Collaborative Innovation: Drive Profitability by Playing Well with Others in the Supply Chain

Hat tip to Michael Lamoureux of Sourcing Innovation for his post covering a recent article in Industry Week on Collaborative Innovation.  Let's start with the meat that gets everyone's mouth watering:

Increase profits 15% to 20%.

That's correct.  According to a survey of 30 global consumer packaged goods manufacturers in retailers, 95% of them cited collaborative innovation as very important to achieving business objectives and a driver of profitability.  A few of the main points, as highlighted by Michael at Sourcing Innovation:

• Non-Adversarial Mindset
  Michael mentioned going one step further to say that you need to be able to trust the the party.  I completely agree.  When it comes to manufacturing sources, particularly in overseas places like China, building trust occurs out of 
• • working with people who are trustworthy in the first place (duh!  but often overlooked...)
  • putting in the time to meet your partners and understand their business
  • approaching your business dealings with them as a partnership and looking for win-win scenarios.  What's good for the goose is good for the gander and your partners will go the extra mile for you to meet your deadlines and meet your specifications when they know they will gain if you do.  

 

• The Ability to Learn to Speak "Another Language"
  Michael's thoughts: "Every profession, and every group, has their own "language". You are going to need to learn it or you might as well only speak English while your collaborator only speaks Mandarin as the communication gap will be just as broad until you do."  IMHO, the success of learning another language is driven by speaking a lot.  I often say that you cannot communicate too much in product development and sourcing throughout your supply chain.  When you talk more, you catch things that were missed and raises the probability of discovering areas where your "language" is different from their "language".  Making the effort is 80% of the battle, and goes a long way to buttress the first point--building a trusted relationship.  It may take more effort in the beginning, but once you are in the swing of things with the other party, progress will occur at blinding speeds.

• New Metrics
  Most companies will have a hard time transitioning from the metrics they have to measure supply chain performance now, and metrics that will help analyze and improve elements of the supply chain such as collaborative innovation.  One area that companies are increasingly tackling is corporate social and environmental responsibility, which requires collaborative innovation and work up-and-down the supply chain.  Metrics for the supply chain, or supply chain partners are developed, such as packaging reduction, eliminating energy intensive materials and processes from the supply chain.  Managing, measuring, and sharing in the successes and failures brings partners closer and can be an indirect method of getting a handle on the level of collaboration taking place.  More simple methods of looking at this might involve looking at what % of ideas came from where.  For example, how much did you product specification change from when you first handed it off for quotation compared to when you arrived at a final quotation based on approved samples?  Were materials changed?  Assembly processes changed?  Part dimensions changed for lower cost tooling?  If so, where did these ideas come from.  Your vendors may be bringing you more value than you think?  Also, one can look at the % of risk shared.  How is performance measured and payment structured?  Is one partner shouldering all of the risk?

• Willingness to Share IP
  When thinking about offshore manufacturing destinations like China, hands start to tremble at the thought of this.  In the article, this point might be more directed towards conversations downstream in the supply chain--such as with distributors, retailers, and key customers.  It's important to make decisions about when and what and with whom you are willing to disclose IP related information.  However, while most focus on what can be risked and loss, there is also quite a bit to be gained.  Fresh and valuable perspectives on how to make the most of one of your most core assets, from a core partner, could be one of the most profitable benefits.  

I like this article because the global business environment is simply too competitive to not leverage the value of your best partners.  Talent and resources can be tapped that you don't need to directly pay for, and mutual wins can translate into strong relationships that drive competitive advantage.  While this may be a lot of MBA and corporate speak to say that putting in effort to play well with others means more change in the piggy bank, it's surprising how many companies and people forget this when playing in the sandbox.    

Product Launch and Manufacturing Insights: Cost Reduction Strategies for Injection Molds and Tooling

We're currently in the midst of several projects moving through the final design to tooling stages--a very iterative process in which companies are finalizing their product designs based on playing with prototypes, buyer/market feedback, and getting cost feedback from suppliers to make decisions on feature/cost trade-offs.  I thought I would write a post regarding some of the issues that have come up and offering a few insights into addressing the sizable up-front financial investment that building injection molds and tooling can pose to companies launching new products.

Companies can look at several different options to bring mold costs down: from design to financing. 

• Product Design: A good product designer will design parts for cost-effective tooling, bearing in mind the part will be ejected from the mold, shrinkage rates, and dimensional tolerances.  If you have a source, or sources, that are great with customer service and will work with you to re-quote injection molds based on several design iterations, this can be very helpful in leading the industrial design to the optimal design/cost balance.

