet to see a common framework that the industry can use to identify, develop, and implement the innovations that can make them more effective competitors,” says Rice. The research project represents an important step toward providing this knowledge.
An MIT CTL paper titled, Supply Chain Innovation: A Conceptual Framework, which is authored by MIT CTL researcher Antonella Moretto and Jim Rice, describes the research on innovation and the new conceptual framework. It is available for download at: http://ctl.mit.edu/research/scinnovation. For more information on the project, contact the authors.