Reliance on innovation to drive growth and boost brand equity has long been a given for technology-based industries, but market conditions now are driving more traditional sectors to compete on the basis of innovation as well.
All types of companies, including "nuts and bolts" businesses that historically have cared little about innovation, are devoting more resources to product development, says Mac McGary, vice president for high-tech and industrial markets at Summerland, Calif.-based QAD, an enterprise solutions vendor for mid-market companies.
In some cases, this shift has been thrust upon them by events, McGary says. "The most obvious event is spiraling prices for oil and raw materials. These prices are rising faster than companies can pass on the increases, so they are trying to find ways to use less material or substitute alternative materials." Similarly, the green movement is driving companies to develop more energy efficient and environmentally friendly products, he says.
Increased global competition also is pressuring companies to be more innovative, says Alex Blanter, director of the Software, Electronics and Services group at PRTM Consulting, Waltham, Mass. "Companies have to find ways to differentiate themselves in an increasingly crowded marketplace and innovation certainly is one way," he says. Global competition also contributes to shorter life cycles since innovative products are quickly copied by fast followers, pressuring companies to come up with more new products and shorten development cycles, Blanter says.
Technology advances contribute to the trend as well. Advanced technology platforms and processes, particularly those devoted to product lifecycle management (PLM), "allow companies to take innovation maturity to a new level," McGary says. Additionally, 3D technology "gives us the remarkable ability to see what the outcome of a design will be and to project the engineering scale or mock-up in 3D first. With 3D, instead of making a prototype, you can send a digital prototype of a product for people to look at with a 360-degree view, and even put through simulated tests, before deciding whether or not to approve it for manufacture." Doing this digitally also speeds time to market, he notes.
Renewed corporate emphasis on top-line growth and lean operations plays a role as well. Mark Davis, leader of product innovation and lifecycle management consulting at Deloitte, New York, notes that many companies are looking to new products for a greater percentage of overall revenue. "Some companies are targeting as much as 30 percent from new products and the only way to meet those targets is to get better at the entire process of innovation," he says.
Lastly, says Blanter, "once a company starts on the path of trying to be more innovative, it creates a positive feedback loop. More innovative products result in higher profits, which allow more investment in innovation."
That assumes, of course, that the products companies bring to market are hits with the consumer. From one-third to one-half the time, this is not the case, according to various estimates of new product failures.
"At the end of the day, if you don't have the right product for the right market segment at the right price and quality, you are not going to be successful, no matter how great an infrastructure you have behind that product," Davis says. However, he adds, the opposite is equally true. A company may have a great product design, but if it doesn't execute well on producing and getting a product to market, it will not succeed.
Convergence Is the Answer
The critical nature and interdependence of these two competencies is leading companies to realize that to succeed at innovation, design excellence and operational excellence must converge. For that to happen, barriers between product development and supply chain management have to come down.
The traditional linear process where a fully developed product is handed off to the supply chain at the end of the process no longer works, if it ever did, experts say. Supply chain activity should occur concurrent with new product development. "The concept of "right" to market depends on getting the supply chain, operations and purchasing to be partners in the new-product introduction (NPI) process, versus handing something off to them once it is designed," says Chris Farinacci, vice president of applications marketing at Oracle, a major enterprise solutions provider based in Pleasanton, Calif. "It no longer is sufficient to have engineers working in their own little bubble, selecting components and suppliers for technical reasons alone." Moreover, he adds, developing products without taking into consideration existing global contracts and relationships "simply undoes a lot of great work by folks on the purchasing side."
"It's the companies that figure out how to drive integration and collaboration with supplier partners and with the supply chain and engineering teams, all at once, and make it truly a joint development team, that are able to launch innovative products quickly," says Prentis Wilson, vice president of product operations for Cisco Systems, San Jose, Calif. Wilson also likes the concept of "right to market" rather than "time to market" for new products. "What we are focused on is the notion of TTQV [total time to quality and volume[ at FCS [first customer shipped], meaning we are right to market on day one," he says.
Jerry McNerney, senior director of transportation, distribution and logistics solutions at Motorola's enterprise mobility business, Holtsville, N.Y., contends that "every company should make it a mandatory requirement for the supply chain to be involved in product design." At Motorola, he says, "supply chain teams are completely aligned and participate with new-product development teams so they can leverage the bill of materials for new products and help make decisions on how to manufacture and bring new products to market. In today's environment, you are going to be at a complete disadvantage if you don't have your supply chain teams as a full participant in the development and the life cycle execution of your products," he says.