• Mold Material:  Another consideration companies may wish to entertain with respect to lowering injection mold cost, is deciding whether to build the mold out of steel or aluminum.  Aluminum has been considered a low price way to get a production run in the thousands of units completed at 1/3 the cost of steel molds.  This article, Why Offer Aluminum Molds for Production, at MoldMakingTechnology, claims that, with proper creation and care,  aluminum molds can deliver production runs into the hundreds of thousands of units and beyond.  I'll let the engineers haggle it out over the feasibility of accomplishing this.  I can tell you that I've received quotations for aluminum molds from several vendors recently and they all cautioned against the potential corrosion that can occur with aluminum molds and the susceptibility of the material to damage given it's softness.  It's worth noting that fluctuations in the price of steel and aluminum material will obviously impact the mold cost.  Currently, in China, aluminum prices rival steel, and the savings previously found in aluminum molds has essentially been wiped out due to this. 

• Mold Plan: In addition to material, one could consider different ways to layout a family of injection molds (assuming your plastic product might be composed of an assembly of parts).  Generally, each part cavity has its own mold base.  However, to reduce cost, one can consider a MUD base (sounds like a spa treatment, but MUD means "Master Unit Die"), in which the part cavity is an insert that can be dropped into the common MUD base.  Thus, only one mold base is created for all of the inserts, instead of bases being created for each insert.  This does increase the run-rate and part cost incrementally, but it can offer a notable cost reduction to reduce the up-front financial investment for new products.  Below are some pictures of a MUD base mold with two inserts:

• Mold Financing: A company should never pay an entire mold fee up-front, and should instead break out the fee according to milestones in the mold building and tweaking process itself.  An up-front payment to begin work, a payment at first shots (the first parts they make off of the tools), and a final payment upon final shots approval (meaning you've approved the parts coming from the molds), is a typical structure.  Occasionally, vendors will be willing to amortize some or all of the mold costs into one or several orders.  The ability to do this will often vary from vendor to vendor, their financial situation, and hunger to obtain the business.  Bear in mind, that until a company has paid all of the cost of the mold, they do not yet own it.

Cutting Costs in Your Company by Spending More to Achieve Operational Efficiency in your Supply Chain

I saw an article in Business Week last week about Sony bringing in Executive Deputy President Yutaka Nakagawa, a proven cost-cutter, to reduce Sony's supply chain costs.  Over the next two years, the company is aiming to halve the number of its parts and materials manufacturers and reduce purchasing costs by 20% this fiscal year.  Sony is hoping to achieve lower costs by buying larger volumes from fewer suppliers.  If the cuts can return the company from what is expected to be its second consecutive year of losses, newly created working capital can be dedicated towards new innovation and product launches.  However, as the Businessweek article points out, if the cuts result in being single sourced when/if demand spikes or quality defects arise, Sony could find itself in a precarious position.  

This reminds me of an article in Purchasing.com, found via Sourcing Innovation, explaining that Cost Reduction Efforts Require More Focus than Sacrifice.  The article's gist harks back to some of my rantings on the importance of strategy in sourcing and long term success.  The article cites a recent survey of private companies by PricewaterhouseCoopers which notes that companies are focusing on reducing costs in discretionary spending such as travel and entertainment, as well as streamlining operations, workforce reductions, and employee compensation.  In many ways, these might be regarded as short-term cost reductions that help financial statements quickly, and in the sphere of public companies, make Wall Street step back from the ledge and decide to live.  The article goes on to point out:

Another piece of research from the Corporate Executive Board, supports this thinking, saying companies need to focus more on reducing cost of goods sold and less on SG&A. "While most CFOs are quick to cut overhead (SG&A) to achieve cost-reduction goals, the companies that are able to maintain cost reductions over the long term spend more on SG&A as a leveraged way to help the business drive operational efficiency and reduce cost of goods sold," the CEB report says. In fact, it says on average, the better cost-cutting companies report cost of goods sold being about 49% of sales vs. 62.8% for average companies. However, the best cost-cutters have slightly higher SG&A.

Let's review that again: "the companies that are able to maintain cost reductions over the long term spend more on SG&A (Selling, General, and Admin expenses) as a leveraged way to help drive operational efficiency and reduce cost of goods sold".  

Michael Lamoureux, of SourcingInnovation, puts it best in his explanation:

You see, when you cut travel, you cut the ability for your people to make, and maintain, relationships. When you cut entertainment, which is typically a very small budget to begin with, you increase stress, which decreases productivity. When you streamline operations, things start to slip through the cracks. Then when you cut workforce, you cut capability, key processes get skipped entirely, critical sourcing events just don't happen, and you keep sourcing off of expensive ever-green contracts and spot-buying at high prices. When you cut training, your staff's skills get even more outdated and your cost reduction efforts miss the mark. And when you cut compensation, your best employees feel unappreciated and trampled on, stop giving 100%, and start looking for their next job.