One way that Cisco leverages the discipline of designing a value stream and a product at the same time is to do trade-offs that might help it be more competitive in the marketplace, says Wilson. "For instance, decisions on when we might do late stage differentiation to meet a global market need may force a trade-off in design that a designer would not have thought of otherwise. Making those trade-offs during the design phase enables us to get to market quicker. When you are trying to solve a need in the marketplace, the solution needs to be defined based on supply chain characteristics as much as on design features."
Decisions in the development process also have significant impact on other processes in the distribution side of the supply chain," adds Hans Thalbauer, head of PLM solutions management at enterprise solutions leader SAP, Blue Bell, Pa. "For example, decisions about where suppliers and manufacturing will be based will impact network design," he says. "Or, if a new product is replacing an existing one, there needs to be a supply chain strategy for phasing out products that are still in the market or in inventory."
"We are finding that our customers are more concerned than ever about lead times, so at Sun we think seriously about our forward distribution system during development," says Marcy Alstott, vice president of enterprise system operations at Sun Microsystems, Santa Clara, Calif. Lead time considerations and product differentiation or postponement strategies go hand in hand, she says. "We look, for example, at having global configuration centers closer to our customers so we can achieve the very competitive lead times they want."
Designing products with the entire value chain in mind is essential from a cost standpoint since 80 percent of costs are built in during the design phase, says Fabian Fedida, PLM and SCM strategy director at Dassault Systemes, a provider of PLM and computer assisted design engineering solutions based in Paris. "That means designing for manufacturing, for sourcing, for easiest support and maintenance, for packaging and distribution, for matching the requirements of the customer-all of that."
There are trade management issues that make it important to involve the supply chain up front as well. Products need to be designed for compliance to make sure that they meet customs and trade regulations and to take advantage of preferential trade agreements, says Farinacci.
Finally, it is important to involve the supply chain early because competition is no longer based on the product alone but on the effectiveness of the extended supply chain. "It is not just about the design anymore, but also about how effective you are at sourcing, working with suppliers, pricing, getting the raw materials and components there-it is all the supply chain around the finished product plus the design that companies are competing on today," says Sue Welch, CEO of TradeStone Software, Gloucester, Mass., which has a PLM solution for the retail and consumer packaged goods industries.
Fedida underscores that point. "People are not just looking at the technical quality of the product but at the cost and service around it, what we call the augmented product," he says.
"As global competition becomes more challenging, our customers want us to come up with more creative ways to help them solve problems," says Alstott. "They are looking across their full set of supply chain partners to find ways to compete more effectively."
"The marketplace is telling us that it is not just product innovation that is important but also the supply chain innovation that goes along with it," agrees Wilson. "Those companies that integrate their supply chain capabilities and do true concurrent supply chain architecting along with product architecting are the ones that will be most successful."
Oracle's Farinacci summarizes the challenge: "How do we get engineering and development, as they design new products, to start thinking about lead times, global sourcing, quality, regulatory and end-of-life issues? And how do we get all those other stakeholders and all those downstream functions to be part of the process in the early stages?"
Clearly one answer is by developing end-to-end processes.
"Process is very critical in enabling continuous product and service innovation," says Thalbauer. "What we are talking about is very complex. First you have to select the right ideas that might become successful products, which is very difficult, and then you have to move those ideas through development and launch. This requires information from marketing, from manufacturing and also from the supply chain." SAP has published a PLM road map that it uses in working with customers to introduce and define end-to-end product lifecycle processes, he says. "That is also how we are building our solutions. SAP's solutions are not focused on PLM or SCM but on supporting this end-to-end process."
To help bridge the walls between functional silos some companies are appointing a chief innovation officer, who is responsible for managing the entire innovation process. According to research from Aberdeen Group, Boston, this strategy can be very effective. A recent survey shows that companies with the best innovation performance are 54 percent more likely than average companies to have an executive dedicated to product innovation.
The importance of this factor also was documented in Booz-Allen-Hamilton's 2007 Global Innovation 1000 survey of the world's largest R&D spenders. This study showed that companies with the closest alignment between innovation and corporate strategy have superior financial performance, with 40 percent higher operating income growth and twice the shareholder returns over the last three years than companies with strategies that are less well-aligned.
Shoshanah Cohen, director of the Global Supply Chain Innovation practice at PRTM, says there has been a noticeable increase in the number of companies creating a CIO position over the past couple of years. "That in itself is not a solution, but it is a demonstration of a company's commitment to innovation and to making innovative processes a focal point," she says.
Sun recently combined its engineering and manufacturing organizations under one executive vice president, says Alstott. "We are hoping this new organization will allow us to break through some of the organizational barriers that could slow us down. We clearly see value in having everyone rowing in the same direction between the engineering and go-to-market and operations teams."
Another way to approach this organizationally is through councils, says Jeff Kavanaugh, partner at Infosys Consulting, Fremont, Calif. "We have seen these called Strategic Portfolio Councils or Planning Councils, but it is where leaders from the supply chain and new-product introduction areas, and possibly information technology and finance, join together to facilitate collaboration. We have seen it work effectively and think it is a useful notion in the interim because it doesn't require a major overhaul at the senior level and yet you still give innovation increased attention. It comes down to how the governance is executed."
The key to making any cross-functional team work is to put the right incentives in place, says Cohen. "You can say cross-functional teams will focus on innovation from the time of concept through launch, but if you don't put incentives in place and provide management examples at the senior level, it's not going to happen." One of the tactics PRTM is seeing among its clients is a formal effort to create incentives designed to optimize performance for the company as a whole as opposed to rewarding functional excellence. "I have to say, that is something that's easier to do on paper than in reality," she notes.
One of the advantages of having a chief innovation officer is that it prompts thinking about how to drive innovation into every role and responsibility in the organization, says McNerney. "You want everyone to feel that they have a part in introducing innovation in their environment."
CIOs or their equivalent currently seem to be focusing on "how to feed the product development engine and make sure that the company's investments in product development are paying off," says Blanter. This includes finding new ways to collect and process ideas, which is leading more companies to move toward open innovation.
Open innovation is a strategy whereby companies actively invite ideas from outside the enterprise, including from suppliers and customers. The concept is being adopted by such leading companies as IBM, Lily and Procter & Gamble.
"I am not aware of any company that is doing everything by itself anymore," says Thalbauer. "All companies are going through this transformation to building and being part of networks, which means they need to be able to collaborate." Asking end consumers directly for input and ideas is particularly important for innovative companies, he says. "That's the only way to ensure that you are bringing the right products to market."
This observation also is borne out by Booz-Allen-Hamilton's global innovation survey. Participating companies that emphasize direct customer engagement reported three times higher operating income growth, 65 percent higher total shareholder return and two times greater return on assets than companies less focused on customer feedback.
"Companies can spend the most money, hire the best engineers, develop the best technology, and conduct the best market research. But unless their research and development efforts are driven by a thorough understanding of what their customers want, their performance may well fall short - at least compared to that of their more customer-driven competitors," write report authors Barry Jarulzelski and Kevin Dehoff.
In addition to process, innovation needs the support of integrated technology solutions. The central technology for new product development is PLM.
"PLM provides a complete way of managing product information across the product's lifecycle," says Blanter. "It provides one version of the truth as a product develops and enables this product information to be shared. The PLM infrastructure allows companies to bridge functional silos a little easier, at least from a data and process perspective, and enables them to tap into their own knowledge a lot more efficiently. From that perspective, it clearly is an enabler of innovation." However, he adds, it must be used in conjunction with process. Alone, "it is a necessary but insufficient set of tools."
PLM vendors have done a good job of listening to customers and developing solutions that make it easier "to tie together the whole product development process and link it to customer needs," says Kavanaugh. Customer needs management "is a big deal and one of fastest-growing areas of PLM," he says. "It's the notion of translating ideas to specifications and specs to production and production to a released product -- and measuring success at each stage. That is the ultimate goal-if a product fails, to know if it was because it was the wrong idea, because the specs were not translated correctly, because it wasn't produced in a quality way or because it wasn't launched the right way. If a company can do root cause analysis on those factors, think how much more effectively it could invest its dollars. I think we will be seeing some very exciting things over the next couple of years in terms of this technology," he says.
PLM is essential when design and manufacturing are dispersed around the globe, as they are in many companies, says McGary. "Our mantra in terms of what we are trying to do with our solutions is to enable companies to design it, engineer it, build it, sell it or service it anywhere in the world." QAD has partnered with PTC, a developer of product management solutions based in Needham, Mass., to provide a full Product Development System (PDS) that is integrated with procurement, supply chain and manufacturing, says McGary. Its solution is particularly aimed at the mid-market, which is where QAD specializes.