As the article says, you have much better opportunities, including:

    * transaction processing
    * supplier management
    * health care benefits
    * IT assets (hardware and software)
    * logistics 

Investing in your people to implement good cost controls and look for ways to achieve operational efficiencies, rather than simply going after the quick and easy slashing of fixed costs, results in your people finding ways to lower the cost of goods for the long term.  This is one major method that smart companies use to destroy the competition over the long haul.

Related blog posts:

• Developing Mass Market Products: The "Good Enough" Revolution
• To Manufacture in China or the United States: Get Beyond Cost to Strategic Sourcing and Manufacturing of Products
• Swimming Naked in the Supply Chain: Getting to Know Factories and Sourcing

Developing Mass Market Products: The "Good Enough" Revolution

The FlipCam, by Pure Digital Technologies.  1 million units sold in the first year.  17% of the camcorder market in approximately 3 years.  Acquired by Cisco for $590mm.  Started by entrepreneurs Jonathan Kaplan and Ariel Braunstein after a failed start-up attempt in the digital camera market.  A consumer product start-up's dream, no?  For such a simple product, what made FlipCam such a wild success?

Wired Magazine has written a fascinating article, The Good Enough Revolution: When Cheap and Simple is Just Fine, on the concept of the "good enough" revolution.  The idea that industries as diverse as camcorders, law, music, the military, and healthcare to name a few, are experiencing a wave of change in the concept of user value.  It might be considered a return to a greater focus on user value, in the ongoing battle between features/quality for the sake of features/quality vs. features/quality for the sake of...the people who actually use the product.  Companies and products which have long built their competitive leads on continually outrunning the competition with the latest high-quality features and technological advances, are continually having their markets disrupted by low-cost, widely accessible, flexible, "good enough" products. 

The article is a great read for many reasons.  Start-ups developing user-centric, disruptive consumer products should be inspired by the success of products like FlipCam.  Being close to the customer and understanding holes in the market are areas start-ups can often outrun large companies.  Large company engineers developing cutting-edge, technologically based features for new products spend more time in the lab and at their desk than interacting with customers.  Not that the cutting edge technologies aren't important, they just generally aren't important to the mass market.  In the words of Wired magazine author, Robert Capps:

Brisk sales combined with a lack of speedy returns destroyed the company's thin margins, and the camera failed. But the experience taught Kaplan and Braunstein a lesson: Customers would sacrifice lots of quality for a cheap, convenient device. To keep the price down, Pure Digital had made significant trade-offs. It used inexpensive lenses and other components and limited the number of image-processing chips. The pictures were OK but not great. Yet Pure Digital sold 3 million cameras anyway.

Kaplan and Braunstein also learned something important about camera retailing in general. The market had long been split into two main segments: point-and-shoots (including disposables) and single-lens reflex cameras, which use interchangeable lenses and other high-end accessories. Not surprisingly, the vast majority of cameras sold then—as now—were the handy point-and-shoots; SLRs tended to attract only serious hobbyists and professionals.

Oddly, though, there was no point-and-shoot analogue in video cameras—and that's where the pair saw their next opportunity. Home videocams were almost without exception expensive, complicated devices loaded with features like image stabilization, night-vision mode, and onboard color correction. And even with tools like Apple's iMovie, it was a hassle to get footage off the cameras and onto a computer for editing and sharing. In terms of complexity and price, the camcorder market resembled the SLR market, but with no low-end alternative. Kaplan and Braunstein suspected that there might be a place for a much cheaper, simpler video camera. So they decided to make one.

There are ample development opportunities for consumer product start-ups like Pure Digital.  In categories where companies must justify massive R&D budgets that result in over-invented, featured-to-death, costly products that the average person doesn't find value in, there are opportunities for the consumer product start-up to tune into user needs and develop low-cost alternatives that offer users 80% of the value, with 20% of the features and cost. 

Developing and sourcing products like this is also easier, as a development team can often find existing components in the market, and working with a manufacturer in a country like China or India does not involve pushing them to source and manufacture technologies that are far beyond them.  The magic lies in learning from users the combination of features and costs that are good enough to meet their needs.  And that magic only requires eyes and ears.

To Manufacture in China or in the United States? Get Beyond Cost to Strategic Sourcing and Manufacturing of Products

When to source manufacturing offshore in a country like China, India, or Mexico?  When to keep manufacturing at home in the U.S.?  Don't start with cost:  start with strategy.