SAP and Oracle, ERP leaders, both provide comprehensive PLM solutions that are integrated with supply chain management and purchasing solutions.
Oracle last year upped its game with the acquisition of PLM vendor Agile. "Agile was the PLM for the supply chain," says Farinacci. "We have adopted a product road map and are now focusing on out-of-the-box integration of Agile to quality, supply chain, purchasing and compliance systems inside and outside of Oracle. This will get quality and compliance and supply chain information married with product design."
Arena Solutions, a vendor of on-demand PLM solutions based in Foster City, Calif., emphasizes the ability of PLM to enable collaboration around a single version of the truth. "One of the key ways we see Arena PLM being used in the market is around this idea of an integrated product record where all of the inputs to the design process get brought together into a complete and inter-disciplinary product definition, which evolves over time as changes are made or projects completed," says Eric Larkin, chief technology officer. This is a challenge because all of the different engineering disciplines on the front end are producing highly complex documentation as their output, he says. Moreover, at different points in the design process, companies may well have outside parties that need to be able to deliver their work product as part of the overall product record. "The foundation of PLM is that it provides a unified system of record for the entirety of the design and allows that record to be part of a company's engagement with its suppliers on both the front and back ends," Larkin says.
Arena is an on-demand solution and Larkin believes that delivery model has particular value in a PLM application because people can sign on separately and selectively share portions of the product record both upstream and downstream and then all that work comes together in a central repository. "This plays a huge role in facilitating and avoiding misunderstanding and miscommunication which lead to inefficiency," he says. "It incorporates the work product into a useable definition that can be published to the supply chain or to other parties."
Larkin notes one other benefit of PLM important to today's environment. "It enables companies to take control of their product records and to manage their product information more tightly. That's crucial because it's a simple fact that the enforcement of intellectual property laws across international borders is largely non-existent."
Dassault acquired MatrixOne, a PLM provider, in 2006 to give it entry into markets with less complex needs than the companies that typically use its core computer-aided design and engineering solutions. "We are tearing down walls between the engineering community and purchasing departments," says Fedida. Dassault recently introduced a sourcing solution "that allows companies to leverage suppliers and their capabilities as part of the development process," he says.
Avatech, Baltimore, Md., also provides solutions and other engineering services, primarily to users of Autodesk 3D design tools. It recently formed a consulting group to help customers increase efficiency and control costs throughout the entire product development process.
"We have a long history of working with our clients to implement the latest design technology, but our consulting services group goes beyond that to focus on other pieces of the process," says Scott Hale, vice president, manufacturing solutions. "We sit down with customers and identify where their bottlenecks are. Then we start work on developing a road map to bridge any technology gaps. A lot of it is around automating manual processes," he says. "The number one thing that we are talking to people about today is not their designed products or their CAD technology, it is BOM [bill of materials] issues," he says. "They want to know how to keep from reentering data, how to get fast and accurate quotes from suppliers and how to filter BOM information downstream to other people that need it. I think a lot of customers are still dealing with bad processes in terms of information flow."
As with innovation, PLM is not just for engineering-based industries anymore. TradeStone recently introduced a PLM solution aimed at retailers that are building private labels. In the apparel area alone, more than $200bn is going to change hands from branded goods to private labels in the next few years," says CEO Sue Welch. And this trend is not limited to clothing. "A lot of hard line retailers also are very focused on building their own private brand," she says. As managers of these private labels, retailers need to develop relationships with suppliers and create a new product pipeline that is able to respond quickly to demand changes. "All of our customers are looking to reduce cycle times by 50 to 60 percent," she says. "They need technology that can communicate complex product information not only faster, but with a greater degree of granularity."
The importance of PLM is validated by the Aberdeen survey, which found that innovation leaders are 87 percent more likely than average companies to use PLM solutions.
"Technology is important when it comes to effectively managing the product innovation pipeline," says Kavanaugh, "but it always gets back to process, metrics and governance. That may sound boring but it's what separates the real innovators from everybody else."
Avatech Solutions, www.avatech.com
TradeStone Software, www.tradestonesoftware.com
Aberdeen Group, www.aberdeen.com
Arena Solutions, www.arenasolutions.com
Sun Microsystems, www.sun.com
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