Lowering costs has been the most common and highly publicized impetus for companies to source and establish manufacturing operations offshore in a low-cost country like China.  But there are myriad reasons why a company might expand operations to an offshore country, or on the flipside, choose to maintain manufacturing at home.  Many of them have nothing to do with cost, but can be far more significant to a company's health than the cost of goods.

For many consumer product industries, seeking the cost-savings is a given.  To be competitive on the retail shelf, offshore manufacturing operations in low cost country sources is necessary.  But the strategic planning for sourcing and manufacturing often does not go beyond this perspective of thinking, a practice which often lands companies in trouble by sacrificing the most valuable aspects of their organization, or results in them missing a chance to maximize the value of their supply chain.  

First, consider a company's competitive advantage.  What aspects of the company are most important to the company's competitive position in the market?  Innovation and launch of new products?  Delivery of a consistent, high-quality customer experience with the company's products and services?  Lowest prices on the market?  There are many ways a company can differentiate itself and flourish in the market.  The question is--how will sourcing an offshore supplier in a country like China detract from or augment this competitive niche? 

Business case studies have shown that companies which have sought offshore suppliers to lower costs, at the expense of other important aspects of their company (such expenses were not clearly understood at the time), have ended up losing market share and value.  For example, companies which are leaders in innovation and technology often become so because they have nurtured a culture of strong, horizontal communication within.  Ideas, knowledge, and relationships are built across functional boudaries (meaning engineers eat lunch with marketing folk) which all contribute to the cross pollination of ideas  and the development of new, innovative products.  However, when a VP of operations decides to begin contracting out manufacturing an ocean away, without paying specific attention to developing the proper communication channels, the core strength of the company is sacrificed over time in the pursuit of short-term cost reductions.

A way in which the above technology company may have gone about this in a better way?  Keeping manufacturing operations at home may or may not have been the answer.  But they clearly could have prepared for their move offshore more effectively.  They could have sourced lower cost manufacturing suppliers and developed close partnerships to foster open dialogue.  Perhaps the company makes sure its design team goes over to visit their suppliers several times per year to visit manufacturing facilities, and vice versa.  A company seeking to optimize its supply chain in this fashion, by attaining a lower cost of goods, IN ADDITION to investing the resources to support its competitive advantages with outsourced service providers, can truly maximize value.  Apple computer could be considered a company that has done this very effectively.  Apple knows where to spend and where to save.  For more insight into how Apple does this on a product basis, check out Manufacturing the Ipod Shuffle: How Apple Produces Great Products at Great Prices.

As Dan Harris of ChinaLawBlog points out in his post Manufacturing in China.  Because There Are 1.3 Billion People There, gaining access to China's consumer market is now becoming a significant reason cited by companies for expansion of operations in China.  Following customers to support them in foreign countries might be another reason.  The fact is, there are numerous ways to drive value beyond lower cost goods.

Why keep manufacturing at home?  Some companies may find it more valuable in the long term to keep manufacturing operations at home, despite the opportunities for cost reduction elsewhere.  These companies know that paying more in the short-term to maintain whatever edge their domestic operations gives them, offers greater rewards in the long-term.  An example of this may be a fashion oriented company that creates new product lines several times annually, and has difficulty accurately forecasting which items will sell.  Thus, they may find that the cost of holding inventory for long periods of time and not being able to respond quickly to market trends is more expensive over the long haul than manufacturing their products domestically and gaining very short lead times.  An analysis of the supply chain at the product level may motivate a company like this to choose a hybrid model in which some of its products are manufactured abroad and some at home.  A fashion company like Zara, which can go from product concept to market in 18 days, is a great example of this.  It starts with strategy.

The bottomline is that companies, particularly smaller companies, that are now sourcing contract manufacturers in places like China, India, Vietnam, and elsewhere because of cost pressures, should consider how else manufacturing in these areas will impact their business.  They have the opportunity to advance to a higher level of strategic planning.  In a country like China, they may gain greater access to materials suppliers, they may be able to take advantage of low cost engineering and design talent, they may find an opportunity to sell into China as well.  If their competitive advantage rests upon delivering high quality product, or innovating products on the cutting-edge, they would do well to ensure that they source suppliers that can support these functions and invest the necessary level of resources to optimize them.  Some may find that not outsourcing, and staying at home, serves their purposes better in the long run.  Companies may find that smaller minimum quantities and faster turnaround are the key drivers in their business.  The point is to assess the strategic sourcing circumstances, make an educated decision, and execute it accordingly.